Taxation System in India
Taxation System in India
India has a well-developed tax structure with clearly demarcated authority between Central and
State Governments and local bodies.
Central Government levies taxes on income (except tax on agricultural income, which the State
Governments can levy), customs duties, central excise and service tax.
Value Added Tax (VAT), stamp duty, state excise, land revenue and profession tax are levied by
the State Governments.
Local bodies are empowered to levy tax on properties, octroi and for utilities like water supply,
drainage etc.
Indian taxation system has undergone tremendous reforms during the last decade. 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 rationalization of tax administration
is ongoing in India.
Direct Taxes
In case of direct taxes (income tax, wealth tax, etc.), the burden directly falls on the taxpayer.
Income tax
According to Income Tax Act 1961, every person, who is an assessee and whose total income
exceeds the maximum exemption limit, shall be chargeable to the income tax at the rate or rates
prescribed in the Finance Act. Such income tax shall be paid on the total income of the previous
year in the relevant assessment year.
Assessee means a person by whom (any tax) or any other sum of money is payable under the
Income Tax Act, and includes (a) Every person in respect of whom any proceeding under the Income Tax Act has been taken
for the assessment of his income (or assessment of fringe benefits) or of the income of any
other person in respect of which he is assessable, or of the loss sustained by him or by such
other person, or of the amount of refund due to him or to such other person;
(b) Every person who is deemed to be an assessee under any provisions of the Income Tax Act;
(c) Every person who is deemed to be an assessee in default under any provision of the Income
Tax Act.
Individual
Hindu Undivided Family (HUF)
Association of persons (AOP)
Body of individuals (BOI)
Company
Firm
A local authority and,
Every artificial judicial person not falling within any of the preceding categories.
Income tax is an annual tax imposed separately for each assessment year (also called the tax
year). Assessment year commences from 1st April and ends on the next 31st March.
The total income of an individual is determined on the basis of his residential status in India. For
tax purposes, an individual may be resident, nonresident or not ordinarily resident.
Resident
An individual is treated as resident in a year if present in India:
1. For 182 days during the year or
2. For 60 days during the year and 365 days during the preceding four years. Individuals
fulfilling neither of these conditions are nonresidents. (The rules are slightly more liberal for
Indian citizens residing abroad or leaving India for employment abroad.)
Non-Residents
Non-residents are taxed only on income that is received in India or arises or is deemed to arise
in India. A person not ordinarily resident is taxed like a non-resident but is also liable to tax on
income accruing abroad if it is from a business controlled in or a profession set up in India.
Non-resident Indians (NRIs) are not required to file a tax return if their income consists of only
interest and dividends, provided taxes due on such income are deducted at source. It is
possible for non-resident Indians to avail of these special provisions even after becoming
residents by following certain procedures laid down by the Income Tax act.
Definition of a company
A company has been defined as a juristic person having an independent and separate legal
entity from its shareholders. Income of the company is computed and assessed separately in
the hands of the company. However the income of the company, which is distributed to its
shareholders as dividend, is assessed in their individual hands. Such distribution of income is
not treated as expenditure in the hands of company; the income so distributed is an
appropriation of the profits of the company.
Residence of a company
o
o
A company is said to be a resident in India during the relevant previous year if:
It is an Indian company
If it is not an Indian company but, the control and the management of its affairs is
situated wholly in India
A company is said to be non-resident in India if it is not an Indian company and some
part of the control and management of its affairs is situated outside India.
Corporate sector tax
The taxability of a company's income depends on its domicile. Indian companies are taxable in
India on their worldwide income. Foreign companies are taxable on income that arises out of
their Indian operations, or, in certain cases, income that is deemed to arise in India. Royalty,
interest, gains from sale of capital assets located in India (including gains from sale of shares in
an Indian company), dividends from Indian companies and fees for technical services are all
treated as income arising in India. Current rates of corporate tax.
Different kinds of taxes relating to a company
Minimum Alternative Tax (MAT)
Normally, a company is liable to pay tax on the income computed in accordance with the
provisions of the income tax Act, but the profit and loss account of the company is prepared as
per provisions of the Companies Act. There were large number of companies who had book
profits as per their profit and loss account but were not paying any tax because income
computed as per provisions of the income tax act was either nil or negative or insignificant. In
such case, although the companies were showing book profits and declaring dividends to the
shareholders, they were not paying any income tax. These companies are popularly known as
Zero Tax companies. In order to bring such companies under the income tax act net, section
115JA was introduced w.e.f assessment year 1997-98.
A new tax credit scheme is introduced by which MAT paid can be carried forward for set-off
against regular tax payable during the subsequent five year period subject to certain conditions,
as under:When a company pays tax under MAT, the tax credit earned by it shall be an amount,
which is the difference between the amount payable under MAT and the regular tax. Regular tax
in this case means the tax payable on the basis of normal computation of total income of the
company.
MAT credit will be allowed carry forward facility for a period of five assessment years
immediately succeeding the assessment year in which MAT is paid. Unabsorbed MAT credit will
be allowed to be accumulated subject to the five-year carry forward limit.
In the assessment year when regular tax becomes payable, the difference between the
regular tax and the tax computed under MAT for that year will be set off against the MAT credit
available.
Rate of dividend distribution tax to be raised from 12.5 per cent to 15 per cent on dividends
distributed by companies; and to 25 per cent on dividends paid by money market mutual funds
and liquid mutual funds to all investors.
The Finance Act 2005 introduced the Banking Cash Transaction Tax (BCTT) w.e.f. June 1, 2005
and applies to the whole of India except in the state of Jammu and Kashmir.BCTT continues to
be an extremely useful tool to track unaccounted monies and trace their source and destination.
It has led the Income Tax Department to many money laundering and hawala transactions.
BCTT is levied at the rate of 0.1 per cent of the value of following "taxable banking transactions"
entered with any scheduled bank on any single day:
Withdrawal of cash from any bank account other than a saving bank account; and
Receipt of cash on encashment of term deposit(s).
However,Banking Cash Transaction Tax (BCTT) has been withdrawn with effect from April 1,
2009.
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.
Under the Act, the tax is charged in respect of the wealth held during the assessment year by
the following persons: Individual
Hindu Undivided Family (HUF)
Company
Chargeability to tax also depends upon the residential status of the assessee same as the
residential status for the purpose of the Income Tax Act.
Wealth tax is not levied on productive assets, hence investments in shares, debentures, UTI,
mutual funds, etc are exempt from it. 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 and Cash in hand (in excess of Rs 50,000 for Individual
& HUF only).
The following will not be included in Assets: Assets held as Stock in trade.
A house held for business or profession.
The scope of capital asset is being widened by including certain items held as personal effects
such as archaeological collections, drawings, paintings, sculptures or any work of art. Presently
no capital gain tax is payable in respect of transfer of personal effects as it does not fall in the
definition of the capital asset. To restrict the misuse of this provision, the definition of capital
asset is being widened to include those personal effects such as archaeological collections,
drawings, paintings, sculptures or any work of art. Transfer of above items shall now attract
capital gain tax the way jewellery attracts despite being personal effect as on date.
Short Term and Long Term capital Gains
Gains arising on transfer of a capital asset held for not more than 36 months (12 months in the
case of a share held in a company or other security listed on recognised stock exchange in
India or a unit of a mutual fund) prior to its transfer are "short-term". Capital gains arising on
transfer of capital asset held for a period exceeding the aforesaid period are "long-term".
Section 112 of the Income-Tax Act, provides for the tax on long-term capital gains, at 20 per
cent of the gain computed with the benefit of indexation and 10 per cent of the gain computed
(in case of listed securities or units) without the benefit of indexation.
The above procedure for granting relief will not be sufficient to meet all cases. No country will be
in a position to arrive at such agreement with all the countries of the world for all time. The
hardship of the taxpayer however is a crippling one in all such cases. Some relief can be
provided even in such cases by home country irrespective of whether the other country
concerned has any agreement with India or has otherwise provided for any relief at all in respect
of such double taxation. This relief is known as unilateral relief.
Double Taxation Avoidance Agreement (DTAA)
List of countries with which India has signed Double Taxation Avoidance Agreement :
DTAA Comprehensive Agreements - (With respect to taxes on income)
DTAA Limited Agreements With respect to income of airlines/ merchant shipping
Limited Multilateral Agreement
DTAA Other Agreements/Double Taxation Relief Rules
Specified Associations Agreement
Tax Information Exchange Agreement (TIEA)
Indirect Taxation
Sales tax
Central Sales Tax (CST)
Central Sales tax is generally payable on the sale of all goods by a dealer in the course of interstate trade or commerce or, outside a state or, in the course of import into or, export from India.
The ceiling rate on central sales tax (CST), a tax on inter-state sale of goods, has been reduced
from 4 per cent to 3 per cent in the current year.
Value Added Tax (VAT)
VAT is a multi-stage tax on goods that is levied across various stages of production and supply
with credit given for tax paid at each stage of Value addition. Introduction of state level VAT is
the most significant tax reform measure at state level. The state level VAT has replaced the
existing State Sales Tax. The decision to implement State level VAT was taken in the meeting of
the Empowered Committee (EC) of State Finance Ministers held on June 18, 2004, where a
broad consensus was arrived at to introduce VAT from April 1, 2005. Accordingly, all states/UTs
have implemented VAT.
The Empowered Committee, through its deliberations over the years, finalized a design of VAT
to be adopted by the States, which seeks to retain the essential features of VAT, while at the
same time, providing a measure of flexibility to the States, to enable them to meet their local
requirements. Some salient features of the VAT design finalized by the Empowered Committee
are as follows:
The rates of VAT on various commodities shall be uniform for all the States/UTs. There
are 2 basic rates of 4 per cent and 12.5 per cent, besides an exempt category and a special rate
of 1 per cent for a few selected items. The items of basic necessities have been put in the zero
rate bracket or the exempted schedule. Gold, silver and precious stones have been put in the 1
per cent schedule. There is also a category with 20 per cent floor rate of tax, but the
commodities listed in this schedule are not eligible for input tax rebate/set off. This category
covers items like motor spirit (petrol), diesel, aviation turbine fuel, and liquor.
There is provision for eliminating the multiplicity of taxes. In fact, all the State taxes on
purchase or sale of goods (excluding Entry Tax in lieu of Octroi) are required to be subsumed in
VAT or made VATable.
Provision has been made for allowing "Input Tax Credit (ITC)", which is the basic feature
of VAT. However, since the VAT being implemented is intra-State VAT only and does not cover
inter-State sale transactions, ITC will not be available on inter-State purchases.
Exports will be zero-rated, with credit given for all taxes on inputs/ purchases related to
such exports.
There are provisions to make the system more business-friendly. For instance, there is
provision for self-assessment by the dealers. Similarly, there is provision of a threshold limit for
registration of dealers in terms of annual turnover of Rs 5 lakh. Dealers with turnover lower than
this threshold limit are not required to obtain registration under VAT and are exempt from
payment of VAT. There is also provision for composition of tax liability up to annual turnover limit
of Rs. 50 lakh.
Regarding the industrial incentives, the States have been allowed to continue with the
existing incentives, without breaking the VAT chain. However, no fresh sales tax/VAT based
incentives are permitted.
Roadmap towards GST
The Empowered Committee of State Finance Ministers has been entrusted with the task of
preparing a roadmap for the introduction of national level goods and services tax with effect
from 01 April 2007.The move is towards the reduction of CST to 2 per cent in 2008, 1 per cent in
2009 and 0 per cent in 2010 to pave way for the introduction of GST (Goods and Services Tax).
Excise Duty
Central Excise duty is an indirect tax levied on goods manufactured in India. 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 types of Central Excise duties collected in India namely
Basic Excise Duty
This is the duty charged under section 3 of the Central Excises and Salt Act,1944 on all
excisable goods other than salt which are produced or manufactured in India at the rates set
forth in the schedule to the Central Excise tariff Act,1985.
Additional Duty of Excise
Section 3 of the Additional duties of Excise (goods of special importance) Act, 1957 authorizes
the levy and collection in respect of the goods described in the Schedule to this Act. This is
levied in lieu of sales Tax and shared between Central and State Governments. These are
levied under different enactments like medicinal and toilet preparations, sugar etc. and other
industries development etc.
Special Excise Duty
As per the Section 37 of the Finance Act,1978 Special excise Duty was attracted on all
excisable goods on which there is a levy of Basic excise Duty under the Central Excises and
Salt Act,1944.Since then each year the relevant provisions of the Finance Act specifies that the
Special Excise Duty shall be or shall not be levied and collected during the relevant financial
year.
Customs Duty
Custom or import duties are levied by the Central Government of India on the goods imported
into India. The rate at which customs duty is leviable on the goods depends on the classification
of the goods determined under the Customs Tariff. The Customs Tariff is generally aligned with
the Harmonised System of Nomenclature (HSL).
In line with aligning the customs duty and bringing it at par with the ASEAN level, government
has reduced the peak customs duty from 12.5 per cent to 10 per cent for all goods other than
agriculture products. However, the Central Government has the power to generally exempt
goods of any specified description from the whole or any part of duties of customs leviable
thereon. In addition, preferential/concessional rates of duty are also available under the various
Trade Agreements.
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. Today the counter services subject to tax have
reached over 100. There has been a steady increase in the rate of service tax. From a mere 5
per cent, service tax is now levied on specified taxable services at the rate of 12 per cent of the
gross value of taxable services. However, on account of the imposition of education cess of 3
per cent, the effective rate of service tax is at 12.36 per cent.
Union Budget 2013-14
Latest Union Budget for the year 2013-14 has been announced by the Financed Minister Mr
P.Chidambaram on 28th of February 2013.
Here are the highlights of the key features of Direct and Indiarect Tax Proposals:
Tax Proposals
Direct Taxes
According to the Finance Minister,there is a little room to give away tax revenues or raise
tax rates in a constrained economy.
No case to revise either the slabs or the rates of Personal Income Tax. Even a moderate
increase in the threshold exemption will put hundreds of thousands of Tax Payers outside Tax
Net.
However, relief for Tax Payers in the first bracket of USD 0.004 million to USD 0.009
million. A tax credit of USD 36.78 to every person with total income upto USD 0.009 million.
Surcharge of 10 percent on persons (other than companies) whose taxable income
exceed USD 0.18 million to augment revenues.
Increase surcharge from 5 to 10 percent on domestic companies whose taxable income
exceed USD 1.84 million.
In case of foreign companies who pay a higher rate of corporate tax, surcharge to
increase from 2 to 5 percent, if the taxabale income exceeds USD 1.84 million.
In all other cases such as dividend distribution tax or tax on distributed income, current
surcharge increased from 5 to 10 percent.
Additional surcharges to be in force for only one year.
No change in the normal rates of 12 percent for excise duty and service tax.
No change in the peak rate of basic customs duty of 10 perent for non-agricultural
products.
Customs
Period of concession available for specified part of electric and hybrid vehicles extended
upto 31 March 2015.
Duty on specified machinery for manufacture of leather and leather goods including
footwear reduced from 7.5 to 5 percent.
Duty on pre-forms precious and semi-precious stones reduced from 10 to 2 perent.
Export duty on de-oiled rice bran oil cake withdrawn.
Duty of 10 percent on export of unprocessed ilmenite and 5 percent on export on
ungraded ilmenite.
Concessions to air craft maintenaince, repair and overhaul (MRO) industry.
Duty on Set Top Boxes increased from 5 to10 percent.
Duty on raw silk increased from 5 to 15 percent.
Duties on Steam Coal and Bituminous Coal equalised and 2 percent custom duty and 2
percent CVD levied on both kinds coal.
Duty on imported luxury goods such as high end motor vehicles, motor cycles, yachts
and similar vessels increased.
Duty free gold limit increased to USD 918.86 in case of male passenger and USD
1,837.47 in case of a female passenger subject to conditions.
Excise duty
Relief to readymade garment industry. In case of cotton, zero excise duty at fibre stage
also. In case of spun yarn made of man made fibre, duty of 12 percent at the fibre stage.
Handmade carpets and textile floor coverings of coir and jute totally exempted from
excise duty.
To provide relief to ship building industry, ships and vessels exempted from excise duty.
No CVD on imported ships and vessels.
Specific excise duty on cigarettes increased by about 18 percent. Similar increase on
cigars, cheroots and cigarillos.
Excise duty on SUVs increased from 27 to 30 percent. Not applicable for SUVs
registered as taxies.
Excise duty on marble increased from USD 0.55 per square meter to USD 1.10 per
square meter.
Proposals to levy 4 percent excise duty on silver manufactured from smelting zinc or
lead.
Duty on mobile phones priced at more than USD 36.78 raised to 6 percent.
MRP based assessment in respect of branded medicaments of Ayurveda, Unani,Siddha,
Homeopathy and bio-chemic systems of medicine to reduce valuation disputes.
Service Tax
For homes and flats with a carpet area of 2,000 sq.ft. or more or of a value of USD 0.18
million or more, which are high-end constructions, where the component of services is greater,
rate of abatement reduced from from 75 to 70 percent.
Out of nearly 1.7 million registered assesses under Service Tax only 0.7 million file
returns regularly. Need to motivate them to file returns and pay tax dues. A onetime scheme
called Voluntary Compliance Encouragement Scheme proposed to be introduced. Defaulter
may avail of the scheme on condition that he files truthful declaration of Service Tax dues since
1st October 2007.
Tax proposals on Direct Taxes side estimated to yield to USD 2,444.32 million and on
the Indirect Tax side USD 863.68 million.
A sum of USD 1,653.78 million towards the first instalment of the balance of CST
compensation provided in the budget.
Work on draft GST Constitutional amendment bill and GST law expected to be taken
forward.
Maximum Limit Maximum Deduction allowed under this Section is Rs. 1.50 Lakh and the
sum includes payment on other allowable investment option available Under Section 80C of the
Income Tax Act,1961. It is to be further noted that combined Maximum limit of deduction under
Sec 80C & 80CCC & 80CCD (1) is Rs 1,50,000.
Deduction limit: Deduction will be allowed only for premiums upto a maximum of 10% of the sum
assured for policy issued on or after April 1, 2012. In case of policy issued before March 31, 2012,
deduction will be allowed only for premiums upto a maximum of 20% of the sum assured.
Allowable on Payment- Only life insurance premia paid or deposited during the year are allowable
as deduction under Section 80C.
Disallowance: The deductions claimed earlier will be taxable as income if the policy is
terminated either by notice or by failure to pay any premium in case of
Regular premium policy: before premiums have been paid for 2 years.
On Wife/husband(dependent or not)
Child
Premium Paid on life of parents, Brother, Sisters or In-laws not EligiblePlease note that life insurance premium paid by you for your parents (father / mother / both)
Brother, Sisters or your in-laws is not eligible for deduction under section 80C.
More than one insurance policyIf you are paying premium for more than one insurance policy, all the premiums can be
included.
Premium Paid to LIC and Other Insurance CompaniesIt is not necessary to have the insurance policy from Life Insurance Corporation (LIC) even
insurance bought from private players can be considered here.
Premiums on pure endowment assurance policy
A pure endowment assurance policy is an assurance on the life of the assessee and hence the
premium paid on such policy would be eligible to rebate under section 80C.
Taxability of Maturity Proceeds
Section 10(10D)
The proceeds under a life insurance policy are exempt under Section 10(10D) of the Act,
subject to the provisions of the said section.
Section 10(10A)(iii)
Commuted Pension received from Pension fund (Pension Plans approved by IRDA) would be
tax-free.
All premiums and charges are subject to applicable taxes including service tax, education cess
and secondary and higher education cess as applicable under the prevailing tax laws.
MUTUAL FUNDS
The Indian capital market has been growing tremendously with
the reforms in industry policy, reforms in public and financial
sector and new economic policies of liberalization, deregulation
and restructuring. The Indian economy has opened up and many
developments have been taking place in the Indian capital market
and money market with the help of the financial system and
financial institution or intermediaries which faster saving and
channel them to their most efficient use.
The measurement of fund performance has been a topic of
increased
interest
in
both
the
academic
and
practitioner
MUTUALFUND
MARKET
SCHEMES
FLUCTUATION
I
INVEST THEIR MONEY INVEST IN VARIETY OF STOCKS/BONDS
N
V
E
S
T
O
R
S
PROFIT/LOSS
FROM PORTFOLIOPROFIT/LOSS
INVESTMENT FROM INDIVIDUAL INVESTMENT
Mutual
funds have
a unique
structure
not
shared with
the
legal
structure
also
drives
the
inter-
Specific
Schemes:
Industry
Specific
SWOT ANALYSIS
SWOT Analysis presents the information about external and
internal environment of mutual fund in structured from where by
key
external
opportunity
and
threats
can
be
compared
Weakness
benefit
of
diversification
Tax benefit
Transparancy & flexibility
Expert
investment
equity
Poor technology & service
level
Lack of proper marketing
management
Opportunity
Threats
concession
Setting up a specific fund
Technology development
foreign players
Introduction of more debt
instrument in market.