E-SIP

PROJECT ON TAXLAWS
By- Dhaval Vyas
7/12/2012

The following pages include project on Tax Laws prevalent in India. It speaks about the background, introduction, classification, usages, advantages, some disadvantages and the future of tax system to be followed in India.

TABLE OF CONTENTS

A-INTRODUCTION

1.1 Definition of Tax-------------------------------------------------------------------------pg6 1.2 History of Tax----------------------------------------------------------------------------pg7 1.3 Types of Taxes ---------------------------------------------------------------------------pg7 1.4 Terms in Taxes----------------------------------------------------------------------------pg8 1.4.1 Income------------------------------------------------------------------------------------pg8 1.4.2 Person-------------------------------------------------------------------------------------pg8 1.4.3 Assessee-----------------------------------------------------------------------------------pg8 1.4.4 Previous year-----------------------------------------------------------------------------pg8 1.4.5 Assessment Year-------------------------------------------------------------------------pg8 1.4.6 Tax rates-----------------------------------------------------------------------------------pg8 1.4.7 Computation of income-----------------------------------------------------------------pg8 1.4.8 Assessment Officer-----------------------------------------------------------------------pg8

B.DIRECT TAX

2.1 Income tax----------------------------------------------------------------------------------pg9 2.1.1 Resident & Ordinarily Resident------------------------------------------------------pg9 2.1.2 Not Ordinarily Resident --------------------------------------------------------------pg10 2.1.3 Non Resident----------------------------------------------------------------------------pg10 2.1.4 Income Heads----------------------------------------------------------------------------pg10 2.1.5 Income from Salaries-------------------------------------------------------------------pg10 2.1.6 Income from House Property---------------------------------------------------------pg11 2.1.7 Income from Business or Profession-------------------------------------------------pg12 2.1.8 Income from Capital Gains------------------------------------------------------------pg12 2.1.9 Income from Other sources------------------------------------------------------------pg12 2.1.10 Other than that one has to understand what is Deduction---------------------pg12 2.1.11 Aggregation of Income, set-off, carry forward of losses and deduction from total income---------------------------------------------------------------------------------------------pg13 2.1.12 Filing of Returns------------------------------------------------------------------------pg13 2.1.13 Appeals------------------------------------------------------------------------------------pg13 2.2 Wealth tax----------------------------------------------------------------------------------- pg14

C.INDIRECT TAX 3.1 Sales tax---------------------------------------------------------------------------------------pg15

3.2 Service tax----------------------------------------------------------------------------------pg15 3.2.1 Background------------------------------------------------------------------------------pg15 3.2.2 Scope---------------------------------------------------------------------------------------pg15

3.2.3 Negative List---------------------------------------------------------------------------pg15 3.2.4 Administrative Mechanism---------------------------------------------------------pg15 3.2.5 Rate of Service Tax-------------------------------------------------------------------pg15 3.2.6 Reverse Charge Mechanism--------------------------------------------------------pg16 3.2.7 Time of Payment-----------------------------------------------------------------------pg16 3.2.8 Point of Taxation-----------------------------------------------------------------------pg16 3.2.9 Registration------------------------------------------------------------------------------pg16 3.2.10 Returns----------------------------------------------------------------------------------pg16 3.2.11 Penalty-----------------------------------------------------------------------------------pg17 3.2.12 Cenvat Credit Rules-2004------------------------------------------------------------pg17 3.2.13 Appeals-----------------------------------------------------------------------------------pg17 3.2.14 Role of Practicing Company Secretary--------------------------------------------pg17

3.3 VAT-------------------------------------------------------------------------------------------pg18 3.3.1 Advantages of VAT----------------------------------------------------------------------pg18 3.3.2 Disadvantages of VAT-------------------------------------------------------------------pg18 3.3.3 Tax Rates Under VAT-------------------------------------------------------------------pg19 3.3.4 Calculation of VAT-----------------------------------------------------------------------pg19 3.3.5 Registration--------------------------------------------------------------------------------pg19 3.3.6 Assessment and Audit--------------------------------------------------------------------pg19 3.3.7 Returns--------------------------------------------------------------------------------------pg19 3.3.8 Zero Rating---------------------------------------------------------------------------------pg19 3.3.9Refunds---------------------------------------------------------------------------------------pg20 3.3.10 Appeals-------------------------------------------------------------------------------------pg20 3.3.11 Role of Company Secretary------------------------------------------------------------pg20

D.FUTURE OF TAX IN INDIA---------------------------------------------------------------pg21

E.CONCLUSION----------------------------------------------------------------------------------pg21

A INTRODUCTION

1.1Definition of Tax

Tax as it generally sounds is some thing enforced upon an individual to part with.There is no legal definition for tax.Tax is usually on ones income.In India government imposes a charge on income,commodity or activity.So one can say its a charge which is enforced upon to be parted with.No one likes taxes.Tax also brings up the concept of income.So one can say there should be an income to attract tax on it.Now income can be in the form of currency,produce,services and so on whichever derives uses for the person consuming it and which allows a person some independence to pursue occupation and work forms of ones own choice.

The taxes are collected for serving the primary purpose of providing revenue for the state.It fulfills the objectives of the state by allowing flow of revenue to its coffers.The main objective of the state can be welfare and taxes allows those activities to be effectively functioned.The Income Tax in its present form came in to force in India from 01st April 1962.It is governed by the Income Tax Act 1961.Earlier we were following the British laws to levy taxes in India.

Income Tax depends on income,however there is no precise definition of the word income attempted under the Income-Tax act 1961.Generally the tax is a certain percentage of ones income.It has to be rational and reasonable so that the common man is not unnecessarily burdened under its weight.The objective is to spread welfare amongst the masses by taxing them lesser than the richer class also known as progressive taxation.This is done to promote equality and ensure the objectives of the government are also fulfilled.

1.2 History of Tax

It is not a recent phenomena that one encounters.Infact even in ancient times taxes were levied all across the world.The form may not have been money or currency note but it did exist,some form or the other.Some people gave their tax in the form of services provided to the king.There was quite often bartering exchange done in those times.The people in those times used to trade in commodities rather than currency.

1.3 Types of Taxes

There are broadly two types of taxes. Direct tax and Indirect tax. These classifications help the tax authorities to maximize their tax bracket to enable maximum number of people included in the drive to earn revenue. Government and state is in dearth of revenue and is always on a lookout to max their revenue potential. Direct taxes are levied mostly at source like TDS, IncomeTax, and Wealth Tax etc

Indirect taxes are indirectly levied by way of production and services used by the population in the form of excise duty, sales tax, Service Tax, Value Added Tax, Goods and Services Tax etc.

Whenever we talk of classification of taxes based on the form of levying Direct Taxes depends on factors like declaration by the individuals, HUF, AOI, BOIetc .So it is got tendency to be underreported and a chance of evasion prevails. However in case of indirect taxation the as the taxes are deducted before they reach the end users, the chance of evasion is marginal. Direct taxes promote progressive taxation where the rich section of the society gets taxed higher than the poorer sections. This ultimately ensures equal distribution of resources to all sections of the society and promotes equality.

On the other hand indirect taxation which is of a more recent phenomenon by including more and more sections of the society ensures evasions and maximizes the avenues available to the government for taxation. Indian tax system has taken ideas from all the major governments of the world. We have adopted taxation from laws of U.K., U.S., Canadian constitution, European nations and East Asian countries like Japan etc.

1.4 Terms in Taxes 1.4.1 Income There is no fixed definition for the word income in the Income tax Act1961.However it is anything which is charged by the officer to collect taxes. 1.4.2 Person The taxes are not only collected from persons but also from HUF(Hindu Undivided Family),AOI(Association of Person),BOI (Body of Individuals) or associations. 1.4.3 Assesses Is the person or body from which Tax is collected in the current financial year. 1.4.4 Previous year The year in which Income is earned could be any years including current year. Eg-2011-2012 1.4.5 Assessment Year The year in which tax is to be paid, usually following the previous year. Eg-2012-2012 1.4.6 Tax rates There are rates which are specified by the government for all types of taxes charged. 1.4.7 Computation of income The income is computed under various heads of income which will be discussed in details in the next section. 1.4.8 Assessment Officer The assessment officer is appointed by the central government to legally assess someone for tax payment, issue notices,penalize,etc

B.DIRECT TAX

There are different forms of direct taxes like 2.1 Income tax 2.2 Wealth tax 2.3Property tax

2.1Income tax Under income tax there are various terms that has to be understood so that we can study income tax. Income should come from persons whose residential status can be any of the following. 2.1.1 Resident & Ordinarily Resident 2.1.2 Not Ordinarily Resident 2.1.3 Non Resident.

2.1.1 Resident & Ordinarily Resident As per sec (6) we have certain conditions which help us decide the residential status of the person. We calculate the world income of the person in study. Resident person will be a person who satisfies any one condition from 1, 2 & 3 below 1) Has stayed for 182 days or more in India during previous year (2011-12), 2) A) stay for 60 days or more in India in previous year (2011-2012) and + B) Stayed for 365 days or more in India during last 4 previous year, Except- Citizen of India who leaves India in any previous year as a member of the crew of an India ship, or for the purpose of employment outside India or Citizen of India or of Indian origin engaged outside India (whether for rendering service or not) and who comes to India in any previous year. 3)A)An individual who has been a non-resident in India in at least nine out of 10 previous year preceding that year, or

B) Has during the seven previous years proceeding that year been in India for a period of, or period amounting in all to 729 days or less.

2.1.2 Not Ordinarily Resident Satisfies any one condition between 1 & 2 1) Has stayed for 182 days or more in India during previous year (2011-12), 2) A) stay for 60 days or more in India in previous year (2011-2012) and + B) Stayed for 365 days or more in India during last 4 previous year, Except- Citizen of India who leaves India in any previous year as a member of the crew of an India ship, or for the purpose of employment outside India or Citizen of India or of Indian origin engaged outside India (whether for rendering service or not) and who comes to India in any previous year.

2.1.3 Non Resident-satisfies condition 3 only 3)A)An individual who has been a non-resident in India in at least nine out of 10 previous year preceding that year, or B) Has during the seven previous years proceeding that year been in India for a period of, or period amounting in all to 729 days or less. The above conditions allows us to identify individuals to be considered to be eligible for taxation.Thereare total five heads of income from where we calculate Income Tax.

2.1.4 Income Heads-In India the Income Tax is calculated under various heads of income. 2.1.5 Income from Salaries The rates of Income are calculated for Male, Female, Senior & Very Senior Citizens as follows:For Male0-180000-NIL 180000-500000-10% 500000-800000-20% 800000&Above-30%
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For female0-190000-NIL 190000-500000-10% 500000-800000-20% 800000&Above-30% For Senior citizens, 0-250000-NIL 250000-500000-10% 500000-800000-20% 800000&Above-30% For Very Senior Citizen (>80yrs) 0-500000-NIL 500000-800000-20% 800000&Above-30% 2.1.6 Income from House Property. As per sec 22- The annual value of the property consisting of nay building or lands appurtenant thereto of which the assessee is the owner, other than such portions of such property as he may occupy for the purposes of any business or profession carried on by him, the profits of which are chargeable to income-tax shall be chargeable to income-tax under the head income from House-property. As per sec 23-The Income from house property is charged to income-tax on the basis of annual value of that property. The gross Annual value of the house property is determined by four factorsa) Actual rental value. b) Municipal value. c) Fair rental value. d) Standard rent.

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2.1.7 Income from Business or Profession This is an important head of income which covers profits and gains of business, profession &vocation etc.Maximum number of assesses are assessed for tax under this head & maximum revenue is collected from it. The owner of the business is liable to pay tax on profit earned by him. Hence what is charged to tax is the net profit of the business. Income from business is taxable if it is carried on at anytime during the previous year. It may be noted that profit for this purpose means not the accounting profit, but the profit as per the provisions of Income Tax Act. Hence the profit as per the books of account is readjusted for arriving at profit as per Income Tax Act. 2.1.8 Income from Capital Gains I t must be capital asset. There should be transfer of asset. As per sec.2 (14), Capital asset means property of ANY KIND (whether movable/immovable/tangible/intangible) excluding following assets 1. Movable personal assets e.g.-Personal car, refrigerator, TV etc 2) Rural Agricultural Land in India 3) Stock-in Trade 4) Gold Bonds 5) Special Bearer Bonds There are two types of Capital Gains 1) Short Term Capital Gains-on transfer of Short Term Capital Assets 2) Long Term Capital Gains-on transfer of Long Term Capital Assets 2.1.9 Income from Other sources The head income from other source is a residuary head.It means that all incomes which are not covered under the other heads of income like house-property,salary,capital gains,and business or profession is covered under income from other sources.Section 56 specifies income under this head. 2.1.10 Other than that one has to understand what is Deduction Deductions cannot exceed Gross Taxable Income, Casual Income, Long Term Capital Gain & Short Term Capital Gain. Once the taxable income is calculated we can make deductions so that the net income taxable is reduced for the assessee and also improves investment for future usages.

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2.1.11 Aggregation of Income, set-off, carry forward of losses and deduction from total income There are also other types of tools used by businesses where they aggregate their income from all heads and either set-off against applicable heads or carry forward the losses to reduce the net taxable income. 2.1.12 Filing of Returns Once the income is calculated it is filed with the Income Tax department for a return after making the payment so that any excess or shortage can be adjusted against future tax and payment. 2.1.13 Appeals If there is any dispute with the rate, amount or return of tax there is a mechanism with which one can appeal to the commissioner of Income tax, High court, Supreme Court or a special Tribunal against the assessment done by an assessing officer.

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2.2 Wealth tax Another form of direct taxation is the wealth tax on the wealth /assets of an Individual, HUF, and Companies etc.Wealth tax is levied on the Net Tax. The rates applicable are as follows:0-300000-NIL 300000&ABOVE -1% Net Wealth is also defined as Total assets-Total debts. There is certain exemption on which wealth tax is not levied like1) Any social club 2) Any political party 3) Any co-op society etc

There are exempts under most heads of income which will not be falling under the tax brackets based on various rules and acts which authorizes them.

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C.INDIRECT TAX Different types of indirect taxes like 3.1 Sales tax The type of tax which is charged or applied during the sale transaction of a commodity or services .This was charged earlier when the service tax and VAT was not applied as a form of indirect taxation. 3.2 Service tax 3.2.1 Background Service tax is a recent inclusion in the form of indirect taxation by including more sections under its banner. The service tax was initially applied to only three sectors. It is governed by the Finance act of 1994.Its applicable all over India except the state of Jammu & Kashmir. 3.2.2 Scope Earlier it was applied to sectors, viz-telephone, stock-broker and general insurance. The scope has now increased to several other fields of operations. The service tax rules have been amended from time to time. There has been a proposition to include most of the new sectors in the Service Tax bracket. 3.2.3 Negative List To ensure maximum services have to be included in the service tax net; the centre has come up with a negative list which does not include items in service tax bracket. so the taxation will be like the current list of services will be continued most of them, the negative list which will exclude the list of items from services and the all the remaining items will be in the service tax net. 3.2.4 Administrative Mechanism The Central Excise department administers Service tax. A separate cell called the Service Tax Cell, under each Commission rate of Central Excise has been created for the purpose. However, in six cities, separate service tax commission rates have been created. 3.2.5 Rate of Service Tax In the year 1994, when the Service Tax was first introduced, it was first levied on the uniform basis at the rate of 5% of the value of taxable service. This rate went up to 85 and currently is fixed at 10% to which education cess of 2% and higher education cess of 1% is levied. E.g.-If a person renders a taxable service of the value of Rs500, the service tax @10% on it will be Rs50+education &higher education cess @3% on Rs50 is Rs1.50.The total service tax payable will be Rs51.50. Also service tax will be rounded off to multiples of Rs1.
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3.2.6 Reverse Charge Mechanism There are two ways to make a payment generally the charges are added to the bill of the service provider and the service receiver or final person pays it along with the Bill. There is another service provider is required to pay the Service tax. They either claim credit from the government later if they fall in the exempt bracket. The place where the service receiver gets charged is known as Reverse charge. If the service tax has been wrongly charged then it has to be refunded to the service receiver or deposit the amount in to the bank account of the Central Government if the person is not found. 3.2.7 Time of Payment As per Sec (68) service Tax is paid within the 5th of the next month or quarter. Service Tax for the quarter or month ending March can be paid by the 31st March. When a payment is done by e-payment or internet banking an extension by 6th of every month or quarter been provided for. 3.2.8 Point of Taxation Service tax is required to be paid according to Point of Taxation Rules. This may vary from case-to case. Point of Taxation means the point in time when a service is deemed to have been provided. 3.2.9 Registration Section (69) of the finance act, read with rule 4 of the Service TAX Rules makes provisions relating to registration. Registration is mandatory for every person liable to pay the service tax. The registration is done with the superintendent of Central Excise. There is no fee for registration. Registration creates a record with the government and identification for an assessee.Where an assessee has several businesses with different services provided a single application mentioning all the services provided for Single Registration for Multiple Services. Either one can have multiple registration or single registration as per their convenience. For eg-1)I f the person has a chain of stores located in multiple locations. He can register for each store separately or mention the list of stores to be included centrally under one registration.If the person fails to make a registration then he will be penalized Rs200/day or Rs5000/- whichever is higher.If the assessee transfers his business then the new owner has to register himself afresh. The registration number is a 15 digit number, just like a PAN number. 3.2.10 Returns In the service tax there is self assessment system and the assessee himself has to prove or decide his tax liability. However the assesses who have registered themselves have to file half yearly return providing the details of the tax liability.1st April -30th September and from 1st October-31st March of the financial year. The return has to be file within 25 days of expiry of the above dates. Even if there is no service provided nil return have to file within the time
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frame provided for. If there is a genuine mistake on the assesses behalf he can revise his return within 90 days from the time he filed original return.

3.2.11 Penalty Penalty for filing return can be as followsDelay up to 15 days-Rs500/Up to 15days-30days-Rs1000/Beyond 30days-Rs1000+Rs100per day up to Rs2000. 3.2.12 Cenvat Credit Rules-2004 The main feature of these rules is to make the rules simple and less cumbersome. The rules contain for Goods and Services. The responsibility lies with the manufacturer or service provider that he can avail CENVAT CREDIT. 3.2.13 Appeals Appeal can be filed against the adjudication officer for order passed, penalty levied, etc The appeal is first made to Commissioner (appeals), second and final appeal is with the Appellate Tribunal CESTAT (Customs, Excise&Service Tax Appellate Tribunal)

3.2.14 Role of Practicing Company Secretary The education, knowledge, training of the CS can allow him to render several services under Service Tax such as1) Registration with Tax Authority 2) Advising on applicability, rate and payment of service tax. 3) Filing of return with authorities. 4) Claiming exemptions. 5) Advising on procedural matters relating to service tax.

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3.3 VAT Its another form of indirect tax. The full form of VAT is value added tax .Most of us is of the opinion that the finished goods produced from the raw material stage and its subsequent value addition at each stage of production is considered to be value added. However even when there is no change in form from Raw material to Finished Goods and just a service provided in transferring the product to remotely inaccessible location in itself can be concluded to be a value addition and a case for taxation to be applied. Its a paid at each such point in the life of the goods from the raw-material stage till the finished good stage where value is added in terms of money. At each such point tax is charged on the output price and credit is given on the tax paid on input price. Value Added Tax (VAT) is a tax imposed on intra state sale as a percentage on the value addition in the goods. Such value additions are measured by deducting the purchase price of inputs from the sale value of goods. 3.3.1 Advantages of VAT 1) To encourage and result in better-administered system. 2) To eliminate avenues of tax evasion. 3) To claim credit on tax paid on inputs at each stage of value addition. 4) Ensures better compliances by generating a trail of invoices and support effective audit enforcement. 5) Contribution to the fiscal consolidation and a steady source of revenue for the central government. 6) It eliminates tax cascading effect. 7) Rates of VAT are uniform all over the country.

3.3.2 Disadvantages of VAT 1) VAT is a new scheme and different from sales tax. Hence old dealers with their old set-up dislike changing with VAT. 2) Partial removal of Tax cascading effect due to different composition scheme, no input tax credit for input purchase from different states, etc. 3) VAT is unable to maintain neutrality unless CST is integrated with VAT during interstate purchases. 4)Input tax credit is invoice based and to claim tax credit invoices, memos have to be maintained and the onus to claim lies with the person who wants credit applied.
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5) The administration cost may go up as the number of dealers to be administered will go up significantly.

3.3.3 Tax Rates Under VAT 1) Goods liable to VAT @4% 2) Goods liable to VAT @12.5% 3) Goods liable to VAT@1 %( gold & silver ornaments) 4) Goods liable to VAT @0 %( exempted goods but eligible for input tax credit) 5) Non VAT goods. 3.3.4 Calculation of VAT There are four main methods involved to calculate VAT, like addition method, direct subtraction method, Intermediate subtraction method and Invoice method. In addition method the factors of production are multiplied by the VAT rate, in the Direct Subtraction method the difference between the sale and purchase price is multiplied by the VAT rate, in the Intermediate Subtraction method the sale price inclusive of VAT minus the Purchase price inclusive of VAT multiplied by VAT rate and finally the Invoice method VAT output tax minus the VAT input price is deducted. 3.3.5 Registration Every dealer up to the level of retailer is required to be registered with the Sales Tax department to avail the credit of tax input. The retailers below the threshold level can opt to not get registered but pay a nominal composition Tax. However there is a limitation they cannot take credit from the prior stage, nor can they pass it to their buyers. 3.3.6 Assessment and Audit The VAT liability shall be self assessed by the dealer himself and scrutiny may be done if doubts regarding under-reporting of transaction or evasion of tax. There shall be a department audit done on a scientific manner. To avoid bias this department will be delinked from the tax collection unit. Simultaneously there shall be cross-checking through computerization between tax authorities of state government and authorities of Central Excise. 3.3.7 Returns The returns filing procedures are such so as to minimize compliance cost. The returns can be filed monthly, quarterly or annually by a registered dealer. 3.3.8 Zero Rating There is a concept of zero rating where in the tax payable on sale is fixed at 0%.The input tax is completely set-off against 0% output based tax and an entire input amount is claimed for a
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refund. This is different from exempt tax where the Input tax paid is lapsed and due to that Zero rating is more beneficial then exempt tax. Generally export sales are zero rated and thereby exporters gain by claiming the input tax paid by them. 3.3.9Refunds The refunds are usually claimed at the end of the financial year. Some state provides refund for excess tax paid on input to output taxes by setting off the payment. The excess is refunded or returned back to the dealer. 3.3.10 Appeals Though proposed to be uniform its still differently applied in different states. Due to this the rules governing VAT falls under different jurisdiction of different states. However the general system is appeal is done to Commissioner at the first level and finally to the tribunal paneled by eminent Tax authorities and District judges. 3.3.11 Role of Company Secretary 1) To ensure all the documents to be filed before the VAT authorities are correct or not. 2) Compliance with the existing rules. 3) To ensure that proper procedures are followed while making an assessment and payment is made. 4) To ensure that the dealers maintain the documents as per the VAT rules. 5) To advise clients on processing appeals and representing them to Appellate tribunals

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D.FUTURE OF TAX IN INDIA Though Income tax is and will constitute the direct mode of taxation in India .The tax rate slabs may vary as per the Finance Act of the concerned year .The future of indirect taxation will depend upon the proposed inclusion of various sectors in the service Tax net. The government is contemplating including a negative list with excluded sections not to be included the included sections list and the remaining sections or sectors fall in the residuary list. The idea is to cover most areas under taxation at par with the WTO rules and with the progressive nations of the world. The future of VAT is charge on goods and services tax. This will also ensure uniformity and neutral application of rates all across the states in the country .Indirect taxation is preferred more too direct modes of taxation as its simple and more cost effective than the regular direct modes of taxation.

E.CONCLUSION Thus the role of Company Secretary with its knowledge base,training,versatility in various related fields of accountancy, law, corporate governance, company law, SEBI law, Tax laws will enable rendering of wide range of services including the field of Taxation .Taxation is constantly being refined an evolved due to new circulars issued, laws and regulations passed from time to time. This mandates being abreast of latest updates and current in ones approach towards the subject of TAXATION.

THANK YOU

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