BUSINESS TAXATION

MEANING OF TAX

Financial charge or other levy

By central government or state government
Paid in the form of money
Burden laid upon individuals to support the government
Payment exacted by legislative authority
Not a voluntary payment / donation
Under different names as income tax, customs, excise etc

CMS B School, JAIN University, Prof. SA Module 1

TAX RATES

Taxes are most often levied as a percentage, called the tax rate.
PROGRESSIVE TAX RATE
A progressive tax is a tax imposed so that the effective tax rate increases as the amount to which the rate is
applied increases. For e.g.. Income tax
REGRESSIVE TAX RATE
A tax that takes a larger percentage from low-income people than from high-income people. A regressive tax is
generally a tax that is applied uniformly. This means that it hits lower-income individuals harder.
Some examples include gas tax and cigarette tax. For example, if a person has Rs.1,000 of income and must pay
Rs.10 of tax on a package of cigarettes, this represents 1% of the person's income. However, if the person
has Rs.2,000 of income, this Rs.10 tax only represents 0.5% of that person's income.
Sales taxes that apply to essentials are generally considered to be regressive as well because expenses for food,
clothing and shelter tend to make up a higher percentage of a lower income consumer's overall budget. In
this case, even though the tax may be uniform (such as 7% sales tax), lower income consumers are more
affected by it because they are less able to afford it.
PROPORTIONAL TAX RATE
In case of a proportional tax, the effective tax rate is fixed, while the amount to which the rate is applied
increases. For e.g.. Property tax (based on the area of the property)

CMS B School, JAIN University, Prof. SA Module 1

KINDS OF TAXES

DIRECT TAXES

The Taxes whose burden falls directly on the Tax payers are the Direct Taxes. For
Instance
1. Income Tax (Capital Gains Tax, STT, Corporate Tax)
2. Wealth Tax

INDIRECT TAXES
The taxes in which the burden of tax is passed on to a third party are called Indirect
Taxes. For instance
1. Service Tax
2. Excise Duty

CMS B School, JAIN University, Prof. SA Module 1

KINDS OF TAXES

OTHER TAXES

1.
2.
3.
4.
5.
6.
7.
8.
9.
10.
11.
12.

Octroi
Sales Tax
VAT
Customs Duty
Professional Tax
Dividend Distribution Tax
Municipal Tax
Entertainment Tax
Stamp Duty, Registration Fees, Transfer Tax
Education Cess, Surcharge
Gift Tax
Toll Tax

CMS B School, JAIN University, Prof. SA Module 1

PRINCIPLES OF A GOOD TAX SYSTEM

Efficient - A tax system should raise enough revenue such that government projects can be
adequately sponsored, without burdening the tax payer too much, becoming a disincentive
for investment and work.

Understandable - The system should not be incomprehensible to the layperson, nor should it
appear unjust or unnecessary complex. This is to minimize discontent and costs. Easy to
understand and calculate.

Equitable - Taxation should be governed by people's ability to pay, that is, wealthier
individuals or firms with greater incomes should pay more in tax while those with lower
incomes should pay comparatively less.

The tax system should be such that it should be difficult to avoid tax.

CMS B School, JAIN University, Prof. SA Module 1

OVERVIEW OF INCOME TAX LAW IN INDIA

Income tax Act : IT act 1961. It came into force on 01.04.1962. It contains 23 chapters, 298
sections and XIV schedules. Additions and deletions are brought by the finance act passed by
Parliament.

The Finance Act : Every year Finance Minister of govt of India presents the budget to
Parliament.
Part A of budget speech contains the proposed policies of the government in fiscal areas.
Part B of budget speech contains detailed tax proposals.
To implement the above proposals Finance bill is introduced in parliament and once the bill is
approved by Parliament and gets assent of President, it becomes the Finance Act.

Income tax rules : Administration of direct taxes is looked after by CBDT. It frames rules called
Income tax rules 1962.

Circulars and Notifications : They are issued by CBDT from time to time

to deal with certain specific problems and to clarify doubts regarding the scope and
meaning of provisions

for guidance of officers or assesses

Department is bound by the circulars

Case laws
CMS B School, JAIN University, Prof. SA Module 1

STEPS TO CALCULATE TAX

Residential status of the assessee should be determined

Calculate the chargeable income under each of the five heads (wherever applicable)

Apply clubbing provisions (wherever applicable)

Set off losses if any

From gross total income so calculated, claim deductions from income under various
sections

On the balance income calculate tax based on rates applicable

Calculate surcharge and education cess as applicable

Reduce any advance tax paid or tds or any self assessment tax paid

Balance is tax payable or refundable

CMS B School, JAIN University, Prof. SA Module 1

COMPUTATION OF INCOME
Particulars

Amount (Rs.)

Income under the head Salary

Income under the head House Property
Income under the head Business/ Profession
Income under the head Capital Gains
Income under the head Other Sources
GROSS TOTAL INCOME
Less : Deductions under chapter VI A (Sec 80C to 80U)
NET TAXABLE INCOME
TAX
Less: TDS, ADVANCE TAX, SELF ASSESSMENT TAX
TAX PAYABLE / REFUNDABLE

CMS B School, JAIN University, Prof. SA Module 1

BASIC CONCEPTS
1. Assesse: It means a person by whom any tax or any other sum of money is payable under this
act.
2. Person: It includes the following.
Individual: It means only a natural person i.e. a human being. It also included a minor
person or a person of unsound mind (guardian).
HUF: It consists of all persons lineally descended from a common ancestor and includes
their wives and unmarried daughters.
The head of the HUF is known as Karta.
Association of persons (AOP) :
When persons combine together for promotion of joint enterprise to produce income
For e.g.: ABC group housing society
Body of individuals : Such as trustees who merely receive the income jointly and who
may be assessable in like manner. For e.g.. BJP
Company
Firm
Local Authority : It means a municipal committee or other authority legally entitled by
the government with the control or management of a municipal or local find. For e.g..
Delhi municipal corporation
Artificial Person : Every artificial juridical person not falling under other heads like
private religious trusts, an idol or deity.

CMS B School, JAIN University, Prof. SA Module 1

BASIC CONCEPTS
2. Person: sec 2(31) : It includes 7 types of persons namely.

Individual
HUF
AOP/ BOI
Company
Firm
Local Authority
Artificial Person

CMS B School, JAIN University, Prof. SA Module 1

DIFFERENCE BETWEEN AOP & BOI

AOP

BOI

Any person can be its member i.e. entities

like Company, Firm etc. can be the member
of AOP but not of BOI.
Members voluntarily get together with a
common will for a common intention or
purpose and associate themselves in an
income producing activity.
AOP is formed on voluntary basis.

Only individuals can be the members

In case of BOI, such common will may or

may not be present, whether or not to
earn income.
BOI is creation of law.

CMS B School, JAIN University, Prof. SA Module 1

BASIC CONCEPTS

3.
4.

Assessment : The procedure by which income of an assesse is determined

by Assessing officer.
Income: A periodic monetary return which accrues or is expected to accrue
from definite sources.
It need not necessarily be periodic e.g.. Winnings from lotteries and crossword puzzles
Normally only revenue receipts are taxed but in few cases capital receipts are also taxed
(sale of a capital asses like land)
Only net receipts and not gross receipts
Taxable on due or receipt basis.
Income earned in a PY is chargeable to tax in the AY.

5. Previous Year (PY): It is the FY ending on 31st March in which income is accrued or received.

It is the financial year immediately preceding the assessment year.

If source of income comes into existence during the financial year, then in such
cases the previous year will start from the date on which source of income comes
to existence and will end on 31 st March.
CMS B School, JAIN University, Prof. SA Module 1

BASIC CONCEPTS

6. Assessment Year (AY): It is the FY ending on 31st march following the PY in

which income of PY is assessed to tax.
It is always a period of 12 months which starts on 1st April every year and ends on 31st March of
the succeeding year..

CMS B School, JAIN University, Prof. SA Module 1

BASIC CONCEPTS

1. A is running business from 1992 onwards. Determine the previous year for the
assessment year 2009-10.
2. A lawyer sets up his profession on 1st July 2011. Determine the first previous year.
3. Suppose Mr.X is leaving India for USA on 10.06.09 and it appears to the Assessing officer
(AO) that he has no intention to return. For what income can the AO charge him the tax
before he leaves India.

CMS B School, JAIN University, Prof. SA Module 1

BASIC CONCEPTS

4. Determine how the following will be chargeable to income tax.

a. X , a partner in a firm
b. DCM Ltd.
c. BJP
d. Laxmi Commercial Bank Ltd.
e. Bar Councils
f. Delhi Municipal Corporation
g. Y
h. HUF of A,B and C
i. Delhi university
j. Courts
k. X,Y and Associates
l. ABC group housing co-op society

CMS B School, JAIN University, Prof. SA Module 1

TAX RATES FOR AY 2014-15

For Individuals, HUF, AOP and BOI
Total Income

Tax Rates

<= 200,000

Nil

200,001 to 500,000

10%

500,001 to 10,00,000

20%

> 10,00,000

30%

In case of resident individual >=60

years and < 80 years

Basic exemption 250,000

In case of resident individual > 80 years

Basic exemption 500,000

Surcharge

Nil

Education cess

3%

CMS B School, JAIN University, Prof. SA Module 1

TAX RATES FOR AY 2014-15

For Firms and Companies
Partnership Firms / LLP

30%

Surcharge

Nil

Education Cess

3%

Domestic Companies

30%

Surcharge

5% (if total income > 10,000,000)

Education Cess

3%

Foreign Companies

40%

Surcharge

2% (if total income > 10,000,000)

Education Cess

3%

CMS B School, JAIN University, Prof. SA Module 1

TAX RATES FOR AY 2014-15

Capital Gains
PARTICULARS

STCG

LTCG

Equity Shares

15% (Sec 111A)

Exempt from tax

CG on any other asset

Added to normal income

and taxed accordingly

20% (Sec 112)

On winnings from lotteries, crossword puzzles, card

games etc

30% (Sec 115BB)

CMS B School, JAIN University, Prof. SA Module 1

RESIDENTIAL STATUS

The Residential Status of an assessee must be determined with reference to each PY.

There are 2 types of Residential Status:

Resident
Non Resident

Resident is again divided in the following 2 categories:

Resident and Ordinarily Resident
Resident but not Ordinarily Resident

CMS B School, JAIN University, Prof. SA Module 1

RESIDENTIAL STATUS - INDIVIDUAL

Particulars

Conditions

Sec 6(1)

1a. A person is said to be R in India in any PY if

he satisfies any one of the following
conditions:

1. He has been in India during the PY for a

total period of 182 days or more OR
1. He has been in India during the 4 years
immediately preceding the PY for a total
period of 365 days or more and has been
in India for at least 60 days in the PY

CMS B School, JAIN University, Prof. SA Module 1

RESIDENTIAL STATUS - INDIVIDUAL

Particulars

Conditions

Sec 6(1)

1b. For the following category of persons it is

necessary to satisfy the first condition to be
Resident in India:

1. An Indian citizen who leaves India during

the previous year for the purpose of
taking employment outside India or as a
member of the crew of an Indian ship
1. An Indian citizen or a person of Indian
origin engaged outside India who comes
on visit to India during the previous year
(a person is said to be of Indian origin if
either he or any of his parents or any of
his grandparents was born in undivided
India).

CMS B School, JAIN University, Prof. SA Module 1

RESIDENTIAL STATUS - INDIVIDUAL

Particulars

Conditions

Sec 6(6)

Additional conditions to test as to when a

resident individual is ordinarily resident in
India- Both the conditions must be satisfied

1. He has been resident in India in at least 2

out of 10 previous years [according to
basic condition noted above] Immediately
preceding the relevant previous year.
1. He has been in India for a period of 730
days or more during 7 years immediately
preceding the relevant previous year.

CMS B School, JAIN University, Prof. SA Module 1

RESIDENTIAL STATUS - INDIVIDUAL

Important Points:

Stay in India includes stay in the territorial waters of India (ie 12 nautical miles into the sea
from the Indian coastline)
Both the date of departure as well as date of arrival is considered to be in India.
The stay need not be continuous nor at the same place
Where a person is in India only for a part of a day, the calculation of physical
presence in India in respect of such broken period should be made on an hourly
basis. A total of 24 hours of stay spread over a number of days is to be counted as
being equivalent to the stay of one day.
If, however, data is not available to calculate the period of stay of an individual in
India in terms of hours, then the day on which he enters India as well as the day
on which he leaves India shall be taken into account as stay of the individual in
India.

CMS B School, JAIN University, Prof. SA Module 1

RESIDENTIAL STATUS - HUF

Particulars

Conditions

1a. HUF is R in India

1. If the control and management of its

affairs is situated wholly or partly in India

1a. HUF is NR in India

1. If the control and management of its

affairs is situated wholly outside India

CMS B School, JAIN University, Prof. SA Module 1

RESIDENTIAL STATUS - HUF

Important Points:
a. Control and management is said to be situated at a place where the head and brain of the
adventure is situated.
b. Place of control may be different from usual place of running the business and sometimes
even the registered office of the assessee.

c. If HUF is resident then status of the Karta determines whether it is ROR or RNOR.

CMS B School, JAIN University, Prof. SA Module 1

RESIDENTIAL STATUS FIRM, AOP, LOCAL AUTHORITY, ARTIFICIAL PERSON

Particulars

Conditions

1a. It is R in India

1. If the control and management of its

affairs is situated wholly or partly in India

1a. It is NR in India

1. If the control and management of its

affairs is situated wholly outside India

CMS B School, JAIN University, Prof. SA Module 1

RESIDENTIAL STATUS COMPANY

Particulars

Conditions

1a. It is R in India

1. An Indian Company is always R in India

2. A foreign co is R in India only if during the
previous year , control and management
of its affairs is situated wholly in India
1. A foreign co is NR in India if during the
previous year , control and management
of its affairs is either wholly or partly
situated out of India

1a. It is NR in India

CMS B School, JAIN University, Prof. SA Module 1

RESIDENTIAL STATUS - COMPANY

Important Points:

Control and management of the affairs of a company are said to be exercised from a
place where the directors meetings (not shareholders meetings) are held and decisions taken
and directions issued.

CMS B School, JAIN University, Prof. SA Module 1

Tax incidence of different taxpayers is as follows:

Individual and HUF

Particulars

Indian income

ROR

RNOR

NR

Taxable in India

Taxable in India

Taxable in India

Taxable in India

Taxable in India

Not taxable in India

Taxable in India

Taxable in India

Not taxable in India

Taxable in India

Not taxable in India

Not taxable in India

Taxable in India

Not taxable in India

Not taxable in India

Taxable in India

Not taxable in India

Not taxable in India

Foreign income
- If it is business Income
and business is controlled
wholly or partly from
India
- If it is income from
profession which is set up
in India
- If it is business income
and business is controlled
from outside India
- If it is income from
profession which is set up
outside India
- Any other foreign
income (like salary, rent,
interest, etc.)

CMS B School, JAIN University, Prof. SA Module 1

RESIDENTIAL STATUS

1. Steve Waugh, the Australian cricketer comes to India for 100 days every year. Find out his
residential status for the AY 2013-14.
2. Mr.B a Canadian Citizen, comes to India for the first time during the PY 2007-08. During
theFYs 2007-08, 2008-09, 2009-10, 2010-11 and 2011-12, he was in India for 55 days, 60
says, 90 days 150 days and 70 days respectively. Determine his residential status for the AY
2012-13.
3. Mr. D an India citizen, leaves India on 22.09.08 for the first time, to work as an office of a
company in France. Determine his residential status for the AY 2009-10.
4. The business of HUF is transacted from Australia and all the policy decisions are taken there.
Mr. E, the Karta of the HUF , who was born in Kolkata, visits India during the PY 2008-09 after
15 years. He comes to India on 01.04.2008 and leaves for Australia on 01.12.08. Determine
the residential status of Mr.E and the HUF for AY 2009-10.

CMS B School, JAIN University, Prof. SA Module 1

RESIDENTIAL STATUS

5. X left India for the first time on May 20, 2003. During the financial year 2005-06, he came to
India once on May 27 for a period of 53 days. Determine his residential status for the
assessment year 2006-07.
6. X comes to India, for the first time, on April 16, 2003. During his stay in India up to October 5,
2005, he stays at Delhi up to April 10, 2005 and thereafter remains in Chennai till his
departure from India. Determine his residential status for the assessment year 2006-07.
7. Activity A- X, a foreign citizen comes to India, for the first time in the last 30 years on March
20, 2005. On September 1, 2005, he leaves India for Nepal on a business trip. He comes back
on February 26, 2006. Determine the residential status of X for the assessment year 2006-07.
8. Activity B- X, an Italian citizen, comes to India for the first time (after 20 years) on May 28,
2005. Determine his residential status for the AY 2006-07

CMS B School, JAIN University, Prof. SA Module 1

RESIDENTIAL STATUS & TAX INCIDENCE

9. For the assessment year 2006-07 (previous year 2005-06), X is employed in India and receives
Rs. 24,000 as salary. His income from other sources includes:
Dividend received in London on June 3, 2005: Rs. 31,000 from a foreign company;
share of profit received in London on December 15, 2005 from a business situated in Sri
Lanka but controlled from India: Rs. 60,000;
interest earned and received in India on May 11, 2006: Rs. 76,000.
Find out his gross total income, if he is (a) resident and ordinarily resident,
(b) resident but not ordinarily resident,
and (c) non-resident for the assessment year 2006-07.

CMS B School, JAIN University, Prof. SA Module 1