A Book Of

B US I N E S S T AX AT I O N For BBM Semester - IV As Per Revised Syllabus Effective from June 2014

Suresh Bhirud M.Com., M.Phil Ex. Head, Dept. of Commerce Bharatratna Dr. Babasaheb Ambedkar College.

Dr. Mahesh A. Kulkarni M.Com., M.Phil (Com.), Ph.D. (Mgnt.), LL.B., D.T.L. Ex. Reader, R.N.C. Arts, JDB Commerce and NSC Science College.

Price ` 260.00

N2480

BBM Business Taxation

ISBN 978-93-5164-255-8

Second Edition : January 2016 © : Author The text of this publication, or any part thereof, should not be reproduced or transmitted in any form or stored in any computer storage system or device for distribution including photocopy, recording, taping or information retrieval system or reproduced on any disc, tape, perforated media or other information storage device etc., without the written permission of Author with whom the rights are reserved. Breach of this condition is liable for legal action. Every effort has been made to avoid errors or omissions in this publication. In spite of this, errors may have crept in. Any mistake, error or discrepancy so noted and shall be brought to our notice shall be taken care of in the next edition. It is notified that neither the publisher nor the author or seller shall be responsible for any damage or loss of action to any one, of any kind, in any manner, therefrom.

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Preface … We have great pleasure to place this book in the hands of B.B.M. (Sem. – IV) students. We have made a sincere effort to give necessary details of the prescribed Acts, in a simple language. The necessary definitions, schedules, annexures etc. have been reproduced from the relevant Acts and wherever necessary, explanations have been given. At the appropriate places, illustrations have been given so as to enable the students to understand the concepts or legal provisions. In Business Taxation, we have considered the latest provisions and amendments made in the Finance Act, 2014. Accordingly, illustrations are given and solved according to the provisions of the Finance Act, 2014 which is applicable from Assessment Year 2015-16. At the end of each chapter, we have given adequate number of questions. This will help the students to prepare themselves for examination. We trust that this book will be very useful not only to the students appearing for the University examination, but also the teachers teaching this subject. We shall welcome the suggestions from teachers and students to make the book more useful. We are thankful to Shri. Dineshbhai Furia, Shri Jignesh Furia, Mr. Malik Shaikh, Mr. Amol Mahabal, Mr. Prasad Chintakindi and the entire staff of Nirali Prakashan for taking lot of pains to publish this book.

Prof. Suresh Bhirud Dr. Mahesh Kulkarni

Syllabus … Sr. No.

Topic

Number of Lectures

Unit 1

Income Tax Act, 1961 (Meaning, Concepts and Definitions) Income, Person, Assessee, Assessment Year, Previous Year, Agricultural Income, Exempted Income, Residential Status of an Assessee, Fringe Benefit Tax, Tax deducted at Source, Capital and Revenue Income and Expenditure. Computation of Taxable Income under the Different Heads of Income

10

Unit 2

10

(a) Income from Salary Salient Features, Meaning of Salary, Allowances and Tax Liability - Perquisites and their Valuation – Deductions from Salary. (Theory and Problems). (b) Income from House Property Basis of Chargeability – Annual Value – Self Occupied and Let Out Property – Deductions Allowed (Theory and Problems). (c)

Profits and Gains of Business/Profession Definitions, Deductions expressly allowed disallowed (Theory and Problems).

(d) Capital Gains Chargeability – Definitions – Cost of Improvement, Short-term and Long-term Capital Gains – Deductions (Theory Only).

Unit 3

(e) Income from Other Sources Chargeability – Deductions – Amounts not deductable. (Theory Only). Computation of Total Taxable Income of an Individual Gross Total Income – Deductions u/s 80 (80 ccc to 80 u)

12

Income Tax Calculation – (Rates applicable for respective Assessment Year) Education Cesses, Refund of Tax and Practical Aspects of Refund. Unit 4

Miscellaneous Return of Income - Advance Payment of Tax - Methods of Payment of Tax - Forms of Return - Organisation Structure of Tax, Authorities/ Administrative and Judicial Organisations) Central Board of Direct Tax (Functions and Powers of Various Income Tax Authorities

12

Unit 5

Introduction to Indirect Taxation Concepts in Central Excise - Central Sales Tax - Service Tax (Theory Only

04

Total

48

,,,

Contents … 1.

Income Tax : Introduction

1.1 −

1.18

2.

Income Tax : Meaning, Concepts and Definitions

2.1 −

2.46

3.

Computation of Taxable Income under the Head 'Salary'

3.1

−

3.46

4.

Computation of Taxable Income From House Property

4.1

−

4.22

5.

Profit or Gain of Business or Profession

5.1

−

5.48

6.

Capital Gains

6.1 −

6.32

7.

Income from Other Sources

7.1 −

7.12

8.

Computation of Total Taxable Income of an Individual

8.1 −

8.66

9.

Miscellaneous

9.1 −

9.24

10.1 − 10.20

10. Introduction to Indirect Taxation

•

P.1 −

April 2015 Question Paper ,,,

P.3

Highlights of Finance Budget 2015 (Applicable from A.Y. 2016-17) 1.

No change in the rate of tax for the individual and HUF nor increase in the exemption limit. Both are the same as A.Y. 2015-16. However, surcharge is increased by 2% if the income is more than that ` 1 crore. It means now surcharge is at 12% if the income is more than ` 1 crore.

2.

For salaried person, the exemption for transport allowance is increased from ` 800 to ` 1,600 p.m. In the case of an employee who is blind or orthopaedically handicapped the limit for exemption in transport allowance is increased from ` 1,600 to ` 3,200 p.m.

3.

Investment in Sukanya Samriddhi Scheme is now eligible for deduction u/s 80C of the Act which is in name of an individual assessee or in the name of a girl child. Interest earned on such investment is also eligible for exemption.

4.

The limit for contribution to pension fund is increased from ` 1,00,000 to ` 1,50,000.

5.

Additional contribution upto ` 50,000 towards NPS under Section 80CCD (1B). It means an additional deduction is allowed for contribution made by an individual assessee under the NPS. On this additional contribution, the ceiling of ` 1,50,000 u/s 80CCE will not be applicable. Therefore, the total deduction u/s 80CCD stand to maximum of ` 2,00,000/-.

6.

In case of health insurance u/s 80D the limit of ` 15,000 has been increased to ` 25,000. For senior citizen the limit has been increased to ` 30,000/-. The aggregate deduction available to any individual in respect of health insurance premia and the medical expenditure will however be limited to ` 30,000. Similarly aggregate deduction for health insurance premia and the medical expenditure incurred in respect of parents will be limited to ` 30,000/-.

7.

Under 80U, in case of individuals suffering disability the fixed deduction is increased to ` 75,000 and in case of severe disability (80% or more), it is increased to ` 1,25,000/(previously it was ` 50,000 and ` 75,000 respectively). Further in case of senior citizen, the limit has been increased to ` 80,000 (previously it was ` 60,000). ,,,

Chapter …

1

Income Tax : Introduction SYNOPSIS 1.1 1.2 1.3

Introduction History of Income Tax in India Meaning and Definitions of Taxation 1.3.1 Characteristics of Taxation 1.4 Canons of Taxation 1.5 Types of Taxes 1.6 Direct Taxes – Meaning, Advantages and Disadvantages 1.6.1 Advantages of Direct Taxes 1.6.2 Disadvantages of Direct Taxes 1.7 Indirect Taxes – Meaning, Advantages and Disadvantages 1.7.1 Advantages of Indirect Taxes 1.7.2 Disadvantages of Indirect Taxes 1.8 Direct Taxes and Indirect Tax – Comparison 1.9 Scope of Income Tax Law 1.10 Application of Income Tax Act, 1961 1.11 Objective of Income Tax 1.12 Taxation Structure in India Questions for Self-Study Questions from Previous Pune University Examination 1.1 INTRODUCTION The important aim of the economic policy is to achieve economic growth of the nation, equal distribution of wealth and income in the country and reduction of poverty. Taking into consideration this aspect, public finance is mainly related with the methods by which the funds are raised to meet the public expenditure. To achieve this goal public expenditure is estimated first and the attempt is made to find out the ways and means of financing such required public expenditure. These are financed out of public revenues. Public revenue includes direct taxes, indirect taxes, profit from government commercial undertakings, etc. Direct and indirect taxes is one of the important source of raising public finance. It helps in diversification of income from the rich to the poor and from the few to the many. The tax system in India is flexible. It helps in mobilisation of resources. With this intention, the incentives for savings and investments have been provided. The direct tax system includes wealth tax, gift tax, etc., apart from income tax. Taxation appears to be the most important source of revenue to the Government. (1.1)

B.B.M. Business Taxation (Sem. – IV)

1.2

Income Tax : Introduction

1.2 HISTORY OF INCOME TAX IN INDIA Income tax was introduced in 1860, abolished in 1873 and reintroduced in 1886. Income tax rates in India were very high during 1950-1980, in 1970-71 there were 11 tax slabs with highest rate being 93.5% including surcharges. In 1973-74, highest rate was 97.75%. But to reduce tax evasion tax rates were reduced later on, by 1992-93 maximum tax rates were reduced to 40%. The Central Government has been empowered by Entry 82 of the Union List of Schedule VII of the "Constitution of India" to levy tax on all income other than agricultural income (subject to Section 10 (1)). The Income Tax Law comprises the Income Tax Act 1961, Income Tax Rules 1962, Notifications and Circulars issued by Central Board of Direct Taxes (CBDT), Annual Financial Acts and Judicial pronouncement by Supreme Court and High Courts. The Government of India imposes an Income Tax on taxable income of all persons including individuals, HUFs, companies, firms, association of persons, local authorities and any other artificial judicial person. Levy of tax is separate on each person. The levy is governed by the Indian Income Tax Act, 1961. The Indian Tax Department is governed by CBDT and the part of the Department of Revenue under the Ministry of Finance, Government of India. Income tax is a main source of funds that the government uses to fund its activities and serve the public. 1.3 MEANING AND DEFINITIONS OF TAXATION A tax is a compulsory payment to be made to the Government by the public. It has no relation to the benefit to be derived by the tax-payer. In other words, there is no direct return to the taxpayer for what he pays, though public in general derives a common benefit. Thus, tax is a compulsory contribution collected by the Government to meet the expenses of various public functions. The term 'taxes' has been defined by various experts as follows. 1.

Prof. Taussig : "The essence of a tax, as distinguished from other charges imposed upon a person or persons by the government, is the absence of a direct quid pro quo between the tax-payer and the public authority".

2.

P. E. Taylor : "A compulsory payment to government without expectation of direct return in benefit to the taxpayer is known as tax".

3.

Prof. Bastable : "A tax is a compulsory contribution of the wealth of a person or body of persons for the service of public powers".

4.

Prof. Seligman : "A tax is a compulsory contribution from a person to the government to defray the expenses incurred in the common interest of all without references to special benefits conferred".

5.

Webster's II New Reverside University Dictionary : "A contribution for the support of a government required of persons, groups or business within the domain of that government'. i.e. taxation".

6.

The Dictionary of Modern Economics : Taxation means "Compulsory levies on private individuals and organisations made by government to raise revenue to finance expense on public goods and services and to control the volume of private expenditure in the economy".

1.3.1 Characteristics of Taxation With the help of the above definitions, we may bring out the following characteristics of taxation : 1.

A tax is a contribution by individuals as well as organisation to the government to undertake various public activities.

B.B.M. Business Taxation (Sem. – IV)

1.3

Income Tax : Introduction

2.

It is a compulsory measure and the tax-payer cannot refuse to pay taxes, i.e. nobody can escape taxation and refusal to pay taxes is a crime. (Therefore, somebody rightly pointed out that there is no excuse for death and income tax.) 3. Taxes are levied to cover public expenses incurred by the government in the common public interest. Thus, money required to maintain law and order, defence, construction and up-keep of roads, etc. is raised through taxes. 4. It is not possible to establish a link between the tax and its benefit to the taxpayer. Public, in general, derives the benefits of money spent by the government but the taxpayer does not get a direct return equal to the amount of tax paid by him. 5. Paying taxes means some sacrifice by the tax-payer. 6. The taxes are levied at progressive rates. 7. It helps in diversification of income from the rich to the poor and from the few to the many. 8. Tax is one of the important and major sources of finance to the government. 9. Taxation results in reduction of surplus income which was otherwise available to tax payers. 10. It may adversely affect the ability to invest. We may conclude that a tax is a compulsory factor which can be imposed only by the government and none else. It is collected for the general welfare of the society and hence a taxpayer has no right to expect a direct return on the amount of tax paid by him. Benefit, thus, cannot be the basis of payment of tax by any person. 1.4 CANONS OF TAXATION Taxation is one of the major sources of Government revenue. At the same time it has got a special role to play in redistribution of income and reduction in inequalities of income prevailing in the society. To achieve both these objectives, the taxation system should be such that it is acceptable to the general public, fair to all members of the society, simple to operate and capable of yielding the optimum revenue. Adam Smith, the well known economist laid down the four basic canons of taxation on which a good tax system should be based. Various economists also have suggested different canons of a good tax system. Canons of Taxation

1. 2. 3. 4.

The Canon of Equity / Ability The Canon of Certainty The Canon of Convenience The Canon of Economy Advocated by Prof. Adam Smith

5. 6. 7. 8. 9. 10.

Canon of Simplicity Canon of Elasticity Canon of Productivity Canon of Co-ordination Canon of Variety Canon of Comprehensiveness Additional canons advocated by other experts

Canons of Taxation Advocated by Prof. Adam Smith 1. The Canon of Equity According to the first canon which is also called as canon of ability, all citizens of the nation should contribute towards expenses of the Government "as nearly as possible in proportion to their respective abilities." In other words, the tax system should be such that the citizens are liable to pay taxes as per individual capacity to pay. The rich are expected to pay more while the poor

B.B.M. Business Taxation (Sem. – IV)

1.4

Income Tax : Introduction

are expected to pay less. The ability to pay taxes increases with the rise in income, thus making the higher economic class to contribute more to the Government revenue. This principle is based on the simple theory that the ability to pay taxes increases more than proportionately to the increase in the income because the utility of money gradually diminishes with every increase in the income. The canon of ability is also recognised as a canon of equity as it calls for equal tax burden for all persons who are similarly situated in the economic income class. The basic principle underlying here is that "equals should be treated equally". This principle makes a tax system "fair and just". Modern economists however, did not agree to this opinion. Instead, they strongly put forth 'progressive' tax system which means increasing rates of taxes with the increase in income i.e., as the income rises, there is a lesser satisfaction to a person earning it and hence, a greater part of that rising income should go to the government. This will enable the government to spend the funds for the welfare of those who are unable to earn more. Therefore, this canon indicates that the taxation burden should be distributed amongst the people of differing ability to pay and the tax burden should be equally spread among the equally strong or equally weak class of society. 2. The Canon of Certainty Like canon of equity, Adam Smith advocated canon of certainty. The tax which an individual must pay, ought to be certain and not arbitrary. Thus, the amount of tax, the time of payment, the method of payment, etc. must be clear to the tax-payer and to other persons – otherwise, the taxpayer shall be at the mercy of the tax administrators who may increase the tax rates as per their whims and fancies. This may put the public into greater degree of inconvenience and this may encourage corruption in administration. This canon of certainty was mainly advocated to prevent exploitation of tax payers by the authorities collecting taxes. If the taxation policies are arbitrary and full of doubts and confusion, the possibility of harassment to the tax payers by the collecting authorities by using their power cannot be ruled out. To avoid such a situation, the taxation policies should be very clear and should create confidence in the minds of tax payers that tax being collected from them is just and proper. The canon of certainty also meant that Government should clearly know how much revenue it should get from the taxation system employed and the time when the revenue would be available in the hands of Government to meet the needs of public expenditure. The certainty in taxes is also very important for the development of industry. For a private industry to operate successfully it needs a stable political environment including a tax system under which the liability towards the tax can be predicted. Investment is risky if the industry is uncertain about the amount of tax to be paid. 3. The Canon of Convenience The third canon of taxation advocated by Adam Smith is the Canon of Convenience. In the words of Adam Smith "every tax ought to be levied at the time or in the manner in which it is most likely to be convenient for the contributor to pay it". The tax should be levied at such a time and in such a manner that its payment should cause least hardship or inconvenience to the tax payer. For example, when land revenue is collected from a farmer after harvesting season, it is quite easy for him to pay the tax but if it is collected before the harvesting season, it is most troublesome and inconvenient to him. Similarly, sales tax, excise duty or taxes on commodities satisfy the canon of convenience. Income tax also satisfies this canon because it is paid by the salaried employees in monthly instalments. In short, the tax system should be such that its enforcement is certain. Even voluntary compliance should exist in the tax policies. The taxes which are impossible to enforce and inconvenient to pay should be avoided.

B.B.M. Business Taxation (Sem. – IV)

4.

1.5

Income Tax : Introduction

The Canon of Economy Adam Smith's fourth canon of taxation is the canon of economy. The tax system should be economical to operate and the tax should be such that the cost of its collection should be minimum. The revenue from tax should be much more than the cost of its collection. Otherwise, the major portion of revenue will be taken away by the cost of its collection. This is particularly important from the point of view that the costs spent on the collection and nothing to the national output and resources which are already in scarcity, should not be wasted. A heavy tax burden also does not satisfy the canon of economy. Thus, it is interpreted that if a tax is quite heavy reducing savings of the public, reducing investments and, thus, the productive capacity, the tax system seems to have failed to satisfy this canon. The people should not feel that the tax is excessive. The above four canons were advocated by Adam Smith. These canons of taxation are the fundamentals of a good tax system and they are nothing but the directions to the government authorities to administer any tax system. II. Additional canons of taxation advocated by other experts : In addition to the above basic fundamentals of the tax system, the economist also advocated few other principles to supplement the basic canons of taxation. The additional canons are as follows : 5. Canon of Simplicity The tax policy should be simple and to the point. The better tax policy is a simple one, requires fewer conditions or assumptions. The assessment of tax, the rates and tax structure laws and rules governing taxes, tax exemptions, etc. must be simple and not complicated. The canon is meant to prevent harassment to tax-payers and corruption among the staff of tax administration. The tax system must be easy to operate. A sound tax system should be simple and should not be too complex. 6. Canon of Elasticity The tax system should be adaptable to changing circumstances. It should not be rigid or inelastic. The tax system is expected to provide built-in devices to facilitate growth and expansion without dissatisfaction. The tax system should be flexible so that taxes may be increased or decreased as per the needs of the state. Thus, income tax rates may be revised upwards or downwards as per the requirements of the government from time to time. Similarly, rise in petrol duty was announced by the Government of India in order to cope up with the oil crisis in our country. This was done with the objective to curb petrol and oil consumption and also to provide additional funds to face oil crisis. In the year 2000-2001, rise in surcharge duty was announced by the Government of India in order to cope up with the Gujarat earthquake problem in our country. 7. Canon of Productivity Productivity has become a key issue with tax planners. Economic growth has come to be firmly linked with gains in productivity. The canon of productivity requires that the taxes imposed by the State provides sufficient revenue so that the government may not be required to face financial difficulties. Thus, a tax system should be capable of providing adequate revenue to the State to enable it to perform its functions satisfactorily. 8. Canon of Co-ordination Co-ordination aims at higher efficiency and effectiveness. Co-ordination brings about integration. Co-ordination expresses the principles of organisation in total, nothing less. Co-ordination is the orderly arrangement of group efforts to provide unity of action in the pursuit of common purpose. It is essential to secure maximum co-ordination between different taxes imposed by different governments. The Constitution of India provides various guidelines in respect of taxation by

B.B.M. Business Taxation (Sem. – IV)

1.6

Income Tax : Introduction

various governments in order to avoid any conflict or dispute between the Central Government and the State Government. This ensures maximum co-ordination. Any Government should not encroach upon the rights of other Government in the matters of taxation. 9. Canon of Variety / Diversity Under diversification a multiple tax system is preferable. A government which adopts variety or diversity as a growth plan seeks to enter into new tax system and process. According to this canon, a multiple tax system should be preferred instead of a single tax system. A single tax system is one whereunder only one tax is to be levied upon a person i.e. he has to pay to the State only one tax, thereby the Government collects all that a person has to pay to the state. This will enable the state to distribute burden of taxation on every section of the society. 10. Canon of Comprehensiveness The comprehension indicates the act or power of understanding as well as the act of including. The comprehensiveness is one of the signs of sound tax system. It should cover all types of receipts and incomes. Only those exemptions which are necessary from administrative convenience point of view should be allowed. The above canons are the general guidelines which characterises a good tax system. In addition to these canons, another important element of sound tax system is that it should help the government to check the inflationary trends. A sound tax system should therefore, ensure the attainment of equality in incomes, wealth and opportunities. 1.5 TYPES OF TAXES The economists classify the taxes into two groups. i.e. Direct taxes and Indirect taxes. However, in modern times, a different classification is available, so taxes may be grouped as under : 1. Taxes on incomes 2. Taxes on commodities 3. Taxes on capital These three types may be regressive, proportional or progressive – Taxation

Direct-Taxes (Taxes on Persons/Organisations)

Income Tax

Wealth Tax

Gift Tax

Indirect-Taxes (Taxes on Commodities)

Excise Duty

Customs Duty

Value Added Tax

1.6 DIRECT TAXES : MEANING‚ ADVANTAGES AND DISADVANTAGES Direct taxes are those taxes which are levied immediately on incomes and property generated by the individual person or the group of persons. The income of the person or the group of persons is directly assessed and the tax payable is determined. This tax is directly paid by the individuals to the Government treasury, thus directly contributing to the exchequer. By this simple logic, the tax on income, the tax on wealth and the tax on gifts are direct taxes since these are collected from persons who earn the income or hold the property or donate the money by way of gifts. The direct taxes are normally levied on the individual persons which are assessed or determined on the basis of their income or property. Direct tax is a tax paid by a person on whom it is imposed and the burden of this tax cannot be shifted by the tax-payer on to any other person. J. S. Mill has defined a direct tax as 'one

B.B.M. Business Taxation (Sem. – IV)

1.7

Income Tax : Introduction

which is demanded from every person who is intended or desired, should pay it'. In other words, where the amount of tax is paid out of the pocket of the person who is legally responsible for the payment of the tax is termed as 'Direct tax'. 1.6.1 Advantages of Direct Taxes 1. Direct tax system helps to create general consciousness in the society : As the tax payer knows how much money he is required to pay and how much money he has paid towards tax on income or property, the direct-tax system helps to create general consciousness and awareness in the society. Due to this characteristics of the direct tax system, it is regarded as the simplest and most effective method of revenue realisation. 2. Revenue elasticity : The revenue of direct taxes varies according to the change in the income. As the income increases, the tax collection also increases. The rates of direct taxes are generally progressive. i.e. lower rate of tax at lower level of income and higher rates of tax at higher level of income. The rates go on increasing with the level of income. Due to this progressive system of tax rates, the revenue from tax collection increases faster than the increase in the income. 3. Most logical and rational revenue mobilisation method : As the rates of direct taxes are progressive they are directly related to the capacity of the tax payer to bear the burden of tax. The lower amount of taxes are levied on the persons earning lower income while the persons earning more income are required to pay higher taxes. Due to this, lower burden is placed on the weaker section of the community whereas the economically stronger class of the society has to bear larger share of tax collection. 4. Reduce the inequality between the rich and poor : Direct taxes are also used as one of the measures to reduce the inequality between the rich and the poor by taking away more and more money from the rich by way of higher taxes on income and property and distributing that income among the poor class of the society through various schemes and provisions of amenities. The higher incidence of taxes on income and properties of rich persons reduces the consumable surplus available with them, which otherwise would have been spent by them on non-priority items. This surplus taken away from rich class is utilised in implementing the socio-economic welfare schemes for the benefit of the poor class of the society. 5. More realistic estimates can be possible : As direct taxes are directly assessed and determined with reference to the income generated in the society, its estimation and budgeting at the planning stage becomes very easy. More realistic estimates can be made as compared to other tax collection systems which helps the Government authorities in making fiscal economic policies. 6. Educative value : Direct taxes have an educative value as they create awareness among the tax payers. Citizens realise their responsibility to pay taxes and because of the direct burden of taxes they become conscious and keep watch on how the public income is utilised by the government in a democratic country. 7. Anti-inflationary tool : Direct taxes are considered as an effective tool of antiinflationary fiscal policy designed to maintain the price level at a stable level. The excessive purchasing power during inflation can be mopped up from the factors of the society, through increased direct taxes. 1.6.2 Disadvantages of Direct Taxes The disadvantages of direct taxes are as follows : 1. Difficult and time-consuming tax collection process : As a large number of tax payers are spread over at different levels of income in the country, the assessment of tax becomes a cumbersome procedure. To determine tax liability, the detailed scrutiny of the accounts and financial affairs of the tax payer is essential but for which the possibility of evasion of tax increases.

B.B.M. Business Taxation (Sem. – IV)

2.

3. 4.

5.

6.

7.

8.

1.8

Income Tax : Introduction

Cost of collection is exorbitantly high : As the Government expenditure on running the big collection machinery, which includes thousands of employees at various levels, maintenance of office establishments across the country, etc. is increasing day-by-day. Therefore, the revenue from direct taxes becomes less beneficial. Sometimes, even the total abolition of the direct taxes is also advocated by economists and financial experts as according to them the revenue realisation from direct taxes is meager as compared to this tremendous cost of collection. Pinch the tax payers more : Direct taxes are to be paid in lumpsum and hence, pinch the tax payers more. Many people find it difficult to understand : The law of direct taxes have become so complicated that many people find it difficult to understand. This requires the expert assistance of tax advisor. Lead to the tendency to avoid the work : The major portion of the income, particularly at the higher levels of income, being taken away by the Government by way of taxes, the desire to work hard and earn more and more income gets reduced. This may also adversely affect the overall production in the country. Evasion and corruption : As the direct taxes are assessed on the individual persons, the honest persons are charged tax strictly as per legislation whereas the dishonest tax payers escape out of their tax liability by manoeuvring their affairs in such a manner so as to reduce their tax liability. There is a great scope for tax evasion by cancelling real income. It may be found in direct system that "Honesty is taxed while dishonesty is rewarded". It leads to corruption. Arbitrarily decided : The nature and base of direct taxes are arbitrarily decided. The finance minister uses his own judgements in determining the taxation potential of the tax payer. There is no scientific formula for evolving the mode of gradation and progression in direct taxation. Narrow-based calculation of tax : Direct taxes are narrow based as many concessions are given to low income groups. The poor section of the society remains untouched under direct taxes and to that extent they fail to achieve their objectives of promoting civil sense among all the citizens.

1.7 INDIRECT TAXES An Indirect tax is a tax, the burden of which can be shifted to others. Indirect taxes are levied on commodities at the stage of manufacture, sale or import. Both direct and indirect taxes aim at the same objective, i.e. to raise the revenue and at the same time to control expenditure and investment. However, their mode of collection is different, depending upon various factors. Indirect taxes are collected at the consumption stages and at the time of spending the income. As indirect taxes are mainly levied on commodities, they are collected at the time of sale or purchase of the commodities in the commercial activity of business. Indirect taxes are collected at various stages in the chain of manufacture from raw materials to the consumption of finished goods. The customs duty is levied at the time of import of goods into the territory of the country. The excise duty is collected at the time of production of finished products and it is levied on the person who manufactures the finished products. The Value Added Tax is collected from the seller of the finished products when he sells the product in the commercial market. The incidence of these taxes are passed on by the manufacturer or seller to the ultimate consumer, commonly called as the customer, through the price charged for the commodity sold. Thus, incidence of indirect taxes gets shifted to the individual person in the society, although they are not directly paid by him into Government treasury.

B.B.M. Business Taxation (Sem. – IV)

1.9

Income Tax : Introduction

When the liability of a tax is on one person but the burden of it falls on another person, it is an indirect tax. It is a tax, the impact of which falls upon one person who can shift the money burden of the tax on some other person. Thus, impact and incidence of indirect tax are on different persons. Consequently, a tax payer is not the tax bearer. For example, taxes on commodities (such as Excise Duty, Value Added Tax (VAT), Import Duty) are imposed upon the producers, dealers or importers, as the case may be, but the burden thereof falls on the consumers. 1.7.1 Advantages of Indirect Taxes 1. Convenience in collection and assessment : The major advantage of indirect taxes is the convenience in collection and assessment. As indirect taxes are collected at various stages in the commercial activity, those are relatively simple to realise and their realisation automatically increases with the increase in the commercial activity. Excise duty is collected at the time of delivery of the manufactured goods from the factory, whereas Value Added Tax (VAT) is collected at the time of sale of such manufactured goods in the market. Customs duty is levied at the time of import of the goods into the country. Since indirect taxes are normally levied on the organised sector, its realisation becomes simple and very convenient. 2. Pinch the tax payers less : It pinches the tax payer less as he is kept in the dark about how much tax he has paid on his total purchases. 3. Indirect taxes are difficult to evade : Evasion of taxes is possible only when manufacturers manipulate the accounts, importers smuggle the goods, etc. Otherwise it is very difficult to evade. 4. Broad-based calculation of tax : Indirect taxes have a broader scope than direct taxes. The low income groups of society which are exempted from direct taxes can be easily caught in the net of taxation through indirect taxes. Thus, indirect taxes may be considered as a balancing factor in the equity of a tax policy. Indirect taxes cover almost the entire population of the country. 5. Indirect taxes can be used to protect the health of the society : Indirect taxes also play the important role of social service to the community by discouraging the consumption of undesired articles such as tobacco, cigarettes, liquors and narcotic drugs by making them costlier by imposition of heavy taxes. This can be said to be one of the social benefits of the taxation policy that the Government can achieve. 6.

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Progressive tax policy : Indirect taxes are generally levied on advalorem basis i.e. on the basis of value of the commodities. The rates of taxes are also different for different commodities, higher for luxury items like refrigerators, cars, air conditioners, etc., and lower for necessity items like edibles, drugs, basic raw materials, etc. The revenue from such taxes can be increased based on pattern of demand for the commodities. Indirect taxes can serve as complementary to direct taxes : Additional revenue can be easily obtained by introducing indirect tax rather than a direct tax, without revealing its real burden to the public. An effective means of mopping up consumer's surplus : Indirect taxes are an effective means of mopping up consumer's surplus which can be utilised fruitfully in expending the process of capital formation in the country.

1.7.2 Disadvantages of Indirect Taxes 1.

Indirect taxes do not create social consciousness : Indirect taxes do not create the social consciousness and awareness as the person paying the taxes, in most of the cases, even does not realise or feel the incidence of tax.