Advance Payment of Tax INTRODUCTION Advance tax is the tax paid in advance (In between the financial year) in respect of the estimated income for the whole year. It’s like paying tax in installments. There is no separate form for Advance Tax. Challan No if the form for both advance tax and self assessment tax. We have to select the code 100 for advance tax in the form. There is No Penalty for not payment of Advance Tax. However we have to pay INTEREST on the short fall of amount. The rate of Interest is 1 %. The relevant sections are Section 208 Condition of liability to pay advance tax Section 209 and 210. Computation of advance tax. Section 211. INSTALLMENTS OF ADVANCE TAX AND DUE DATES. Section 215. INTEREST PAYABLE BY ASSESSEE. The capital gains winning from lottery are liable for payment of advance tax. It is obligatory to pay advance tax in every case where the advance tax payable is Rs 10,000. The assessee who has opted for computed business income ,on presumptive basis at 8 % turnover shall be exempted from payment of advance tax with effect from assessment year 2011-2012.
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Advance Payment of Tax
INTRODUCTION
Advance tax is the tax paid in advance (In between the financial year) in respect of the estimated income for the whole year. It’s like paying tax in installments.
There is no separate form for Advance Tax. Challan No if the form for both advance tax and self assessment tax. We have to select the code 100 for advance tax in the form. There is No Penalty for not payment of Advance Tax. However we have to pay INTEREST on the short fall of amount. The rate of Interest is 1 %. The relevant sections are
Section 208 Condition of liability to pay advance tax
Section 209 and 210. Computation of advance tax.
Section 211. INSTALLMENTS OF ADVANCE TAX AND DUE DATES.
Section 215. INTEREST PAYABLE BY ASSESSEE.
The capital gains winning from lottery are liable for payment of advance tax. It is obligatory to pay advance tax in every case where the advance tax payable is Rs 10,000.
The assessee who has opted for computed business income ,on presumptive basis at 8 % turnover shall be exempted from payment of advance tax with effect from assessment year 2011-2012.
Section 208. CONDITIONS OF LIABILITY TO PAY ADVANCE TAX.
Advance tax shall be payable during a financial year in every case where the amount of such tax payable by the assessee during that year, as computed, is five thousand rupees or more.Under the existing provisions of section 208 the Income-tax Act, liability for payment of advance tax during a financial year arises when the amount of such taxes payable during that year are Rs. 5,000/-or more.
However, It is proposed in the Union Budget 2009-10 to raise the threshold limit for payment of advance tax from the present Rs. 5,000/- to Rs. 10,000/-.The recommended amendment take impact from the 1st April, 2009. Hence, advance-tax for the financial year 2009-2010 would be payable only if the advance tax liability is Rs. 10,000/- or more
ADVANCE TAX COMPUTATION (SEC-210)
An assessee who is liable to pay advance tax should estimate his current income and pay advance tax thereon without having to submit any estimate to the assessing authorities.
After making payment of first/second installment of advance tax,an assessee can revise the remaining installment with his revised estimate of current income and pay tax accordingly
Tax is computed on the current income at the rates in force during the financial year.
Income Tax Slabs for Assessment Year 2011-12 (F Y 2010-11)
Income Tax Rates – Rate (%)
Up to 1,60,000
Up to 1,90,000 (for women)
Up to 2,40,000 (for resident individual of 65 years or above)
NIL
1,60,001 – 5,00,00010
20
Income Tax Slabs for Assessment Year 2011-12 (F Y 2010-11)
Income Tax Rates – Rate (%)
5,00,001 – 8,00,000
8,00,001 upwards 30
Rs. 20,000 tax exemption will be provided for investments in certain investment bonds. This is in addition to the already allowed exemption (Rs. 1,00,000) in certain savings instruments.
Tax Exemption will be given for contribution to the Central Government Health Scheme (CGHS).
Tax deductible at source is to be excluded from tax payable while computing the advance tax liability even if tax had not been deducted.
WHEN ASSESSEE DEEMED TO BE IN DEFAULT
If any assessee does not pay on the date specified , any instalment of advance tax that he is required to pay by an order of the Assessing Officer and does not, on or before the date on which any such instalment as is not paid becomes due, send to the Assessing Officer an intimation or does not pay on the basis of his estimate of his current income the advance tax payable by him , he shall be deemed to be an assessee in default in respect of such instalment or instalments.
INTEREST FOR DEFAULTS IN PAYMENT OF ADVANCE TAXIf an assessee who is liable to pay advance tax has failed to pay such tax or, where the advance tax paid by such assessee is less than ninety per cent of the assessed tax, the assessee shall be liable to pay simple interest at the rate of one and one-fourth per cent for every month or part of a month comprised in the period from the 1st day of April next following such financial year to the date of determination of total income
INTEREST FOR DEFAULTS IN FURNISHING RETURN Of INCOME
the assessee shall be liable to pay simple interest at the rate of one and one-half per cent. for every month or part of a month comprised in the period commencing on the date immediately following the due date, and, - (a) Where the return is furnished after the due date, ending on the date of furnishing of the return; or
(b) Where no return has been furnished, ending on the date of completion of the assessment
INTEREST FOR DEFERMENT OF ADVANCE Tax
Where in any financial year, the company which is liable to pay advance tax has failed to pay such tax or - (i) The advance tax paid by the company on its current income on or before the
15th day of June is less than fifteen per cent of the tax 15th day of September is less than forty-five per cent of the tax 15th day of December is less than seventy-five per cent of the tax
due on the returned income, then, the company shall be liable to pay simple interest at the rate of one and one-half per cent per month for a period of three months on the amount of the shortfall from fifteen per cent or forty-five per cent. or seventy-five per cent, as the case may be, of the tax due on the returned income; (ii) The advance tax paid by the company on its current income on or before the 15th day of March is less than the tax due on the returned income, then, the company shall be liable to pay simple interest at the rate of one and one-half per cent on the amount of the shortfall from the tax due on the returned income :
DUE DATES OF ADVANCE TAX(SEC-211)
Advance Tax is Payable as follow
For corporate assessee
Before 15 june - upto 15 % of advance tax
Before 15 Sept - upto 45 % of advance tax
Before 15 Dec - upto 75 % of advance tax
Before 15 March - upto 100 % of advance tax
For Non corporate assessee
Before 15 Sept - upto 30 % of advance tax
Before 15 Dec - upto 60 % of advance tax
Before 15 March - upto 100 % of advance tax
Any payment of advance tax before March 31 is advance tax paid during the financial year.
If the last day for the payment of advance tax is on the day on which the receiving banks are closed then the assessee can pay the advance tax on next day of working.No interest shall be charged
The corporate and other assessee can make electronics payment of tax through internet banking facilitated by the authorized banks.
It is not necessary for the assessee to make the payment from his own account.An assessee can make payment from account of other person also but pan no. should be of the assessee.
TAX IS PAID BY ORDER OF ASSESSING OFFICER
Cases when tax is paid by order of assessing officer
1. Inspite of legal obligations , assessee has not paid tax.
2. The assessing officer may pass an order requiring assessee to pay advance tax on his current year’s income
3. The order must specify the different installment in which the advance tax is to be paid.
4. Such order must be passed during the previous year but not later than last day of feburary.
5. Taxpayer is one who has been assessed to income tax.
Lower Estimate by the assessee
On receipt of notice from assessing officer to pay the advance tax , assessee can submit his own estimate of lower current income.IN such a case the assessee has to send an information to assessing officer in form no. 28A.
An estimate by assessee can not be rejected by the departmental authorities.However care must be taken by assessee in every such case as estimate (by due date of making such payment of advance tax) for failure in this regard will prompt the assessing officer to make legally permissible coercive recovery under law.
Higher estimate by assessee
If estimate of the assessee is likely to be higher than the amount estimated by assessing officer,the assessee shall pay higher than the amount estimated by the assessing officer,the assessee shall pay higher tax according to his own calculation .No intimation to the assessing officer is required.
Assessing officer will have to find out the income of current year.It is calculated as:-
a. Total income of the last previous year in respect of which the assessee has been assessed by way of regular assessment.
b.Total income returned by assessee for any subsequent year.
Whichever of the above is higher.
Tax liability on the income of the current year is calculated according to the rate applicable.
Example: State whether Mr. X is liable to pay advance tax and if yes then what amount should be paid by what date. The income of Mr. X is Rs. 2, 00,000.
Solution: The tax is Rs. 15,300 on income of Rs. 2, 00,000. Since, tax is more than Rs. 5,000, therefore, advance tax is payable. The advance tax is payable as under:
Since Mr. X is a non-corporate assessee therefore, the first installment will be due on 15th September.
Date installment total tax
15th September first 30% of Rs. 15,300 = Rs. 4,590 Rs.4,590
15th December next 30% of Rs. 15,300 = Rs. 4,590 Rs.9,180
15th September balance 40% of Rs. 15,300 = Rs. 6,120 Rs.15,300
All persons whose tax liability is Rs. 5,000 or more pay advance tax. Advancepayment of tax is made in installments. The first installment is paid on 15th Juneby corporate assessee while non-corporate assessee pays the first installment on15th September. The whole of advance tax is paid by 15th March by both corporate and non-corporate assessee. The payment of advance tax is thus made in
The previous year itself and therefore, it helps government to speed up payment of tax and earn interest on it. Since advance tax is paid simultaneous to earning ofincome therefore the scheme of advance payment of tax is also known as pay as you earn scheme.
TAX DEDUCTION AT SOURCE
TAX DEDUCTION AT SOURCE
Tax deducted at source (TDS) and Tax collection at source (TCS), as the very names imply aim at collection of revenue at the very source of income. It is essentially an indirect method of collecting tax which combines the concepts of “pay as you earn” and “collect as it is being earned.” Its significance to the government lies in the fact that it prepones the collection of tax, ensures a regular source of revenue, provides for a greater reach and wider base for tax. At the same time, to the tax payer, it distributes the incidence of tax and provides for a simple and convenient mode of payment.The concept of TDS requires that the person, on whom responsibility has been cast, is to deduct tax at the appropriate rates, from payments of specific nature which are being made to a specified recipient. The deducted sum is required to be deposited to the credit of the Central Government. The recipient from whose income tax has been deducted at source gets the credit of the amount deducted in his personal assessment on the basis of the certificate issued by the deductor.
TDS (Tax Deducted at Source) Rate chart For Financial Year 2010-11
The following items of payment are subject to tax deduction at source:-
Salaries (S 192)
Here we shall discuss Indian Income Tax Deducted at Source on Salaries as per Section 192 of the Indian Income Tax Act.
Any person responsible for paying any income chargeable under the head “Salary” is required to deduct tax at source on the amount payable.
Person responsible for paying: the employer himself. If the employer is a company, the company itself including the principal officer thereof. If the employees are of Central/State Governments, the person responsible for paying would be the concerned disbursing officer.
No tax is required to be deducted at source unless the estimated salary exceeds the maximum amount not chargeable to tax for the financial year in which the salary is paid.
Tax is to be deducted on the estimated income under the head “Salaries” calculated as per the provisions of the Act.
Tax is required to be deducted from salary income only when it is actually paid to the employee. No need to deduct tax at the time of making a provision.
If a person is employed by more than one employer during the financial year, tax will be deducted on the aggregate salary by one of the employers chosen by the employee by submitting the information in Form No.12B.
In respect of salary payments to an employee of the Government, Public Sector Undertaking, company, co-operative society, local authority, university, institution, association or body, tax deduction at source is to be made after allowing relief under section 89, if any. To avail this benefit, the concerned employee should furnish particulars in Form No. 10E to the employer.
If the employee has income under any other head, he may choose to declare to the employer. He can do so by providing information about his other sources of income on a plain paper to the employer.
If the employee has declared details of his income under any other head, the employer has to take into account the other incomes also in computation of tax to be deducted from such employee. But, this should not result in reducing the tax deductible from the employee except in the case where loss under the head “Income from House Property” has been taken into account.
For the purposes of deduction of tax at source on salary payable in foreign currency, the value in rupees of such salary shall be calculated at the prescribed rates of exchange.
If tax is deducted at source, TDS certificate in Form No.16 is to be issued to the employee within one month from the close of the financial year. If the income from salaries does not exceed Rs.1,50,000/-, the employer can issue TDS certificate in Form No.16AA.
If the salary payable during the financial year exceeds Rs.1,50,000/-, the person responsible for payment shall furnish to the employee the complete particulars of perquisites or profits in lieu of salary provided to him in Form No. 12BA. This is in
addition to the Form No.16 given to the employee. If the salary does not exceed Rs.1,50,000/-, such information can be provided in Form No.16 itself.
The liability of the employer to deduct and pay tax is absolute. Failure to do so would attract interest and penal provisions under the Act. (F.No.237/4/75-A & PAC dt.23-11-1976).
The tax deducted shall be remitted within 7 days from the last day of the month in which the tax is deducted.
Failure to deduct tax at source would also attract penalty u/s 271C of an amount equal to the amount of tax not deducted.
Failure to remit the tax deducted at source would attract imprisonment and fine as per section 276B.
Interest on securities (S 193)
Where any payment is made in the nature of “Interest on Securities,” the person responsible for making such payment of income or credit has to make deduction of tax at source before making such payment or crediting to the account of the payee.
Exemptions:
1. National Defence Bonds 1972 (4.25%), ia) National Defence Loan 1968, or National Defence Loan 1972 (4.75%), ib) National Development Bonds,
2. 7 year (IV Issue) National Savings Certificates,3. Any interest payable on debentures issued by any institution or authority or any Public
Sector Company or any Co-operative socieity, including a Co-operative Land Mortgage Bank or Cooperative Land Development Bank, as may be notified by Central Government in Gazette,
4. Gold Bonds, 1977 (6.1/2%), Gold Bonds 1980 (7%),5. Interest on any Security of Central Government or State Government,(However w.e.f.
1.6.07 exemption will not be available if interest payment exceeds rupees ten thousand during the F.Y. on 8% savings(Taxable) Bonds 2003.
6. Any interest payable to an individual, resident of India, on debentures issued by a Public Limited Company where the debentures are listed in a recognised stock exchange, if the interest is paid by an account payee cheque and its amount does not exceed Rs. 2500/- during the financial year,
7. Any interest payable to LIC,8. Any interest payable to GIC or any of its four companies,9. Any interest payable on any security issued by a company, where the security is in
dematerialized form and is listed in recognized stock exchange in India(Inserted by Finance Act 2008).
10. Any interest payable to any insurer in respect of any securities owned by it or in which it has full beneficial interest.
Dividend income(S 194)
Where any amount is payable in the nature of “Dividends” by an Indian Company or a Company that has made arrangement for declaration and payment of dividend within India (including dividend on preference shares). Exemption
A. Exemption from T.D.S. is granted in case of a shareholder who is an individual and the company pays dividend of Rs.2500/- or less in one financial year and it is paid by account payee cheque (Rule 28).
B. Further If the Assessing Officer gives a certificate in writing that total income of the share-holder is below taxable limit then the person paying the dividend to share holder is not to deduct tax at source (Rule 28 and Rule 29).
C. Further no TDS to be done in respect of dividends referred to in Section 115-O.
Interest (other than interest on securities) (S 194A)
The ‘Interest’ other than ‘Interest on Securities’ is subject to tax deduction at source as per rates in force under Section 194A. However an individual or Hindu Undivided family is not obliged to deduct tax at source. But w.e.f. 1.6.2002, an HUF or an individual whose total sales, gross receipts or turnover from the business or profession ,carried on by him exceeded monetary limit specified in clause (a) or clause (b) of section 44AB(Rs. 40 lakh), are also liable to deduct tax under this Sections. However, any other person (i.e company, firm, Association of persons, Trust etc.) who is responsible for paying Interest (other than ‘Interest on Securities’) is responsible for deduction of tax at source. Exemption
1. Such interest income is credited or is paid to a banking companyor co-operative Society engaged in banking, or a Financial Corporation or, LIC, or UTI, or company or cooperative society carrying on insurance business, or any other institution, association or body notified by the Central Government for reasons recorded in writing.
2. Any financial corporation set up under Central, State or Provincial Act3. Life insurance corporation of India4. Unit trust of India5. Any company or cooperative society engaged in the business of insurance6. Any other institution, association or body so notified by Central Government7. Interest income credited, or paid, by co-operative society to its members account, or to
another co-operative society.8. Interest income on deposits under any scheme framed and notified in Gazette by Central
Government.9. Income credited or paid in respect of deposits other than time deposits, such time deposits
made on or after 1-7-1995, with banking company including any bank nor banking institution referred to in Section 51 of the Banking Regulation Act, 1949.
10. Interest earned on deposits with; a primary agricultural credit society. a primary credit society. a Co-operative land mortgage bank. a Co-operative land development bank
a Co-operative society engaged in banking business (other than time deposits on or after 1-7-1995)
Winning from Lotteries or Crossword Puzzles (S 194B)
Under Section 194B, winnings from lottery or crossword puzzle or card game and other game of any sort exceeding Rs. 10000/- are also subject to deduction of tax at source, as per rates in force . In cases where the winnings are wholly in kind or where they are partly in cash and partly in kind but the part in cash is not sufficient to meet the tax liability for tax deduction in respect of the whole of the winning, the person responsible for paying shall, before releasing the winning either in cash or in kind, ensure that tax is paid in respect of the winnings.
Rate of TDS= 30% ( no surcharge & no education Cess)
Winning from Horse Race (S 194 BB)
Any person who is responsible for paying to any person any income by way of winning from any horse race an amount exceeding Rs. 5000 shall, at the time of payment, deduct tax at the rate prescribed for such year.
Rate of TDS= 30% ( no surcharge & no education Cess)
Payment to Contractors (S194C)
Under the Indian Income Tax Act, the following provisions relate to the Tax Deduction at Source from payments to Contractors and Subcontractors under section 194C. Person responsible for paying any sum for carrying any work to any resident contractor should deduct tax at source.
Tax should be deducted at source only if the contract is between the contractor and the following specified persons:
1. The Central Government or any State Government. 2. Any local authority. 3. Any corporation established by or under a Central, State or Provincial Act 4. A company 5. Any Co-operative Society. 6. Any authority, constituted in India by or under any law, engaged either for the
purpose of dealing with and satisfying the need for housing accommodation or for the purpose of planning, development or improvement of cities, towns and villages, or for both.
7. Any Society registered under the Societies Registration Act, 1960 or any law corresponding to that Act in any part of India.
8. Any Trust.
9. Any University established by or under any Central, State or Provincial Act or any institution declared to be a University under the University Grants Commission Act.
10. Any firm. 11. Any individual or Hindu Undivided Family whose books are required to be
audited under section 44AB during the immediately preceding financial year. [The turnover from business/profession exceeds the limits specified u/s 44AB during the immediately preceding financial year]
12. Association of persons or Body of Individuals, whether incorporated or not, whose books are required to be audited under section 44AB during the immediately preceding financial year.
Individual or HUF need not deduct tax if the contract is exclusively for personal purposes. Income Tax should be deducted at the time of payment or credit to the account of the contractor whichever is earlier. Income Tax is to be deducted at source @ 1% if the contractor/sub contractor payee is an individual or HUF. Payment of amounts to persons other than Individual/HUF would attract TDS rate of 2%.
Provisions of Section 194C are applicable only where the contract is either a “contract for carrying out any work” or a “contract for supply of labour for works contract”. Hence, these provisions are not applicable for payments made under the contract of sale of goods.
Insurance Commission (Section 194D)
Any person, who is responsible for paying to a resident any remuneration or reward, whether called commission or by any other name, for soliciting or procuring insurance business (including continuance, renewal or revival of policies of insurance), is enjoined upon to deduct tax at source at the time of credit of such income to the account of the payee or at the time of payment thereof in cash or by issue of a cheque or draft or any other mode, whichever is earlier. Deduction is to be done as per rates in force. However, if the aggregate of such account, credited or paid during one financial year is Rs.20000/- or less, then no tax is required to be deducted at source.
Payments to Non-resident sportsmen or sports associations’ (S 194E)
If a payment is to be made to a non-resident sportsman (including an athlete) who is not a citizen of India or nonresident sports association and the income is covered by Section 115BBA,then income-tax is to be deducted at source @ 10% of such payment.
Deduction of tax from payment in respect of National Savings Scheme (S 194EE)
Sec. 194EE has been inserted with effect from 1-10-91. Where any payment is made by a person of an amount referred to in clause (a) of sub section (2) of sec. 80CCA, then such person will deduct tax @20% there on at the time of making such payment. The amount standing to the
credit of an assessee under National Saving Scheme 1987 and the interest accrued thereon is covered under this provision. However in following cases no tax is deductible:
where amount so payable in a financial year is less than Rs.2500/- or where payment is made to heirs of a deceased assessee or where in case of resident individual, tax on his estimated total income of the previous
year including such withdrawal would be nil and a declaration by him is furnished to that effect in form 15-G and verified in prescribed manner by the person responsible for such payment.”
Payment on account of repurchase of units of mutual fund covered u/s 80CCB (S 194 F)
Deduction of tax at source is to be done on payment on account of repurchase of units by mutual fund or UTI @20% at the time of making any payment, by the person responsible for paying any amount referred to in Sec. 80 CCB to any person.
Deduction of tax from commission etc. on sale of lottery tickets (S 194 G)
The person responsible for paying any income by way of commission, remuneration or Prize on lottery ticket has to deduct tax @ 10% at the time of credit to the recipient account, or at the time of payment in cash or issue of cheque/draft any other mode, whichever is earlier.
TDS commission or brokerage [Section 194H]
The liability to deduct Income tax at source is on any person except individual and HUF. However, individual and HUF are also covered by liability to deduct tax at source if their books are required to be audited under section 44AB during the immediately preceding financial year.
Tax is to be deducted at source at the time of payment or credit whichever is earlier. Tax has to be deducted at the rate of 10%. There is no requirement of deduction of tax at source as per Indian Income Tax Act if the aggregate amounts of commission or brokerage paid/credited or likely to be paid/credited during the financial year to the payee does not exceed Rs.2,500/-. No deduction shall be made by BSNL or MTNL to their PCO franchisees.
Income from Rent [Section 194 I]
1. In case any amount of rent is paid by other than an individual or HUF ( other than those covered u/s 44AB ) the person responsible for deducting tax will be at the rate of:
a) 15% if the payee is individual or HUFb) 20% in all other cases.
The provision will not be applicable if the total rent credited or likely to be credited does not exceed Rs. 1,80,000.
Fee for Professional or Technical Services (S 194 J)
1. This provision is applicable on all those persons except individuals and HUF ( other than those covered u/s 44AB ) who make any payment by way ofa) Fees for professional services orb) Fees for technical services
2. It provides for TDS at the rate of 10% but payment must be made in cash, cheque or draft.
3. No tax shall be deducted in these cases:a) Any amount credited or paid before 1-7-2005.b) Any amount credited pr paid is such amount does not exceed Rs.30,000
4. If Assessing Officer is satisfied that total income of a person is justified deductions at lower, he will be issued a certificate to this effect on application by such person.
5. Term professional services means services rendered by a person in the course of carrying on legal, medical, engineering, architectural or advertising or such other profession as is notified by the board.
TDS on units of UTI and Mutual Funds (S 194 K)
TDS deducted at the rate of 10.5% on any icome distributed or credited by the UTI or MF, payment shall be bycash, cheque or draft or any other mode.
No TDS in these cases:
a) If the amunt of income does not exceed Rs. 2500 orb) If amount is paid to a person whose total income including this income does not exceed
Rs. 50,000 and who is an individual or HUF and submits a declaration in form 15H orc) If Assessing Officer issues a certificate allowing no TDS.
Payment of compensation on acquisition of certain immovable property (S 194LA)
Any person responsible for paying a resident any sum, being in form of compensation on account of compulsory acquisition, under any law for the time being in force, of any immovable property other than agricultural land shall at the time of payment ,deduct an amount equal to 10% of such sum as Income-tax. No deducation shall be made where the amount of such payment does not exceed one hundred thousand rupees.
Any other sum paid to Non-residents [Section 195]
Any person responsible for paying to a non-resident, not being a company, or to a foreign company, any interest (not being interest on securities) or any other sum chargeable under the provisions of this Act (not being income chargeable under the head "Salaries" shall, at the time of credit of such income to the account of the payee or at the time of payment thereof in cash or by the issue of a cheque or draft or by any other mode, whichever is earlier, deduct income-tax thereon at the rates in force.
Provided that in the case of interest payable by the Government or a public sector bank within the meaning of clause (23D) of section 10 or a public financial institution within the meaning of that clause, deduction of tax shall be made only at the time of payment thereof in cash or by the issue of a cheque or draft or by any other mode. Provided further that no such deduction shall be made in respect of any dividends referred to in section 115-O.
Grossing up of Income [Section 195A]
In case income is paid net of tax i.e tax-free interest and tax is borne by the issuing authority, such net interest hass to be grossed up by multiplying the net interest by 100/(100-rate of tax).
Interest or Dividend or other sums payable to Government, Reserve Bank or Certain Corporations [Section 196]
No tax shall be deductable at source by any person on interest or dividend payable to-
a) The governmentb) The RBIc) A corporation established by or under central act which is, under any law for the time
being in force, exempt from income taxd) A mutual fund specified under section 10(23D)
Where such sum is payable to it by way of interest or dividend in respect of any securities or shares owned by it, in which it has full interest.
Income from Foreign Currency Bonds or Shares of Indian Company [Section 196C]
In case of income is paid in these respects, income tax at the rate of 10% shall be deducted at source.
TDS on Interest on Bonds or GDR’s [Section 196]
Tax at the rate of 10% will be deducted on interest and dividend on GDR’s.
Deduction of Tax at Lower Rates [Section 197]
If the Assessing officer is satisfied that the total income of the recipient justifies deduction at any lower rate or no deduction, the officer can give him a certificate to such lower deduction. Such application has to be made by the assessee.
Tax deducted is income Received [Section 198]
All sums deducted under the foregoing provisions shall for the purpose of computing the income of an assesse, be deemed to be income received.
Credit for Tax Deducted [Section 199]
a) Any deduction made in accordance with these provisions is deemed to have been on behalf of the assessee or the person from whom income-tax was deducted and he is given credit for it in his regular assessment.
b) Any amount deducted at source and paid to Central Gov. shall be deemed as a tax paid on behalf of the person out of whose income tax hass been deducted and paid and credit shall be given for such amount.
c) Where deduction are made with these provisions on or after 1st april, 2008 and paid to the Central gov., the amount of tax deducted and specified in the statement shall be treated as a tax paid on behalf of the person referred above the credit shall be given to him .
Duty of Person deducting tax [Section 200]
Any person deducting any sum in accordance with the foregoing provisions shall pay within the prescribed time, the sum so deducted to the credit of the Central Government or as the Board directs. Any person being an employer, referred to in sub-section (1A) of section 192 shall pay, within the prescribed time, the tax to the credit of the Central Government or as the Board directs.
Processing of statements of tax deducted at source [Section 200A]
Where a statement of tax deduction at source has been made by a person deducting any sum (hereafter referred to in this section as deductor) under section 200, such statement shall be processed in the following manner, namely:—
(a) The sums deductible under this Chapter shall be computed after making the following adjustments, namely:—(i) Any arithmetical error in the statement; or(ii) an incorrect claim, apparent from any information in the statement;
(b) The interest, if any, shall be computed on the basis of the sums deductible as computed in the statement;
(c) the sum payable by, or the amount of refund due to, the deductor shall be determined after adjustment of amount computed under clause (b) against any amount paid under section 200 and section 201, and any amount paid otherwise by way of tax or interest;
(d) an intimation shall be prepared or generated and sent to the deductor specifying the sum determined to be payable by, or the amount of refund due to, him under clause (c); and
(e) The amount of refund due to the deductor in pursuance of the determination under clause shall be granted to the deductor provided that no intimation under this sub-section shall be sent after the expiry of one year from the end of the financial year in which the statement is filed.
TAX PLANNINGTax planning is concerned with an arrangement of one’s financial and tax matters in a way so as to reduce or avoid the tax burden without violation of law of the land. Such planning is legitimated, provided it is within the provisions of law. Colorable devices cannot be part of tax avoidance through tax planning. Tax reduction or avoidance trough proper planning is not illegal, what constitutes a crime is tax evasion by resorting to dubious methods.
Tax planning lies in taking maximum advantage of the exemption, deductions, rebates, reliefs etc. by the tax payer so as to achieve his goals of tax reduction or avoidance. One can and is entitled to arrange his affairs as not to attract taxes imposed by the state. Tax planning is an important arrangement of tax management. Following are the main points in the concept of tax planning and management for your consideration.
(1) Compliance of tax laws by minimizing tax incidence.(2) Taking advantage of tax concession.(3) Keeping the incidence of tax or paying zero tax by planning location, nature of business,
form of business organization and availing maximum advantage of various exemptions , deductions etc.
(4) Avoiding penalties and prosecutions.(5) Creating a cell n the organization which is entrusted with the job of tax planning.(6) Maintenance of tax records.
Scope of tax planning:
Tax planning being before setting up of an organization .It is integral part of tax management broadly speaking, the area of tax planning covers the following.
(1) Choice of form of organization by considering the benefit available to each type of person.
(2) Taking advantage of location and availing exemptions and deductions under section 10A, 80 1A etc.
(3) Tax planning s exercised while raising finance through shares or debentures or other source of finance.
(4) Planning of capital structure also depends upon tax consideration. Debt equity ratio in an structure depends upon tax advantage
(5) Other areas tax planning includes dividend policy, M&A. Many decisions taken by management are based on tax considerations.
Importance of Tax Planning:
1. Reduction in tax liability:
The first and foremost unction of tax planning is reduction in tax liability and tax planning helps the tax payer to reduce his tax liability by enabling him to claim the various exemptions and all. Since tax constitutes cash outflows therefore tax planning helps tax payer to make savings and to feel a lesser pinch of taxation.
2. Minimization of litigation:
Taxation laws being so complicated and cumbersome have always been a cause of litigation. By resorting to tax planning a tax payer can avoid litigation and also save a considerable amount of money and time which otherwise get wasted in litigation cases.
3. Healthy growth of nation:
As we know that tax revenues constitute a major portion of government revenues. Any effort by the government to provide deduction, exemption etc. to tax payer leads to the fall n the revenue of the government. But in spite of this government deliberately provides such exemptions to the tax payers. As most of the times these deductions or exemptions are for the socio-economic development of the economy of the country. For example deduction for investment in Infrastructure bonds.
4. Helps in the capital formation:
Tax Planning helps a lot in capital formation of a nation. Most of the times tax laws encourage tax payers to invest money in government instruments. Many tax benefits can be availed by investing money in the government owned undertakings or by depositing money in the state sponsored saving schemes. For example deduction for Investment in NSC’s.
5. A source of working capital:
As we know cash balance is the main constituent of working capital and is regarded as life blood of business. It is required for meeting day to day expenses purchasing assets etc. Effective tax planning helps in conserving this important constituent of working capital. In the absence of proper tax planning much of the cash will go out of business thus leaving lesser cash for other important purposes.
6. Other Implications:
Boast to capital markets, coat effectiveness, employment generation etc.
Tax Avoidance
In the words of Justice Chinnapa Reddy, “Tax Avoidance is an act of dodging tax authorities without breaking the law”
The Institution of Taxation in U.K. has defined Tax avoidance as:
-the transaction that are designed to avoid or reduce the liability of tax or
-the transaction that are brought into existence solely for tax avoidance and not to achieve a commercial purpose and
-the transaction that are clearly outside the purview of the intentions of the law makers.
Thus tax avoidance is an attempt to manage financial affairs by using colorable devices with the intention of reducing the tax liability. Many a time tax avoidance involves an attempt to reduce tax burden by taking advantage of certain loopholes or weaknesses in tax laws.
In India before the decision of Supreme Court in McDowell & Co. Ltdvs. CTO, Tax avoidance was regarded as a lawful act. But after the pronouncement of the case it was held that tax avoidance is illegal because of following reasons:
(1) There is substantial loss of public revenue required for the economic development of the nation
(2) It Results in the creation of black money economy which results into inflation(3) It results into lot of litigation which results into huge amount of tax arrears busy courts
and wastage of time and money (4) It results into injustice and inequality caused by the tax avoidance for the honest tax
payers(5) It results into an unethical practice of transferring the incidence of tax liability from the
tax dodgers to the honest tax payers who have to pay tax at higher rates.
Till now the rules settled under above case act as guiding principle for unpinning cooked tax planning.
Tax Evasion
It is an illegal method of saving tax and makes the person liable to penalties and prosecution. “Tax evasion” refers to an exercise by a tax payer for not paying the tax legally becoming due. It is the general term for efforts by assesses to evade taxes by illegal means. Tax evasion usually involves assesses deliberately misrepresenting or concealing the true state of their economic affairs to the tax authorities to reduce their tax liability and includes dishonest tax reporting. Tax evasion typically involves failing to report income or improperly claiming deductions that are not allowed or authorized. The methods of tax evasion are:-
(1) Under disclosure of income(2) Inflating the expenses and thus reducing the real income (3) Manipulation of accounts to reduce the real income(4) Violation of rules and regulations of laws with the intention to save the tax(5) Benami transactions
Although tax evasion leads to lower cash outflow on account of taxes yet such saving of money may not be real and absolute. In fact tax evaded remains liability of the evader. If trapped he will have pay the tax evaded along with penalties.
Difference between Tax Planning and Tax Evasion:
Tax Planning Tax Evasion1) It is an exercise aimed at reducing tax liability by availing maximum benefits of various deductions, exemptions, rebates, reliefs etc. provided under tax laws.
1) It is an exercise of reducing tax liability either (a) by showing lesser income than the actual or (b) by hiding the very source of any income.
2) It is completely within the framework of law.
2) It is willful disobedience of law and involves an element of deceit.
3) It is legal and accepted by Judiciary. 3) It is illegal and is prohibited.4) It is based on principle of disclosure. 4) It involves hiding the facts regarding
incomes and expenditures.5) It is deliberate creation of law for wealth creation trough encouraged savings and investments.
5) It is a white collar crime and is seen as an offence.
6) Tax planning is an honest effort of the tax payer to benefit him and economy as a whole.
6) It requires a dishonest nature and courage to violate the law.
7) Tax Planning lead to socio economic development of the economy.
7) It leads to generation and accumulation of black money which is great hurdle in the progress of an economy.
Difference between Tax Planning and Tax Avoidance:
Tax Planning Tax Avoidance1) It is an exercise of reducing tax liability by staying within the four corners of law.
1) It is an exercise of reducing tax liability by exploiting some loopholes of the law.
2) It involves fair obedience of law with an honest attitude.
2) It involves foul play with law.
3) It is legal and acceptable by judiciary 3) It is unethical, illegal and is prohibited.4) Transactions are real and natural. 4) transactions are sham and fabricated
artificially5) It is dependable. 5) It is not dependable because as and when the
ingenuity is exposed tax avoider has to pay tax retrospectively.
Difference between Tax Avoidance and Tax Evasion:
Tax Avoidance Tax Evasion1) Act of minimizing tax liability by locating some weaknesses of law.
1) An act of bringing down the tax liability by disclosing less income than the actual or by concealing the source of income or by claiming deductions that are not allowed otherwise.
2) It may be within the framework of law but it is against the basic intent of the legislative provisions.
2) The evasion is gross violation and disrespect of law.
3) It can be curbed by introducing anti avoidance provisions or clubbing provisions.
3) It can be curbed by implementing the law effectively.
McDowell’s Case Reference:
In McDowell and company Ltd vs. CTO 1995 the facts were that that the assesse company , manufacturer or liquor holding D2 license sold liquor to buyers who themselves paid the excise duty there own directly. The department sought to include the amount representing the excise duty paid directly by the appellant’s turnover, for the purpose of determining its liability for sales tax under Andhra Pradesh general sales Act 1957.
It is important to note after the decision of the SC in one of the previous judgments, involving the same appellants,McDowell& Co. Ltd. vs. CTO. In this 1977 case the question before the SC was as to whether excise duty paid directly to the excise authorities or deposited directly in the state exchequer in respect of Indian Liquor by the buyers before removing the same from the distillery could be said to form part of the taxable turnover of the appellant company? The SC
came to this conclusion that excise duty didn’t go into the “common till” of the appellant company and, therefore, didn’t become a part of the circulating capital hence, the sales ax authorities were not competent to include in the turnover of the appellant company the excise duty which was paid directly by the buyers to the department.
As fermentation after this 1977 Judgment the relevant rules were amended. The amended rules 76(a) provided.
“No spirit or Liquor manufactured or stored shall be removed unless the excise duty specified in rule 6 has been paid by a holder of a D2 license before such removal”
The amended rule 79(i) provided “On payment of the excise duty by the holder of D2 License a distillery pass for the removal of spirit fit for the human consumption may be granted in favor of any of the following persons only”
The 4 kinds of persons are specified of whom the holder of license for sale of spirit by wholesale or retail was one such person.
Thus, the question of liability towards the payment of excise duty acquired new dimensions. In the connection it is very much pertinent as to how the SC commended upon its earlier decision of 1977 it observed as under that:
“That intending purchaser of the Indian liquor who seeks to obtain distillery passes is also legally responsible for payment of excise duty is too broadly stated. The duty was primarily a burden which the manufacturer had to bear enabling didn’t give rise to any legal responsibility or obligation for meeting the burden”
Furthermore, theSupreme Court held that this aspect does not need any further explanation, for the change in rule 76 clearly a firm the position that liability for the payment of excise duty was of the manufacturer
The appellant company reliedheavily on the observation of Hidayatullah speaking for the Supreme Court in George oaks private ltd vs. state of madras where it was said
“In laws dealing with sale tax turnover has in England and American also been held to include the tax. The reason for such inclusion is stated to be that the dealer who realizes the tax does not hand it over forth with to government but keeps it with him and turns it over in his business before he parts with it .thus the tax becomes for the time being a part of the circulating capital of the trades man and is turned over in his business
Thus the main contention of the appellant company was that the excise duty paid by the buyers directly to the excise department never came in to the hands of the appellant it could never be consideration as a part of its turnover not forming a part of its circulating capital.
Thiscontestation was rejected by the supreme court.Ranganathnath Mishra (judge) delivering the judgment of the court observed as follows:
“If we accept the observation of hidayatullah (j) as lying down the test for general application it would be vary prejudicial to the revenue as between the seller and the buyer by special arrangement a part of what ordinarily would constitute consideration proper could even be kept out and the turnover could be reduced and tax liability would be avoided .we are of the view that the conclusion reached in the appellants case in McDowell’s And co ltd on the second aspect of the matter namely when the excise duty does not go in to the common till of the assesse and it does not become a part of the circulating capital it does not constitute turnover is not the decisive test for determining whether such duty constituteturnover ”
The definition of “Turnover” clearly indicates that the total amount charged as the consideration for the sale to be taken into account for determining the turnover. Where a bill of sale is issued the total amount set out there in s to be taken into account. Excise duty through paid by the purchaser to meet the liability of the manufacturer, is part of the consideration for the sale and is includable in the turnover of the manufacturer. The purchaser has paid the tax because the law asks him to pay it on the behalf of manufacturer.
The fact that excise duty doesn’t go into the common till of the manufacturer and it doesn’t become a part of circulating capital is not the decisive test for determining whether such duty would constitute such turnover.
The tax planning may be legitimate provided it is within the framework of law. Colorable devices can’t be part of the tax planning it is wrong to encourage or entertain the believe that it is honorable to avoid the payment of tax by resorting to dubious method. It is the obligation of every citizen to pay the taxes honestly without resorting to subs refuges.
Before proceeding further with the issue of tax evasion the SC developed upon the conceptual methodology of excise duty. In R.C.Jail vs. Union of India it was observed:
“The excise is primarily a duty on production or manufacture of goods produced or manufactured within the country. Subject always to the legislative competence of the taxing authority, the said tax can levy at the convenient stage so long as the character of the imposed is not lost. The method of collecting doesn’t effect the essence of the duty but only relates to the machinery of collection of administrative convenience”
In Guru Swami&Co. vs. State of Mysore, spoke for majority and stated the ratio thus:
“These cases establish that in order to be in excise duty the levee must be upon goods and the taxable event must be the manufacturer or production of goods. Further the levy need not to be imposed at the stage of production or manufacturer but may be imposed later”
The SC was of the view that the conclusion of this court in1977 cases that intending purchase of the Indian liquors who seek to obtain distillery passes are also legally responsible for payment of excise duty is to broadly stated. The duty was primarily a burden which the manufacturer has to bear and even if the purchaser paid the same under the distillery rules the provisions were merely enabling and didn’t give rise to any illegal responsibility or obligation for meeting the burden.
On an intelligent reading of the following passage extracted from SC judgment in HindustanSugar mills vs. Rajasthan State. One court find as to how the element of tax evasion crept into McDowell’s case. The apex court observed in Hindustan sugar as under:
“Take for example excise duty payable by a dealer who s a manufacturer, when he sells good manufactured by him he always passes on the excise duty on the purchaser. Ordinarily it is not shown as a separate item in the bill , it is included n the precise charged by him. The sale price in such a case could be the entire price inclusiveof excise duty because that would be the consideration payable by the purchaser for the sale of good”
Further more the position is not different when under a prior agreement the legal liability of the manufacturer dealer for payment of excise duty is satisfied by the purchaser by direct payment to the excise authorities or to the state exchequer.
Therefore the apex court observed in McDowell’s case that as a fact in the hands of buyer the cost of liquor is what is charged by the appellant under its bill together with the excise duty which the buyer has directly paid on sellers account, the consideration for the sale is thus the total amount and not what is reflected in the bill.
Support was also sought besides Shah J observation in Raman’s case by the learned council, Mr.Soli Sorabji on behalf of the appellant company from the observation of same leaned judge J in the CIT Gujarat vs. BM Kharwar.
“The taxing authority is entitled and is ended bond to determine the true legal relation resulting from a transaction, if the parties has chosen to conceal by defuse the legal relation it is open to taxing authority to unravel the devise and to determine the true character of relationship but the legal effect of transaction can’t be displaced by promoting into substances of transaction.
The observation of Vicount Simon in Natilla vs. IRC may be recalled in the connection:
“On the contrary, one result of such method if they succeed is off Corse to the increase pro tan to the load of the tax on the shoulders of the great body of great citizens who don’t desire, or don’t know how to adopt these Maneuvers. Another consequence is that the legislator has made amendments to our income tax code which aim at nullifying the effectiveness of such schemes.
Tax planning may be legitimate provided it is within the framework of law colorable devices can’t be part of tax planning.
Tax Planning and Managerial Decision (MAKE or BUY )
Management decision should be based on careful consideration of all the factors, including implication as regard to tax liability. Keeping view various tax implications that are relevant while taking some specific management decision under different provision of Income tax Act have dealt with:
Make or Buy:
One of the vital investment subject to the influence of tax factor is “Make or buy decision”. Most of the companies have to decide sometimes or the other whether they should buy a part from a market and stop making it themselves or whether they should stop buying it and start making it. There are various consideration affecting this decision, chief of which is cost. In other words, in making this sort of decision the various cost of making the product or part component of product is compared with its purchase price in market. A host of other consideration such as capacity utilization, supply position of the article to be bought, terms of purchase, ill effect of layoffs etc. are kept in view while taking such decision. Tax planning can be helpful in decision as regards making or buying a particular product, component etc.
Broadly speaking, business can be of following three types:
(1) Trading Business(2) Manufacturing Business(3) Service Sector
The decision ‘to make or buy’ is a costing decision and is also influenced by many general factors which are as follows:
Availability of financial resources Investment required in fixed assets Availability of skilled and unskilled labour Availability of suppliers Existence of idle capacity in organization Price at which the product is available in the market Other miscellaneous factors
Apart from costing considerations following factors also go in decision making process:
Utilization of Capacity Inadequacy of funds Latest Technology Dependence of Supplier Labor problem in the factory
What are the cost involved in making of a part Fixed Cost Variable Cost
What are the cost involved in buying of a part from outside agency: Buying cost Inventory cost
Comparision of both the cost shall determine which decision the company shall follow, therefore tax saved in both the cases are same.
Tax Consideration
Establishing a new unit: If the decision to manufacture a part or a component involves a setting up separate industrial unit than tax incentives available u/s 10a,10b, 32, 80 IA,80 IB should be considered.
Export: If “Make or Buy” decision is taken for exporting goods then tax incentives available under section 80 HHC depends upon whether goods manufactured by tax player himself are exported or goods manufactured by others are exported by tax players.
Sale of plant and machinery: If buying is cheaper than manufacturing and the assessee decides to buy parts or components for a long period of time, he may like sell the existing plant and machinery. Tax implications as specified by section 50 has to be considered.
If the decision is taken to produce a part, then any other industrial unit to be established. When a separate industrial unit is established then the company may get tax benefits and also deductions under various sections to a company which decides to produce a part, are:
1. Deduction in respect of profits and gains from newly established small scale undertakings in rural area (Sec 80 HHA)
A tax players deriving a profits and gains from a new small scale industries undertaking set up in rural area will entitled to deduction of an amount equal to 20% of such profits and gains. The deduction will be admissible for a period of 10 previous years in which the small scale industrial undertaking commences production of any article.
2. Deduction in respect of profits and gains from industrial undertaking (Ship or Hotel etc.): (Sec 80-1)Under sction-80-1, a deduction will be allowed in respect of profits and gain derived from industrial undertakings, ship or hotel established after a certain date. The deduction will be of an amount equal to 30% of such industrial undertakings or Ship or Hotel, If its company and 25% in categories of assesses.
3. Deduction in respect of profits and gains from newly established small scale undertakings or Hotel business in Backward area (Sec 80 HHA)All assesses are entitled to a deduction of 20% of the profit derived by them for new industrial undertakings and Hotel setup in backward area. The deduction will be allowed in respect of the ten assessment year relevant to previous year in which the industrial undertaking begins to manufacture or produce articles.
4. Depreciation AllowanceA company which produce a part or a component will be allowed an allowance in respect of depreciation of buildings, machinery, plant or furniture owned and used the assesee for the purpose of business and profession.
Two primary factors which have a decisive influence on the choice of make or buy are
the cost and availability of production capacity. Facilities are made available and other
things being equal cost consideration assumes primacy. If the cost of making an item in-
house is going to be higher than the cost of acquiring it from an outside supplier, the
choice is to buy it. On the other hand, if the cost of making the item in ones own plant is
cheaper than buying it from the supplier, the choice is to make it. A good make-or-buy
decision, nevertheless, requires the evaluation of several less tangible factors in addition
to the two basics ones.
Considerations which favor making the parts are:
1. Cost considerations less expensive to make the part
2. Desire to integrate plan operations
3. Productive use of excess plant capacity to help absorb fixed overheads.
4. Needs to exert direct control over production and/or quality
5. Design secrecy.
6. Unreliable suppliers.
7. No suitable supplier quotation
8. Desire to maintain a stable workforce in periods of declining sales
Considerations which favor buying the part:
1. Cost considerations less expensive to buy the part
2. Suppliers research and specialized know-how
3. Small volume requirements
4. Limited production facilities
5. Desire to maintain stable workforce in periods of rising sales.
6. Desire to maintain multiple source policy.
7. Government policy favoring ancillary industries.
8. Monopoly items which are rationed by the government and on which, the buyer has no option.
Other Factors
Some companies, by tradition, prefer to make almost every component of their products. Others
prefer to buy as much as possible from outside suppliers. In general, an aggressive company in
an industry that is expanding rapidly with many technological changes (e.g. electronics), will
prefer to buy many of its components from outside suppliers. In such industries, the company has
many opportunities to employ its capital profitably through horizontal diversification, expanding
its line of finished products.
With due considerations to above factors, ‘marginal costing’ and ‘differential costing’ techniques of cost accounting help a lot in reaching at any conclusion.
Solution to ‘make or buy’ problem under cost acconting:
(A) Where idle capacity exists in the existing undertaking
Case 1: NO EXTRA FIXED COST REQUIRED In such case, marginal cost(MC) of producing a component should be compared with the price(P) at which it is available in the market.
Case 2:SOME EXTRA FIXED COST IS ALSO REQUIRED In such case, the relevant cost of manufacturing[i.e variable cost+fixed cost] should be compared with the price at which it is available in the market.
(B) Where idle capacity does not exist
In such case, the part or component can be manufactured either by setting up a new industrial undertaking or by discontinuing the production of some other product.
Here relevant cost of manufacture[i.e Variable cost+Fixed cost+Opportunity cost] of the part should be compared with the price at which it is available in the market.
*Tax Consideration in Make or Buy decision:
I. If a business house/company decides to make a product/part instead of buying it and the making of product involves setting up of new industrial undertaking then a business house should make a detailed analysis of following tax incentives available to new industrial undertaking under Income-Tax Act:(a)Tax holiday u/s 10 A(b)Tax holiday u/s 10 B(c)Tax holiday u/s 80 1A(d)Deduction u/s 80 1B
If the decision to buy the product or component will render the plant machinery, furniture, land and building etc; earlier used in manufacturing the product, idle then the business house may have to sell these assets. In such a case, before taking decision ‘to buy’, the provision related to capital gain tax should also be studied.
TAX PLANNING AND MANGERIAL
DECISIONS (DIVIDENDS)
CAPITAL STRUCTURE DECISION
Before commencing a new project a vital managerial decision regarding selecting the right type
of capital structure has to be taken. An optimum capital structure is one which maximizes
shareholders’ returns. The advantages of having an optimum capital structure are two-fold. It
maximizes the value of the assets of the company and wealth of its owners and minimizes the
cost of capital which, in turn, raises the ability to find inbuilt additional investment opportunities.
Problem of planning capital structure is of crucial importance and has its long term implications.
The tax planner should properly balance risk, cost, control and tax considerations. In capital
structure decisions, the cost of capital is an important consideration along with the risk factor.
One of the main reasons for raising finance through borrowing is to increase earning on equity
share capital. But excessive use of debt capital increases the financial risk of the company.
Under the tax laws, dividend on shares is not deductible and distributed profit is subject to
dividend tax. On the other hand, interest paid on borrowed capital is allowed as deduction under
section 36(1)(iii). Cost of raising finance through borrowing is deductable in the year in which it
is incurred. Cost of issue of shares is allowed as deduction in five years under section 35D.
because of the above provisions, corporate taxation plays an important role in determining the
choice between different sources of financing.
MEANING OF DIVIDEND:
Section 2(22) gives the definition of “deemed dividend”. However, the definition laid down by
Section 2(22) is inclusive and not exhaustive. If, therefore, a particular distribution is not
regarded as dividend within the extended meaning of the expression in section 2(22), it may still
be dividend for the purpose of the Income-tax act.
Under section 2(22), the following payments or distributions by a company to its shareholders
are deemed to the accumulated profits of the company:
a) Any distribution entailing the release of company’s assets.
b) Any distribution of debenture, debenture stock, deposit certificates and bonus to
preference shareholders.
c) Distribution on liquidation of a company.
d) Distribution on reduction of capital.
e) Any payment by the way of loan or advance by a closely held company to a shareholder
holding substantial interest provided the loan should not have been made in the ordinary
course of business and money lending should not be a substantial part of the company’s
business.
If dividend comes under (a) to (d), then the payer company will pay dividend tax under section
115-O and in the hands of recipient shareholders, it is not chargeable to tax.
On the other hand, if dividend comes under (e), then it is taxable in the hands of shareholder. In
such a case, the payer company will not pay the dividend tax.
The following shall not be treated as “dividend”:-
a) Any payment made by a company on purchase of its own shares in accordance with the
provisions contained in section 77A of the Companies Act; or
b) Any distribution of shares made in accordance with the scheme of demerger by the
resulting company to the shareholders of the demerged company whether or not there is a
reduction of capital in the demerged company.
Any payment or distribution under the abovementioned clauses is treated as dividend.
However, the payment or distribution under the abovementioned clauses can be treated as
dividend only to the extent of accumulated profits of the company.
It is expressly provided that it does not include capital gains arising before April 1,
1946 and after March 31, 1948 but before April 1, 1956.
In case of a company, which is not in liquidation, it includes all profits of a company
up to the date of distribution or payment.
In the case of a company in liquidation, it includes all profits of the company up to
the date of liquidation. Where, however, the liquidation is consequent on the
compulsory acquisition of a company’s undertaking by the Government or a
Government company, accumulated profits do not include any profits of the company
prior to the three successive years immediately preceding the previous year in which
the acquisition took place.
ACCUMULATED PROFITS:
Accumulated profits include all profits (accumulated or current) up to the date of distribution
or payment (or up to the date of liquidation in case of liquidation).
In a number of cases it has been held that accumulated profits are computed on the basis of
accumulated profits.
Distribution of Accumulated Profits:
Under the sub- clause (a) of section 2(22), any distribution by a company of its accumulated
profits (whether capitalized or not) is dividend if it entails the release of company’s assets.
The clause provides for two conditions; first, distribution should be from accumulated profits
(not from capital) and secondly, such distribution must result in the release of the assets of
the company.
As no specific mode of distribution is prescribed by the clause, distribution may be in the
form of payment in cash or kind.
BONUS SHARES:
One of the conditions laid down in sub clause (a) of section 2(22) is that distribution must
entail the release of assets by the company to its shareholders. When, therefore, a company
distributes ordinary or equity bonus by capitalizing its profits, then there is no release of
assets and, consequently, bonus shares are not taxable as dividend. If however, bonus shares
are issued to preference shareholders, it amounts to distribution of dividend by virtue of sub-
clause (b) of section 2(22).
Under this clause the following two distributions are treated as dividend to the extent of
accumulated profits (whether capitalized or not) of the company:
a) Distribution by a company to its shareholders (whether equity shareholders or
preference shareholders) of debentures, debenture stock or deposit certificates in any
form, whether with or without interest; and
b) Distribution by a company to its preference shareholders of bonus shares.
Under the above said conditions, distribution amounts to dividend in the hands of recipient even
if there is no release of assets at the time of distribution.
Under sub-clause (c) any distribution made by a company to its shareholders on its liquidation is
treated as dividend to the extent to which such distribution is attributable to the accumulated
profits of the company immediately before its liquidation.
Under sub-clause ( c), the following are however, not treated as dividend:
a) Any distribution in respect of preference shares issued for full cash consideration; and
b) Any distribution insofar as such distribution is attributable to the capitalized profits of the
company representing bonus shares allotted to the equity shareholders after March 31,
1964, but before April 1, 1965.
Any distribution by a company to its shareholders on the reduction of capital is treated as
dividend to the extent the company possesses profits (whether capitalized or not). However, the
following are not treated as dividend under this clause:
a) Any distribution out of accumulated profits which arose up to the previous year 1932-33
or up to the previous year ending during 1932-33
b) Any distribution in respect of preference shares issued for full cash consideration; and
c) Any distribution insofar as such distribution is attributable to the capitalized profits of the
company into two companies, and there is no reduction of capital in the aggregate,
section 2(22)(d) would not apply.
Under sub-clause (e), any loan or advance to a shareholder or concern is treated as dividend in
certain cases.
CASE 1 CASE 2
1. Loan or advance is given by closely held 1. Loan or advance is given by a closely held
company company (say X Ltd.)
2. Such loan is given to a registered
shareholder
2. Such loan is given to a “concern” (say Y)
[see Note 3]
3. The shareholder (getting the loan)
beneficially holds 10 percent or more of the
equity shares in the company (giving the loan)
3. One of the shareholders beneficially holding
10 percent equity shares capital in X Ltd. has a
substantial interest [see Note 4] in Y
4. Such loan or advance is treated as dividend
in the hands of the shareholder
4. Such loans or advance is treated as
dividends in the hands of Y
Notes :
1. Such loan or advance is treated as dividend to the extent of accumulated profits [excluding
capitalized profit]
2. Loan or advance for the above purpose may be given to a shareholder (in case 1) directly or it
may be given for the benefit of the shareholder or on the behalf of the shareholder.
3. “Concern” for this purpose may be a HUF, sole proprietorship, firm, AOP, BOI or company.
4. A person shall be deemed to have a substantial interest in a concern, if he is (at any time
during the previous year), beneficially entitled to atleast 20 percent of income of such concern (if
such concern is company). Shares held by a person in two different capacities i.e. as an
individual and as an HUF, cannot be clubbed or amalgamated for the purpose of deciding
whether a person has substantial interest in a concern.
5. Where money lending is a substantial part of business of the company giving loan the above
provisions are not applicable. For this purpose the factual position as it stands during the relevant
previous year alone is supposed to be take into consideration to decide the issue whether the
lending of money is indeed a substantial part of business of the concerned company.
6. If after giving advance to a shareholder, the company declares normal dividend and such
dividend is set off against outstanding load/advance, the amount so set off will not be taken as
“dividend”.
TAX TREATMENT OF DIVIDEND IS AS FOLLOWS :
If dividend is covered by section 2(22) [not by clause (e) of section 2(22)] and declared,
distributed or paid during April 1, 1997 and March 31, 2002 or after March 31, 2003, then it is
not taxable in the hands of shareholders by virtue of section 10(33) or 10(34).On such dividend
the company declaring dividend will pay dividend tax under section 115-O.
If a loan or advance is given after May 31, 1997 which is deemed as dividend under section
2(22)(e) then such a loan or advance is taxable under section 56 as dividend in the hands of
recipient.
TAX CONSIDERATION IS GIVEN BELOW :
The table given below highlights the tax consequences –
SITUATIONS TAX TREATMENT IN THE
HANDS OF THE
COMPANY ISSUING
BONUS SHARES
TAX TREATMENT IN THE
HANDS OF THE
SHAREHOLDERS
1. At the time of issue of
bonus sharesNo tax liability No tax liability
2. At the time of sale of
shares by shareholderNo tax liability See para A>
3. At the time of
redemption of bonus share
or at the time of liquidation
of the company
Under section 2(22)(a) or
2(22)(c), it will be treated as
dividend distribution to the
extent of accumulate profits
and, consequently, the payer
company will pay dividend tax
Out of the amount received at the
time of redemption or
liquidation, amount treated as
“dividend” under section 2(22)
(a)/(c) will be exempt in the
hands of shareholders. Balance
will be safe consideration to
compute capital gains
A> Section 55 specifies that the cost of acquisition of any additional financial asset as bonus
shares or security or otherwise which is received without any payment by the assessee on the
basis of his holding any financial asset shall be taken to be NIL.
Moreover, in the case of capital asset being a share, security or unit which is allocated without
any payment on the basis of holding of any other financial asset, the period of treating such
share, security or unit as a short term capital asset shall be calculated from the date of allotment
of such share, security or unit, as the case may be.
Effect of the above provision may be summarized as follows :
COST OF ACQUISTION OF ORIGINAL
AND BONUS SHARES
1. If original shares and bonus shares are
acquired before April 1, 1981
Original shares – Actual cost or fair market
value on April1, 1981, whichever is more
Bonus shares – Fair market value on April 1,
1981
2. If original shares are acquired before April
1, but bonus shares are allotted after April 1,
1981
Original shares – Actual cost or fair market
value on April 1, 1981, whichever is more
Bonus Shares – Nil
3. If original and bonus shares are acquired
after April 1, 1981
Original Shares – Actual cost
Bonus Shares – Nil
4. Period of holding bonus shares The period of holding shall be determined
from the date of allotment of bonus shares (and
not from the date of acquisition of original
shares)
Notes :
1. The above rules given in the table are also applicable in respect of shares, securities,
debentures, bonds, units allotted without any payment on the basis of building of any other
financial assets.
2. If securities transaction tax is applicable at the time of transfer, long term capital gain is not
chargeable to tax and short term capital gain is taxable @ 15 percent! Plus surcharge plus
education cess plus secondary and higher education cess.
Tax Planning & Managerial Decisions (Bonus Shares) Tax Planning In Respect Of Bonus Shares
The concept of bonus shares has emerged as a result of Ploughing back of profits policy often adopted by companies. These shares are issued by a company to its existing shareholders in the process of conversion of reserves & surpluses into capital. These shares are issued out of accumulated profits of the company and are given to existing shareholders in proportion of their shareholding in the company. Since nothing goes out of pocket of shareholders in getting these shares, these are called “BONUS SHARES” or “FREE SHARES”
The process of conversion of reserves & surpluses into share capital is also called “CAPITALIZATION OF RESERVES AND SURPLUSES” and it has following two effects:
1) It reduces accumulated reserves & surpluses of the company2) There is a corresponding increase in the paid up capital of the company.
The issue of bonus shares enables a company to bring the amount of its paid-up capital line with the real capital employed so as to show real earning capacity of the company and brings down the apparent abnormal high rate of dividend.
Provisions of Companies Act 1956 In Respect Of Bonus Shares
1) Sec. 205 of the Companies Act prohibits a company to issue bonus shares in lieu of dividend by providing that no dividend can be paid except cash.
2) The bonus shares could be issued out of the following reserves:-I. General Reserve
II. Balance on P & L A/c or P & L Appropriation A/cIII. Reserve FundIV. Capital reserve or profit realised in cashV. Balance in Sinking fund created for redemption of debentures after the
debentures have been redeemedVI. Dividend equalization fund
VII. Capital Redemption Reserve(CRR)VIII. Security Premium received in cash
3) Bonus shares cannot be issued out of:- Reserves created for some specific purpose Capital Reserve appearing as a result of revaluation of assets and liabilities
In addition to above, a company is also required to follow the guidelines issued by SEBI from time to time regarding the issue“Tax Aspects” Of “Bonus Shares”The tax aspects of bonus shares can be studied from the following two angles.
Tax aspects for company issuing bonus shares Tax aspects for shareholders receiving bonus shares
A) Tax aspects for company issuing bonus sharesThe issue of bonus shares is not regarded as distribution of the dividend to the company. This can be drawn from clause (a) of sec. 2(22) which defines “dividend”. The said clause reads as:“Dividend includes any distribution by the company to its shareholders to the extent of the accumulated profits whether capitalized or not resulting in the release of all or any part of assets of the company”Since the issue doesn’t involve the release of any asset of the company, hence it is not treated as distribution of dividends by companyHowever clause (b) of Sec. 2(23) provides that distribution will be treated as distribution of the dividend by the company though it doesn’t involve release of any asset of the company.
A1-If bonus shares are issued to equity shareholders
There are four occasions which necessitate the understanding of tax implications for issuing company. These are:
1) At the time of Issue:-
Since issue of bonus shares to equity shareholders doesn’t amount to dividend, hence the company is saved from paying dividend tax u/s 115-O in the year of distribution of such bonus shares
2) At the time of redemption:-
When such bonus shares are redeemed it is treated as dividend distributed by the company to the extent of Accumulated Profits u/s 2(22) (a) because there is release of asses from the company. In case, bonus such have been redeemed during the period
I. On or after 1-6-97 to 31-3-02II. On or after 1-4-03,the company will be required to pay dividend tax u/s 115-O at
prescribed dates
RATES OF TAX U/S 115-0 FOR PREVIOUS YEAR
Period Rate Surcharge Education Cess Total
i. From 1-4-2007 onwards 15 % 10 % 3 % = 16.995%
3) At the time of liquidation of issuing Co.:-On such occasion any distribution made to equity shareholders, to the extent of accumulated profits, shall be treated of dividend u/s 2(22).Then any sum distributed to equity shareholders against bonus shares as well as other shares.
4) If the shareholder sells bonus shares:- Then it does not involve any tax liability for the company issuing bonus shares.
IF BONUS SHARES ARE ISSUED TO PREFERENCE SHARE-HOLDERS
(1) At the time of issue: - Clause (b) of sec.2 (22) specially provides that distribution of bonus shares to preference share-holders shall be treated as distribution of dividend by the company. In case, such bonus shares have been issued during the period
(i) On or after 1-6-97 to 31-03-02 and(ii) On or after 1-4-03, the company shall be required to pay dividend tax u/s 115-0. The
rates of dividend tax u/s 115-0 have already been shown earlier.(2) At the time of redemption :- No tax liability(3) At the time of liquidation of co. :- No tax liability(4) If the shareholder sells bonus shares :- Then it does not involve any tax liability on
company
TREATMENT OF EXPENDITURE ON ISSUE OF BONUS SHARES
The decision to issue bonus shares often necessitates the incurring of certain expenses by the company. These expenses may be
i. Expenses incurred for increasing the authorized capital of the companyii. Other expenses related to bonus issue such as printing, postage, fees etc.
TREATMENT OF EXPENSES INCURRED FOR INCREASING THE AUTHORISED CAPITAL
As we know that the issue of bonus shares implies the issue of fresh shares to the shareholder free of cost. Thus, if the existing company has already exhausted its authorized share capital by issuing to the shareholders in the past, then it will have to increase its authorized share capital. For this purpose, company may have to incur certain expenses. It is important to note that such
expenses shall be treated as capital expenditure in view of the authoritative pronouncements by the Supreme Court.
TREATMENT OF OTHER EXPENSES SUCH AS PRINTING & STATIONERY, POSTAGE, FEES ETC
For a long time, the treatment of these expenses remained as subject matter of judicial controversies due to conflicting judgment by various courts. However , this controversy has been put to rest by the Supreme Court’s judgment dated September 25 , 2006 , in the case of CIT V’s General Insurance Corporation (2006) 205 CTR 280 , wherein it has been held that these expenses incurred on issue of bonus shares is revenue expenditure.
TAX TREATMENT IN THE HANDS OF SHAREHOLDERS
In the hands of equity shareholder
1. At the time of receipt :- Since the receipt of bonus shares by equity shareholders-does not amount to receipt of dividend , therefore the shareholder is not required to treat the values of bonus shares as his income from other source.
2. At the time of redemption: - When bonus shares held by equity shareholders are redeemed by the company at a later stage, it is treated as receipt of dividend by shareholders. If shares are redeemed during the period.
a) On or after 1-6-97 to 31-3-02 andb) On or after 1-4-03, then, any such amount shall be fully exempt in hands of shareholders.
3. At the time of liquidation of company: - Amount received by shareholders on bonus shares as well as on other shares is treated as receipt of dividends. On such occasion, occurring during the period (a) on or after 1-6-97 to 31-3-02 and: (b) on or after 1-4-03, any amount received shall be fully exempt in the hands of shareholder.
4. At the Time of Sale
On sale of bonus shares, a shareholder is required to pay tax on any gain arising there from. Such gain will be long term or short term depending upon the period of holding of such bonus shares. The period of holding shall be counted from the date of issue of the bonus shares.
For calculating capital gain, the cost of acquisition of bonus shares shall be taken as follows:-
i. If bonus shares were received before 1-4-81 :
In such a case the market value of bonus shares as on 1-4-81 shall be treated as cost of acquisition.
ii. If bonus shares were received on or after 1-4-81:
In such a case, the cost of acquisition of bonus shares shall be taken as nil and entire amount received on sale shall be chargeable to capital gain tax.
ILLUSTRATION: Assessed A is the investor in shares and held 1,000 shares of Rs. 10 each in a company. On 31st March, 2007 he was allotted 1000 Bonus Shares of the face value of Rs 10 each. The cost of acquisition of original shares was Rs. 12 each. During the previous year ending 31st March, 2010 assessee sold 500 shares out of his Bonus Shares @14 per share. Compute the capital gain for the assessment year 2010-11 if the cost inflation index for 1991-92 is 199 and 2009-10 is 632.
Solution:
Shares (STCA)
Sale price of 500 shares @ 14 per share 7000
Less: Cost o 500 Bonus Shares Nil
Short Term capital gain 7000
TAX TREATMENT IN THE HANDS OF PREFERENCE SHAREHOLDERS
1. At the time of receipt: - When bonus shares are received by preference shareholders then it is treated as dividend received by them. If bonus shares are received during the periods (a) on or after 1-6-97 to 31-3-02 and (b) on or after 1-4-03, then such distribution shall be fully exempt in the hands of preference shareholders.
If the bonus shares were received during P.Y. 2002-2003 then preference shareholders are required to include the market value of bonus shares in their individual income as income under the head other sources.
2. At the time of redemption :- It shall not be treated as dividend in the hands of preference shareholders because the market value of said bonus shares , when issued to them , was treated as dividend received by them.
3. At the time of liquidation of company: - It shall also not be treated as dividend in the hands of preference shareholders.
4. At the time of sale: Same as discussed for equity shareholders.
Tax planning and Managerial Decision (Continue or Closure)
Introduction
Ups and downs are a part and parcel of business life. In an up situation, a business flourishes, earns profits and brings cheers to businessman. A number of factors play an important role in placing a business in such a situation. Some of these factors are as follows :
(1) High demand of product(2) Cost effectiveness(3) Govt. support(4) Tax incentives available etc.
In a down situation, a business shrinks, generates losses and causes tension to owners. Such a situation occurs when any/ some/ all of the above factors go against the business. i.e.
(i) Low demand/ falling demand of product(ii) Falling profit margin(iii) Withdrawl of government support(iv)No encouraging future prospects etc.
Such situations are normally described as industrial sickness.
Generally under such a situation, a business house faces a problem whether the business should be continued or shut down.
Meaning of ‘ Shut down’ or ‘discontinuance of business for Income tax purposes
It refers to a complete cessation or closing down of the business. It involves :-
No buying or selling No manufacturing Assets to be sold or disposed off Returning capital to owners etc.
Post shutdown tax effects
Before deciding for closing a business, two aspects should be understood clearly :-
(A)various tax provisions to be complied with after deciding to shut down a business(B) tax implications of shut down decision
(A) Tax provisions to be complied with while discontinuing a business
(1) Provisions relating to discontinued business (Sec 176) (Applicable to all)
(1)in case of any discontinued business in any assessment year, the income of the period from the expiry of the previous year for that assessment year up to the date of such discontinuance may, at the discretion of the Assessing Officer, be charged to tax in that assessment year.
(2) The total income of each completed previous year or part of any previous year included in such period shall be chargeable to tax at the rate or rates in force in that assessment year, and separate assessments shall be made.
(3) notice of discontinuing of any buisness or profession is reqiured to be given to assessing officer within fifteen days thereof.
(3A) in case of discontinued buisness in a year, any sum received after the discontinuance shall be deemed to be the income of the recipient and charged to tax accordingly in the year of receipt, if such sum would have been included in the total income of the person who carried on the business had such sum been received before such discontinuance.
(4) Where any profession is discontinued in any year on account of the cessation of the profession by, or the retirement or death of, the person carrying on the profession, any sum received after the discontinuance shall be deemed to be the income of the recipient and charged to tax accordingly in the year of receipt, if such sum would have been included in the total income of the aforesaid person had it been received before such discontinuance.
(5) assessment made under the provisions of this section, the Assessing Officer may serve on the person whose income is to be assessed or, in case of a firm, or any person who was a partner of such firm at the time of its discontinuance or, in the case of a company, or the principal officer thereof, a notice containing all or any of the requirements which may be included in a notice under clause (i) of sub-section (1) of section 142 and the provisions of this Act shall, so far as may be, apply accordingly as if the notice were a notice issued under clause (i) of sub-section (1) of section 142.
(6) The tax chargeable under this section shall be in addition to the tax, if any, chargeable under any other provision of this Act.
(7) Where the provisions of sub-section (1) are applicable, any notice issued by the Assessing Officer under clause (i) of sub-section (1) of section 142 or section 148 in respect of any tax chargeable under any other provisions of this Act may, notwithstanding anything contained in clause (i) of sub-section (1) of section 142 or section 148, as the case may be, require the furnishing of the return by the person to whom the aforesaid notices are issued within such period, not being less than seven days, as the Assessing Officer may think proper.
(2) Provisions relating to dissolution of association of persons (Sec 177)
(1) in case of discotinuance of buisness or profession or dissolution of association of persons carrying a buisness , the Assessing Officer is required to make an assessment of the total income of the association of persons as if no such discontinuance or dissolution had taken place, and all the provisions of this Act, including the provisions relating to the levy of a penalty or any other sum chargeable under any provisions of this Act, shall apply, so far as may be, to such assessment.
(2) Without prejudice to the generality of the foregoing sub-section, if the Assessing Officer or the Commissioner (Appeals) in the course of any proceeding under this Act find that association of persons was guilty of any of the acts specified in Chapter XXI, he may impose or direct the imposition of a penalty in accordance with the provisions of that Chapter.
(3) any person who was a member of association of persons at the time of discontinuance of buisness or dissolution and the legal representative of any such person who is deceased, shall be jointly and severally liable for the amount of tax, penalty or other sum payable, provisions of this Act, or imposition of penalty or other sum.
(4) Where such discontinuance or dissolution takes place after any proceedings in respect of an assessment year have commenced, the proceedings may be continued against the persons referred to in sub-section (3) from the stage at which the proceedings stood at the time of such discontinuance or dissolution, and all the provisions of this Act shall, so far as may be, apply accordingly.
(5) Nothing in this section shall affect the provisions of sub-section (6) of section 159.
(3) Provisions relating to company in liquidation (section 178)
(1) Every person -
(a) Who is the liquidator of any company which is being wound up, whether under the orders of a court or otherwise; or
(b) a person who has been appointed as a receiver of the assets of a company should give notice to the assessing officer about his appointment within thirty days of his appointment (liquidator).
(2) The Assessing Officer after making required inquiries, or checking information whether it is fit, issue notice to the liquidator within three months from the date on which he receives notice of the appointment of the liquidator the amount which, in the opinion of the Assessing Officer, would be sufficient to provide for any tax which is then, or is likely thereafter to become, payable by the company.
(3) The liquidator -
(a) Shall not, without the leave of the Chief Commissioner or Commissioner, part with any of the assets of the company or the properties in his hands until he has been notified by the Assessing Officer within three months and
(b) On being so notified, shall set aside an amount equal to the amount notified and, until he so sets aside such amount, shall not part with any of the assets of the company or the properties in his hands :
Provided that nothing contained in this sub-section shall debar the liquidator from parting with such assets or properties for the purpose of the payment of the tax payable by the company or for making any payment to secured creditors whose debts are entitled under law to priority of payment over debts due to Government on the date of liquidation or for meeting such costs and expenses of the winding up of the company as are in the opinion of the Chief Commissioner or Commissioner reasonable.
(4) If the liquidator fails to give the notice of his appointment within thirty days to assessing officer or fails to set aside the amount as required by sub-section (3) or parts with any of the assets of the company or the properties in his hands in contravention of the provisions of that sub-section, he shall be personally liable for the payment of the tax which the company would be liable to pay :
Provided that if the amount of any tax payable by the company is notified under sub-section (2), the personal liability of the liquidator under this sub-section shall be to the extent of such amount.
(5) in case of more than one liquidators , the obligations and liabilities attached to the liquidator under this section shall be aplicable to all the liquidators jointly and severally.
(6) The provisions of this section shall have effect notwithstanding anything to the contrary contained in any other law for the time being in force.
(4)Liability of directors of private company in liquidation (Section 179)
(1) Notwithstanding anything contained in the Companies Act, 1956 (1 of 1956), directors of the private companies are severally and jointly liable for the payment of taxes due during their tenure in respect of any income of any previous year or from any other company in respect of any income of any previous year during which such other company was a private company cannot be recovered, unless he proves that the non-recovery cannot be attributed to any gross neglect, misfeasance or breach of duty on his part in relation to the affairs of the company.
(2) When a private company is converted into a public company and the tax assessed in respect of any income of any previous year when company was a private company cannot be recovered, then,director of such private company is not liable in relation to any tax due in respect of any income of such private company assessable for any assessment year commencing before the 1st day of April, 1962.
(B)Tax implications on/after discontinuance of business
(1) Treatment of business losses relating to discontinued business :
W.e.f. A.Y. 2000-2001, the business losses of the discontinued business can be set off against the future profits of the other business. The business losses of discontinuous business may relate to :-
(a) the previous year in which the business is discontinued
However, as per sec 71(3), business losses can be carried forward for upto a maximum period of 8 assessment years immediately succeeding the assessment year for which the loss was computed.
(2)Treatment of unabsorbed depreciation relating to discontinued business :
W.e.f. assessment year 2001-2002, unabsorbed depreciation can be set off in future year against business profit. The unabsorbed depreciation of discontinued business can also be set off against future business profits of other business. Such unabsorbed depreciation may relate to :
(a)the previous year in which the business is discontinued ; or
(b)previous year/years prior to the previous year in which business is discontinued
(3)Profit or loss on sale of assets of discontinued business
(i) if assets sold are depreciable assets
(a) If sale proceeds > W.D.V. of block :- then such excess shall be treated as short term capital gain.
(b) If sale proceeds< W.D.V. of block :- then such short fall shall be treated as short term capital loss.
(ii)if assets sold are non-depriciable assets :-
(a) Sold at a profit :- Such profit shall be treated as ‘ long term ‘ capital gain or ‘short term capital gain’ depending upon the nature of asset i.e. whether short term asset or long term asset.
(b) Sold at a loss :- then such loss shall also be long term capital or short tterm capital loss depending upon the nature of asset.
(iii) if stock/ goods are sold :- any profit on sale of stock is treated as business income of the assesses of the previous year in which it is sold
(iv)Sale of assets held for scientific research
(4)Withdrawl of certain incentive deductions
Discontinuance of business may result in wthdrawl of certain incentive deductions already claimed by business house. Such incentive deductions have been allowed to business houses operating in certain specified business areas. A brief discussion of these incentive deductions is given below:-
(i) Incentive-deduction to tea-coffee/rubber business (Section 33AB)
Assesses engaged in growing and manufacturing tea, coffee and rubber have been provided special deduction after profit. For claiming this deduction,these assesses are required to deposit certain amount to ‘ Special Deposit Account’ namely :-
Tea Development Account- In case of coffee business
Rubber Development Account- In case of rubber business
The amount deposited in above ‘Special Accounts’ is to be used for specific business purposes including purchase of business assets. The assets so acquired cannot be sold before the expiry of 8 years.
How Discontinuance results in withdrawl of deduction?
Now at the time of shutting down of business the following two possibilities can be there :-
(a) Unutilised amount in special accounts :-
Assessee can withdraw such amount but such withdrawn amount shall be deemed to be the profits of the business of the previous year in which amount is withdrawn.
(b) Sale of assets acquired before 8 years :-
The deduction allowed earlier shall be withdrawn & shall be treated as business profits of the previous year in which such asset is sold or otherwise transferred.
(ii) Incentive deduction to petroleum or natural gas business (Sec 33ABA)
Assesses engaged in the business of prospecting for, or extraction or production of petroleum or natural gas or both in India by entering into agreement with the Central Govt. have been allowed deduction u/s 33ABA.
For claiming this deduction, above assesses are required to deposit certain amount with SBI in a ‘Special Account’ as per approved scheme of Govt.
Further, assets acquired by withdrawing amount from such ‘ Special Account’ are not to be sold/transferred before the expiry of 8 years from the end of previous year in which such assets were acquired.
How Discontinuance results in withdrawl of deduction?
(Same as discussed u/s 33AB in pt. (i)
(iii) Incentive deduction to shipping business (Sec 33AC)
This deduction is allowed to a government company or an Indian public limited company which is engaged in the business of operation of ships. For claiming this deduction, such assesses are required to deposit certain amount in ‘Shipping Reserve’ can be used for certain specified
business purpose including for acquiring new ship within 8 years next following the previous in which the amount was credited to reserve.
The new ship so acquired cannot be be sold/transferred before the expiry of 3 years from the end of year in which the ship was acquired.
How Discontinuance results in withdrawl of deduction?
(a) Unutilised amount in shipping reserve :-
(Same as discussed u/s 33AB in pt. (i)
(b) Sale new ship before 3 years :-
(Same as discussed u/s 33AB in pt. (i)
(c) Consequences in the new ship in transferred after the expiry of three years
On sale of such ship after 3 years, the sale proceeds is required to be used for requiring a new ship within a period of one year from the end of previous year of such sale. Otherwise the deduction will be withdrawn & amount shall be treated as the business income of the A.Y. in which the ship in sold.
(5)Treatment of expenses incurred after discontinuance:-
Such expenses are not allowed as deduction against business income because such expenses are not incurred for the purpose of carrying of business or profession. Thus, retrenchment compensation paid to staff after liquidation of Co. is not allowed as deduction (P.N. Ganesan (P) Ltd. V.C.II. (1990) 52 TAXMANN 461 Madras HC
Tax Planning for shut down or continue
(1) Decision relating to profit-earning business(a) Profit earning business with no past losses and unabsorbed depreciation
It is never advisable to shut down or discontinue such a business.
(b) Profit earning business with past losses and unabsorbed depreciation
If possible, such a business should be continued till the past losses and unabsorbed depreciation are not fully set off.
(2) Loss generating business
If the occurrence of loss is a temporary phenomenon and financial position of the business allows the business house to bear such losses for some years then such a business should be continued. The business, in this case, can be continued at reduced level of activity. Later on, when the business restarts earning profit, then past business losses and unabsorbed depreciation can be set off.
However, if the occurrences of losses is expected to be for a long period then business should be discontinued at the earliest.
(3) How tea/coffee/rubber business house can avoid the withdrawl of deduction claimed u/s 33AB ?
Following tax planning can avoid withdrawl of deduction claimed u/s 33AB:-
(i) If assets acquired by withdrawing amount from ‘Special Account’ are to be sold before the expiry of stipulated period of 8 years then, if possible, such assets should be sold to any of the following persons :-(a) Government (Central or state)(b) Local Authority(c) A corporation established by or under a Central, State or Provincial Act(d) A government company as defined in Sec 617 of the Companies Act, 1956
If this is done, then the incentive deduction shall not be withdrawn and hence assessee shall not be liable to pay tax on deemed business profits.
(ii) In case of firm :- If assets acquired u/s 33AB are required to be sold before the expiry of 8 years then such a firm is advised to sell/ transfer such assets to a company in connections with succession of firm by company arrangement subject to fulfillment of prescribed conditions given for this. These conditions are :(a) All the properties of the firm relating to the business or profession immediately
before the succession become the properties of the company;(b) All the liabilities of the firm relating to the business or profession immediately
before the succession become the liabilities of the company;(c) All the partners of the firm before succession become all the shareholders of
company.
(4) How petroleum or natural gas business houses can avoid the withdrawl of deduction claimed u/s 33ABSame as suggested for Tea/Coffee/Rubber business in pt(3)
(5) Assesses engaged in shipping business cannot avoid the withdrawl of deduction claimed u/s 33AC by rresorting to any tax planning
(6) While discontinuing a company, the management is advised to see the possibility of its amalgamation with some other company
(7) Whether selling business as ‘Slump sale’ is beneficial or not?In case of slump sale, the entire business is sold/transferred for a lump sum price without assigning values to individual assets Sec 50-B of income Tax Act provide the method of computation of capital gain arising from slump sale.Capital gain on slump sale = Sale proceeds-Net worthMeaning of networth :- Networth shall be the aggregate value of total assets of the undertaking/division as reduced by the value of liabilities of such undertaking as appearing in the books of account.Aggregate value of total assets :- (a) In case of appreciable assets, the W.D.V off the block(b) In case of other assets, the book value of such assets.Thus management of
discontinued business has two options to sell assets i.e.(i) To sell the entire undertaking as slump sale or(ii) To sell assets individually or otherwise
So, it is advised that tax incidence under the two options should be analysed before hand.
If undertaking is being sold after having continued for more than three years then the entire capital gain will be long term capital gain which is put to tax@20%(concessional rate)
NEW INDUSTRIAL UNDERTAKING E.P.Z
SPECIAL PROVISIONS IN RESPECT OF
NEWLY ESTABLISHED UNDERTAKING IN FREE TRADE ZONE [SECTION 10A]
Sec 10A provides a deduction of such profits and gains as are derived by an undertaking
from the export of articles or things or computer software for certain consecutive assessment
years.
Such undertakings are required to be set up in FTZ, Electronic hardware Technology
Park, software Technology Park or special economic zone etc.
ESSENTIAL CONDITIONS TO BE FULFILLED
1 What to manufacture or produce? [Sec 10A (2) (i)]
The undertaking must manufacture or produce articles or things or computer software etc.
Meaning of computer software
"Computer software" means-
(a) Any computer programmed recorded on any disc, tape, perforated media
or other information storage services;
(b) Any customized electronic data or any predict or service of service of
similar nature as may be notified by the Board, which is transmitted or
exported from India to any place outside India by any means.
2. Location of undertaking. Undertaking must be located in Free Trade zone. Electronic
hardware Technology Park, software Technology Park, or special Economic zone etc.
Meaning of Free Trade Zone:-
Free trade zone means the:-
- Kandla Free Trade Zone;
- Santacruz Electronics Exports Processing Zone;
- Falta Export Processing Zone;
- Madras Export Processing Zone;
- Cochin Export Processing Zone;
- Noida Export Processing Zone;
- Or any other Processing Zone;
Note: Out of the above, the followings have been converted into 'Special Economic
Zones:
(i) Santacruz (Mumbai) Electronic Export Processing Zone.
(ii) Kandla (Gujarat) free Trade Zone.
(iii) Cochin (Kerala) Export Processing Zone.
"Software Technology Park" means any park set up in accordance with the Software
Technology, Park Scheme notified by the Government of India in the Ministry of Commerce and
Industry.
"Special economic zone" means a zone which the Central Government may, by
notification in the Official Gazette, specify as a special economic zone for the purpose of this
section.
"Electronic hardware Technology Park" means any park set up in accordance with the
Electronic Hardware Technology Park (EHTP) Scheme notified by the Government of India in
the Ministry of Commerce and Industry:
3. Commencement of operations [Sec. 10A (2) (i)]
Location of undertaking Year of starting of manufacturing or
production
(a) In any Free trade zone Previous year relevant to A.Y. 1981-82 or
thereafter
(b) In Electronic Hardware
Technology park or software
technology park
P.Y. relevant to A.Y. 1994-95 or thereafter
(c) In any special economic zone P.Y. relevant to A.Y. 2001-02 or thereafter
Note: For the purpose of this section "manufacture or produce" shall include the cutting
and polishing of precious and semi-precious stones.
4. Export out of India
Undertaking must export out of India, the articles or things or computer software
manufactured or produced.
On site development of computer software
The profits and gains derived from on-site development of computer software (including
services for development of software) outside India shall be deemed to be the profits and gains
derived from the export of computer software outside India. Thus, where a unit located in the
EPZIEOUISTP develops computer software at the site of client, abroad, such unit should not be
denied the tax holiday under section 10A on the ground that it was prepared on site, as long as
software is a product of the unit.
5. Undertaking not to be formed by the splitting up or the reconstruction [Sec 10A (2)
(ii)]
Undertaking shall not be formed by the splitting up or the reconstruction of a business
already in existence.
However, this condition shall not apply in respect of any undertaking which is formed as
a result of the re-establishment, reconstruction or revival by the assesses of the business of any
such undertaking as is referred to in section 33B, in the circumstances and within the period
specified in that section.
6. Undertaking not be formed by transfer of old Machinery [Sec 10A (2) (iii)]
Undertaking is not formed by the transfer to it the machinery or plant previously used for
any purpose.
What is not regarded as "previously used for any purpose"
Any machinery or plant which was used outside India by any person other than the
assesses shall not be regarded as machinery or plant previously used for any purpose, if the
following conditions are fulfilled:-
(a) such machinery or plant was not, at any time previous to the date of the installation by
the assessee, used in India;
(b) such machinery or plant is imported into India from any country outside India; and
(c) no deduction on account of depreciation in respect of such machinery or plant has been
allowed or is allowable under the provisions of this Act in computing the total income
of any person for any period prior to the date of installation of the machinery or plant
by the assessee.
Thus, if an assessee imports second hand foreign machinery then it shall be treated at par
with purchase of new plant or machinery if certain conditions given above are fulfilled.
Old P&M can be< 20% of total value of P&M of undertaking
Where old plant or machinery transferred to new undertaking is less than or equal to 20%
of total value of plant or machinery of new undertaking, the benefit of section 10A shall not be
denied to the undertaking. In other words the usage of old plant and machinery upto 20% of total
value of plant and machinery is allowed.
7. Receipt in India/ Repatriation to India of convertible foreign exchange [Sec 10A (3)]
The sale proceeds of articles or things or computer software exported out of India must
be received in India and if not received in India, then must be brought into India, in convertible
foreign exchange for the purpose of the Foreign Exchange Regulation Act 1973 and any rule
made there under or any other corresponding law for the time being in force.
Meaning of convertible foreign exchange:- Convertible foreign exchange means
foreign exchange which is for the time being treated by the Reserve Bank of India as convertible
foreign exchange for the purpose of the Foreign Exchange Regulation Act 1973 and any rules
made there under or any other corresponding law for the time being in force.
Meaning of "competent authority: [Explanation 1 to Sec 10A (3)]
"Competent authority" means the Reserve Bank of India or such other authority as is
authorized under any law for the time being in force for regulating payments and dealings in
foreign exchange.
Crediting of sale proceeds to 'Special Account' outside India
(Explanation 2 to Sec. 10A (3))
If sale proceeds are credited to a separate account with any bank outside India with the
approval of the Reserve Bank of India, such amount shall be deemed to have been received in
India.
8. Report of Chartered Accountant [Sec 10A (5)]
W.e.f. A.Y. 2001-02, assessee claiming this deduction must furnish, in the prescribed
form No. 56F. Along with the return of income, the report of chartered accountant, as defined in
the explanation below sub-section (2) of section 288, certifying the correctness of the deduction
claimed.
Meaning of accountant [Explanation 1 to Sec 288(2)]
"Accountant' means a 'Chartered accountant within the meaning of the Chartered
Accountants Act, 1949 and includes, in relation to any Sate, any person who by virtue of the
provision of subsection (2) of section 226 of the Companies Act, 1956, is entitled to be appointed
to act as an auditor of companies registered in that State.
9. Amount of deduction
Undertaking Rate of deduction Period of deduction
1. (a) Set up in any
FTZ
100% of profit and gains
derived by an
undertaking from Export
of articles Or things
computer Software
The deduction is available
for a period of 10
consecutive assessment
years beginning with the
assessment year relevant to
the previous years in which
undertaking begins to
manufacture or produce
such articles or things or
computer software
2. Undertakings
which begin
operations on or
after 1-4-05 in
any special
economic zone
(i) 100% profits by an
undertaking from
export.
(ii) 50% of the profits
(iii) 50% of the profits
For a period of 5
consecutive A.Y.s
beginning with A.Y.
relevant to P.Y. in which
the undertaking begins to
manufacture articles things
or computer software.
For next 2 consecutive
A.Y.s
For next 3 consecutive A.Y.
if certain conditions are
fulfilled*
Conditions for claiming extended deduction for 3 years.
(i) Credit of the amount to Special Account The deductions @ 50% of profits will be
available if equivalent amount is debited to profit and loss account and credited to a "Special
Economic Zone Reinvestment Allowance Reserve Account".
(ii) Utilization of Reserve:- The amount credited to the above special account is to be
utilized-
(a) For the purposes of acquiring new machinery or plant which is first put to use
before the expiry of a period of three years next following the previous year in
which the reserve was created; and
(b) Until the acquisition of new machinery or plant as aforesaid, for the purposes
of the business of the undertaking other than for distribution by way of
dividend or profits or for remittance outside India as profits or for the creation
of any asset outside India.
(iii) Furnishing particulars of new Plant & Machinery:- The assessee is required to
furnish the particulars in respect of new machinery or plant along with the return of
income for the assessment year relevant to the previous year in which such plant or
machinery was first put to use.
Withdrawal of benefit
(i) Use of Reserve for non-specified purpose:- Where any amount credited to the
'Special Economic Zone Re-investment Allowance Reserve Account" has been used
for any purposes other than those specified above, the amount so utilized shall be
deemed to be the profits of the previous year in which the amount was so utilized.
(ii) Non Utilization of Reserve:- Where the amount transferred to Special Account has
not been used for specified purposes before the expiry of 3 years as stated above the
amount not so utilized shall be deemed to be the profits of the previous year
immediately following the previous year in which the period of 3 years expires.
10. Furnishing of return of Income on or before due date (Applicable w.e.f. A.Y. 2006-
07)
W.E.F.A.Y. 2006-07, an assessee will be allowed deduction U/S 10A only if the return of
income is filed on or before the due date specified under section 139 (1). In other words,
deduction U/S 10A shall not be available to any undertaking, which does not furnish return of
income on or before the due date.
Calculation of profit from Exports [Sec 10A (4)]
Profits of the undertaking eligible for benefit u/s 10(A) shall be:-
Profit of the business of the undertaking X Export turnover Total turnover
“New industrial undertaking E.O.U”
SPECIAL PROVISION IN RESPECT OF NEWLY ESTABLISHED 100% EXPORT ORIENTED UNDERTAKINGS [SECTION 10B]
This section was introduced with effect from A.Y 1989-90. Prior the introduction of this section, the deduction was available only to those undertaking which were situated in certain specified areas such as free trade zones etc.
Thus to give a boost to export, government of India introduced the scheme of 100% export-oriented units and at the same time provided 10 years tax holiday u/s 10B to such undertakings these 100% EOUs have also been given many other incentives as discussed below:-
a) Custom duty free import of raw material and other capital equipment required for production or manufacturing.
b) Refund of excise duties.c) Refund of central sales tax.d) Assured regular supply of power, water etc.
Forum of organization:-
Deduction u/s 10B is available to a 100% EOU from export of article etc. this section does not provide any particular form of organization for undertaking. Thus undertaking can be operated as sole proprietorship, partnership firm, company etc.
ESSENTIAL CONDITIONS TO BE FULFILLED:-
1) What to manufacture/ produce [sec 10B (2) (i)]:- the undertaking must manufacture or produces articles or things or computer software.Meaning of computer software:-Computer software means-a) Any computer program recorded on any disc, tape, perforated media or other information
storage device etc.b) Any customized electronic data or any product or service of similar nature as may be
notified by the board, which is transmitted or exported from India to any other place outside India by any means.
2) 100% export-oriented units [sec 10 B (1)]:- the undertaking must be a 100%export oriented undertaking.Meaning of 100% export-oriented undertaking: - this means an undertaking which has been approved as a hundred percent export oriented undertaking by the board appointed in this behalf by the central government in exercise of the powers conferred by section14 of the industries (development and regulation) Act, 1951 and rules made under that Act.
On site development of computer soft ware:- The profits and gains derived from onsite development of computer soft ware (including services for development of soft ware) outside India shall be deemed to be the profit and gain derived from the export of computer soft ware outside India.
3) Undertaking not to be formed by the splicing up/or the reconstruction [sec 10 B (2) (i)]Undertaking shall not be formed by the splitting up or the reconstruction of a business already in existence.
4) Undertaking not be formed by transfer of old machinery [sec 10B (2) (iii)] Undertaking is not formed by the transfer of machinery or plant previously used for any purpose.
What is not regarded as previously used for any purpose:-Any machinery or plant which was used outside India by any person other than the assessee shall not be regarded as machinery or plant previously used for any purpose if the following conditions are fulfilled:-
i) Such machinery or plant was not, at any time previously to the date of installation by the assessor used in India.
ii) Such machinery or plant is imported into India from any country outside India.iii) No deduction on account of depreciation in respect of such machinery or plant has
been allowed or is allowable under the provision of Act in computing the total income of any person for any period to the date of installation of machinery or plant by assesses.Thus, if an assessee imports second hand foreign machinery then it shall be treated as par with purchase of new plant or machinery if certain conditions given above are fulfilled
5) Receipt in India/ repatriation to India of convertible foreign exchange [sec 10B (3)]The sale proceeds of articles or things or computer soft ware exported out of India must be received in India and if not received in India then must be brought into Indian convertible foreign exchange within 6 months from the end of relevant previous year. This period can be extended by the competent authority.
Meaning of convertible foreign exchange:-Convertible foreign exchange means for foreign exchange which is for the time being treated by the RBI as convertible foreign exchange for the purpose of the foreign exchange regulation act 1973 and any rules made there under or any other corresponding law for the time being in force.
Meaning of ‘competent authority’:-Competent authority means the RBI or such other authority as is authorized under any law for the time being in force for regulating payments and dealings in foreign exchange.
6) Report by chartered accountant [sec 10B(5)]-We & AY 2001-02, assessee claiming this deduction must furnish in the prescribed form no. 56G, along with return of income, the report of chartered below sub section (2) of section 288, certifying the correctness of deduction claimed.
Meaning of accountant:-Accountant means a chartered accountants act within the meaning of the chartered accountants ACT, 1949 and includes in relation to any state, any person who by virtue of the provision of sub section (2) of section 226 of the companies ACT,1956, is entitled to be appointed to act is an auditor of companies registered in that state.
7) Furnishing of return of income on or before due date (applicable w.e.f. A.Y. 2006-07)W.e.f. A.Y. 2006-07 an assessee will be allowed deduction U/S 10B only if the return of income is field on or before the due date specified under section 139(1). In other words deduction U/S 10A shall not be available to any undertaking, which does not furnish return of income on or before the due date.
Amount of deduction (for A.Y. 2010-11) 100% of the profits and gains of the business of the undertaking.Period of deduction:-The deduction is available for a period of 10 consecutive assessment years beginning with the assessment year relevant to the previous year in which the undertaking being to manufacture or produce such articles or things or computer software (No deduction u/s 10B shall be allowed to an undertaking for the assessment year 1012-13 and subsequent years)
Tax Planning In Amalgamation
Amalgamation
Amalgamation is a blending of two or more existing undertakings into one undertaking. The shareholders of each blending company become substantially the shareholders in the company which is to carry on the business of the blended undertakings. There may be amalgamation either by transfer of two or more undertakings to a new company, or by the transfer of one or more undertakings to an existing company.
Meaning of Amalgamation under the Income Tax Act [Sec 2(1B)]
"Amalgamation", in relation to companies, means the merger of one or more companies with another company or the merger of two or more companies to form one company (the company or companies which so merge being referred to as the amalgamating company or companies and the company with which they merge or which is formed as a result of the merger, as the amalgamated company) in such a manner that -
a) All the property of the amalgamating company or companies immediately before the amalgamation becomes the property of the amalgamated company by virtue of the amalgamation;
b) All the liabilities of the amalgamating company or companies immediately before the amalgamation become the liabilities of the amalgamated company by virtue of the amalgamation;
c) Shareholders holding not less than three-fourths in value of the shares in the amalgamating company or companies (other than shares already held therein immediately before the amalgamation by, or by a nominee for, the amalgamated company or its subsidiary) become shareholders of the amalgamated company by virtue of the amalgamation.
Actual cost and written down value when assets are transferred in scheme of amalgamation [Sec 43]:
When a capital Asset [Sec 43(1)]:
Where, in a scheme of amalgamation, any capital asset is transferred by the amalgamating company to the amalgamated company and the amalgamated company is an Indian company, the actual cost of the transferred capital asset to the amalgamated company shall be taken to be the same as it would have been if the amalgamating company had continued to hold the capital asset for the purposes of its own business.
When a Block of Asset is transferred [Sec 43(6)]:
Where in any previous year, any block of assets is transferred, by the amalgamating company to the amalgamated company in a scheme of amalgamation, and the amalgamated company is an Indian company, the actual cost of the block of assets in the case of the transferee-company or the amalgamated company, as the case may be, shall be the written down value of the block of assets as in the case of the transferor-company or the amalgamating company for the immediately preceding previous year as reduced by the amount of depreciation actually allowed in relation to the said preceding previous year.
The expenditure incurred in connection with the amalgamation is allowed to be written off in 5 successive years, beginning with the previous year in which the amalgamation takes place.
Transfer of capital assets in amalgamation-when not treated as transfer [Sec 47]
Transfer of capital assets to amalgamated Indian company [Sec47 (vi)]:
Any transfer, in a scheme of amalgamation, of a capital asset by the amalgamating company to the amalgamated company is not taken as a transfer
a) If the amalgamated company is an Indian company;
b) The scheme of amalgamation satisfies the condition of section 2(1B).
Transfer of shares in an Indian company held by a foreign company to another foreign company in a scheme of amalgamation [Sec 47 (via)]
Any transfer, in a scheme of amalgamation, of a capital asset being a share or shares held in an Indian company, by the amalgamating foreign company to the amalgamated foreign company, if –
a) At least twenty-five per cent of the shareholders of the amalgamating foreign company continue to remain shareholders of the amalgamated foreign company, and
b) Such transfer does not attract tax on capital gains in the country, in which the amalgamating company is incorporated;
Allotment of shares in amalgamated company to the shareholders of amalgamating company [sec 47 and 49(2)]
Any transfer by a shareholder, in a scheme of amalgamation, of a capital asset being a share or shares held by him in the amalgamating company, if -
a) The transfer is made in consideration of the allotment to him of any share or shares in the amalgamated company, and
b) The amalgamated company is an Indian company;
In the aforesaid cases, the cost of acquisition of the asset shall be deemed to be the cost of acquisition to him of the share or shares in the amalgamating company.
Carry forward and set-off of losses [Sec 72A]
The accumulated loss and unabsorbed depreciation of the amalgamating company shall be deemed to be loss/depreciation of the amalgamated company subject to following conditions:
1. Amalgamation of a company owning industrial undertaking, public sector company or companies engaged in the business of operation of aircraft, shipping business, hotel business or a banking company.
2. The amalgamating company has been engaged in the business for three or more years.
3. The amalgamating company has continuously held 75% of the book value of fixed assets for two years prior to the date of amalgamation.
4. The amalgamated company continues to hold 75% of the book value of fixed assets of amalgamating company for five years.
5. The amalgamated company should continue the business the business of the amalgamating company for a period of five years.
6. The amalgamated company fulfils such other conditions as may be prescribed to ensure the revival of the business of the amalgamating company or to ensure that the amalgamation is for genuine business purpose.
7. The amalgamated company should achieve level of production of at least 50% before the end of four years.
8. The amalgamated company shall furnish certificate about particulars of production.
The following sub-section (6A) shall be inserted after sub-section (6) of section 72A by the Finance Act, 2010, w.e.f. 1-4-2011 :
(6A) Where there has been reorganisation of business whereby a private company or unlisted public company is succeeded by a limited liability partnership fulfilling the conditions laid down in the proviso to clause (xiiib) of section 47, then, notwithstanding anything contained in any other provision of this Act, the accumulated loss and the unabsorbed depreciation of the predecessor company, shall be deemed to be the loss or allowance for depreciation of the successor limited liability partnership for the purpose of the previous year in which business reorganisation was effected and other provisions of this Act relating to set off and carry forward of loss and allowance for depreciation shall apply accordingly.
“Accumulated loss” means so much of the loss of the predecessor firm or the proprietary concern or the private company or unlisted public company before conversion into limited liability partnership or the amalgamating company or the demerged company, as the case may be, under the head “Profits and gains of business or profession” (not being a loss sustained in a speculation business) which such predecessor firm or the proprietary concern or the company or amalgamating company or demerged company, would have been entitled to carry forward and set off under the provisions of section 72 if the reorganisation of business or conversion or amalgamation or demerger had not taken place
“Industrial undertaking” means any undertaking which is engaged in—
(i) the manufacture or processing of goods; or(ii) the manufacture of computer software; or(iii) the business of generation or distribution of electricity or any other form of
power; or(iv) mining; or(v) the construction of ships, aircrafts or rail systems
The following clause ( b ) shall be substituted for the existing clause ( b ) of sub-section (7) of section 72A by the Finance Act, 2010, w.e.f. 1-4-2011 :
“Unabsorbed depreciation” means so much of the allowance for depreciation of the predecessor firm or the proprietary concern or the private company or unlisted public company before conversion into limited liability partnership or the amalgamating company or the demerged company, as the case may be, which remains to be allowed and which would have been allowed to the predecessor firm or the proprietary concern or the company or amalgamating company or demerged company, as the case may be, under the provisions of this Act, if the reorganisation of business or conversion or amalgamation or demerger had not taken place
Provisions relating to carry forward and set-off of accumulated loss and unabsorbed depreciation allowance in scheme of amalgamation of banking company in certain cases.
72AA. Notwithstanding anything contained in sub-clauses (i) to (iii) of clause (1B) of section 2 or section 72A, where there has been an amalgamation of a banking company with any other banking institution under a scheme sanctioned and brought into force by the Central Government under sub-section (7) of section 45 of the Banking Regulation Act, 1949 (10 of 1949) , the accumulated loss and the unabsorbed depreciation of such banking company shall be deemed to be the loss or, as the case may be, allowance for depreciation of such banking institution for the previous year in which the scheme of amalgamation was brought into force and other provisions of this Act relating to set-off and carry forward of loss and allowance for depreciation shall apply accordingly.
Amalgamation of shipping companies:-
115VY. Where there has been an amalgamation of a company with another company or companies, then, subject to the other provisions of this section, the provisions relating to the tonnage tax scheme shall, as far as may be, apply to the amalgamated company if it is a qualifying company:
Provided that where the amalgamated company is not a tonnage tax company, it shall exercise an option for tonnage tax scheme under sub-section (1) of section 115VP within three months from the date of the approval of the scheme of amalgamation:
Provided further that where the amalgamating companies are tonnage tax companies, the provisions of this Chapter shall, as far as may be, apply to the amalgamated company for such period as the option for tonnage tax scheme which has the longest unexpired period continues to be in force:
Provided also that where one of the amalgamating companies is a qualifying company as on the 1st day of October, 2004 and which has not exercised the option for tonnage tax scheme within the initial period, the provisions of this Chapter shall not apply to the amalgamated company and the income of the amalgamated company from the business of operating qualifying ships shall be computed in accordance with the other provisions of this Act.
Qualifying company:-
115VC. For the purposes of this Chapter, a company is a qualifying company if—
(a) it is an Indian company;
(b) the place of effective management of the company is in India;
(c) it owns at least one qualifying ship; and
(d) the main object of the company is to carry on the business of operating ships
“Tonnage tax scheme” means a scheme for computation of profits and gains of business of operating qualifying ships under the Special Provisions Relating To Income Of Shipping Companies
115VD. For the purposes of this Chapter, a ship is a qualifying ship if—(a) it is a sea going ship or vessel of fifteen net tonnage or more;(b) it is a ship registered under the Merchant Shipping Act, 1958 (44 of 1958), or a ship
registered outside India in respect of which a license has been issued by the Director-General of Shipping under section 406 or section 407 of the Merchant Shipping Act, 1958 (44 of 1958); and
(c) a valid certificate in respect of such ship indicating its net tonnage is in force
There are many tax incentives for amalgamation to the amalgamating company, shareholders as well as to the amalgamated company which are as under.
Benefit to the amalgamating company: -
1- Exemption from capital gain: - amalgamating company has no liability of capital gain tax if the amalgamated company is an Indian company on the transfer of the capital assets under section 47(vi).
2- Tax concession to foreign company: - no capital gain tax on transfer of shares of an Indian company to a foreign company to another foreign company if these conditions are fulfilled.
- 25% or more shareholders of the amalgamating foreign company become the shareholders of the foreign amalgamated company.
- In this transfer no capital gain tax will be charged.
No tax liability on transfer of license:- no tax liability on transfer of the license in communication, gas, power etc fields if the amalgamating as well as amalgamated company is an Indian company
Benefits to the shareholders are as under:-
1- Time frame of holding: - the shareholder has the right of share in the amalgamated company in the time process of amalgamation.
2- Exchange: - no brokerage as well as exchange will attract in case of amalgamation.
Benefits to the amalgamated company are several which are as under:-
1- Capital expenditure on scientific research (Section 35(5)): - if the company before claiming full deduction on capital expenditure amalgamated, the amalgamated company can claim the remaining part of deduction.
2- Expenditure on license (Section 35 ABB (6)): - if the company before claiming full deduction on obtaining license of telecommunication, the amalgamated company can claim the remaining installments on such deduction.
3- Preliminary expenses (Section 35D (5)): - if the company before claiming full deduction of preliminary expenses amalgamated, the amalgamated company can claim the remaining part of deduction.
4- Capital expenditure on patent and copyright (Section 35A(6)):- if the company before claiming full deduction on capital expenditure on patent or copyright amalgamated, the amalgamated company can claim the remaining part of deduction
5- Amalgamation expenses (Section 35DD(1)): - if an Indian company does expenses on amalgamation, the company is allowed a deduction of 20% per year for the time frame of five year starting from the year in which the amalgamation is done.
6- Voluntary retirement scheme expenses (Section 35DDA): - if the company before claiming full deduction on voluntary retirement scheme expenses amalgamated, the amalgamated company can claim the remaining part of deduction.
7- Prospecting of mineral expenses (Section 35E (7)): - if the company before claiming full deduction on prospecting or extraction or production of such minerals amalgamated, the amalgamated company can claim the remaining part of deduction.
8- Capital expenses on family planning(Section 36(1)(ix)):- if the company before claiming full deduction on capital expenditure on family planning amalgamated, the amalgamated company can claim the remaining part of deduction.
9- Bad debts: - if the amalgamating company has some bad debts, they are automatically become the bad debts of amalgamated company and such company are entitled to claim deduction on it.
SEZ or 100% export unit: - if a company in SEZ or 100% export unit undertaking transferred to another Indian company, such company is entitled to claim the benefits of SEZ and 100% export unit without any formalities and for unexpired period
Treatment of business losses and depreciation of the amalgamating company:-
If there are some losses of amalgamating company or the value of depreciation for the previous year in the field of banking company as well as the aviation or ship, hotel etc, the amalgamated company can treat these losses and value of depreciation of their own and can set- off and carry forwarding accordingly. Amalgamated company has the right to carry forward and set off business losses of amalgamating company to eight years from the year in which the amalgamation done. These are few points which should be fulfilled for this set off and carry forward.
- The loss should be the business loss and not the speculative losses.
- There should be regular flow of give and take in the business and not only single or
double entry of exchange of goods in which the business loss occurs.
- The loss should be notified to the central government of India.
- The amalgamated company should use at least fifty percent of the production of the
sources of amalgamating company before claiming such deduction.
- There should be a written application to the central government of India for the
deduction and carry forward.
Tax planning in the contrast of amalgamation: - these steps should keep in mind for benefits of tax in the view of amalgamation.
1- If there are some assets or liabilities which are not taken by the merging company, these assets should be sold and liabilities should be paid before any process of amalgamation.
2- If the shareholders holding more than 25% shares of the company not willing to be a shareholder to the new company after merging, they should be paid off for fulfilling the condition of 75% shares must for the amalgamation.
3- It’s always better that the loss making company merges in a good profit making company for claiming the set off and carry forward losses and depreciation.
4- Shares of the new company should be given to the shareholder in contrast of amalgamation for claiming the deduction 47(vii) of income tax. If shares +debentures + cash are given to the shareholder, the deduction is not available.
TAX PLANNING IN CASE OF FOREIGN COLLABORATIONS AND JOINT VENTURE
TAX PLANNING IN CASE OF FOREIGN
COLLABORATIONS AND JOINT VENTURE
There are two types of foreign collaborations:a) Financial collaboration (foreign equity participation) where foreign equity alone isinvolved .b) Technical collaboration (technology transfer) involving licensing of technology bythe foreign collaborator on due compensation. -There are two approving authorities1) Reserve Bank of India, and2) Department of Industrial Development in the Ministry of Industry, Governmentof India.
Government PolicyThe Government of India’s policy on foreign private investment is based mainly on the Approach adopted in 1949. The basic policy is to welcome foreign private investment on a selective basis in areas advantageous to the Indian economy. The conditions under which foreign capital is welcome are as follows:a) All undertakings (Indian or foreign) have to conform to the general requirements of the Government’s Industrial Policy.b) Foreign enterprises are to be treated at par with their Indian counterparts.c) Foreign enterprises would have the freedom to remit profits and repatriate capital subject to foreign exchange considerations.
The Industrial Policy 1991, is based on the view that while freeing Indian Industry from official controls, opportunities for promoting foreign investments in India should also be fully exploited. It is felt that foreign investment would bring attendant advantages of technology transfer, marketing expertise, introduction of modern managerial techniques and new possibilities for promotion of exports.
Areas of Foreign CollaborationThe Government of India issues from time to time a list of industries indicating where foreign investments may be permitted. The lists so issued are illustrative only The Government of India (Foreign Investment Promotion Board) also considers import of technology in Industries listed in Annexure A & Annexure B of Schedule 1 of Foreign Exchange Management (Transfer or issue of security by a person resident outside India) Regulations, 2000 subject to compliance with the provisions of the Industrial Policy and Procedures as notified by Secretariat for Industrial Assistance (SIA) in the Ministry of Commerce and Industry Government of India from time to time.
Technical CollaborationThe Industrial Policy, 1991, also provides that equity collaboration need not necessarily be accompanied with technical collaborations. The salient features of the Policy relating to Foreign Technology Agreements are outlined below:
Paragraph 39C - Foreign Technology Agreements.
Standard Conditions Attached to Approvals for Foreign Investment &Technology Agreements
1) The total non-resident shareholding in the undertaking should not exceed the percentage(s) specified in the approval letter.
2) A) The royalty will be calculated on the basis of the net ex-factory sales price of the product, exclusive of excise duties, minus the cost of the standard bought-out components and the landed cost of imported components, irrespective of the source of procurement, including ocean freight, insurance, customs duties, etc. The payment of royalty will be restricted to the licensed capacity plus 25% in excess thereof for such items requiring industrial licence or on such capacity as specified in the approval letter. This restriction will not apply to items not requiring industrial licence. In case of production in excess of this quantum, prior approval of Government would have to be obtained regarding the terms of payment of royalty in respect of such excess production.B) The royalty would not be payable beyond the period of the agreement if the orders had not been executed during the period of agreement. However, where the orders themselves took a long time to execute or were executed after the period of agreement, then in such cases the royalty for an order booked during the period of agreement would be payable only after a Chartered Accountant certifies that the orders in fact were firmly booked and execution began during the period of agreement and the technical assistance was available on a continuing basis even after the period of agreement.C) No minimum guaranteed royalty would be allowed.
3) The lumpsum shall be paid in three instalments as detailed below, unless otherwise stipulated in the approval letter:-
i. First 1/3rd after the approval for collaboration proposal is obtained from Reserve Bank of India and collaboration agreement is filed with the Authorised Dealer in Foreign Exchange.
ii. Second 1/3rd on delivery of know-how documentation.iii. Third and final 1/3rd on commencement of commercial production, or four
years after the proposal is approved by Reserve Bank of India and agreement is filed with the Authorized Dealer in Foreign Exchange, whichever is earlier. The lumpsum can be paid in more than three instalments, subject to completion of the activities as specified above.
4) All remittances to the foreign collaborator shall be made as per the exchange rates prevailing on the date of remittance.
5) The applications for remittances may be made to the Authorised Dealer in Form A2 with the undernoted documents:-
a) A No Objection certificate issued by the Income-tax authorities in the standard form or a copy of the certificate issued by the designated bank regarding the payment of tax where the tax has been paid at a flat rate of 30% to the designated bank.
b) A certificate from the Chartered Accountant in Form TCK/TCR (depending upon the purpose of payment).
c) A declaration by the applicant to the effect that the proposed remittance is strictly in accordance with the terms and conditions of the collaboration approved by RBI/Government.
6) The agreement shall be subject to Indian Laws.7) A copy of the foreign investment and technology transfer agreement signed
by both the parties may be furnished to the following authorities:-a) Administrative Ministry/Department.b) Department of Scientific and Industrial Research, New Delhi.c) Concerned Regional Officer of Exchange Control Department, RBI.d) Authorised Dealer designated to service the agreement.
8) All payments under the foreign investment and technology transfer agreement including rupee payments (if any) to be made in connection with the engagement/deputation of foreign technical personnel such as passage fare living expenses, etc. of foreign technicians, would be liable for the levy of ces under the Research and Development Cess Act, 1986 and the Indian Company while making such payments should pay the cess prescribed under the Act.
9) A return (in duplicate) in Form TCD should be submitted to Regional Office of the Reserve Bank of India in the first fortnight of January each year.
Depreciation and interest deductions:Depreciation ratesASSETS RATES (%)
Buildings 5-10Plant and Machinery 25-100Furniture and Fittings 15Vehicles(other than for commercial use) 20Pollution control Equipment 80
Energy Saving Devices 80Ships 25Intangible assets 25
Withholding Tax for NRIs and Foreign Companies:Withholding Tax Rates for payments made to Non-Residents are determined by theFinance Act passed by the Parliament for various years. The current rates are:
i) Interest 20%ii) Dividends paid by domestic companies : Niliii) Royalties 10%iv) Technical Services 10%v) Any Other Services Individuals: 30% of the income Companies: 40% of the
net income The above rates are general and in respect of the countries with which India does not havea Double Taxation Avoidance Agreement (DTAA).DOUBLE TAXATION RELIEF
Agreement with foreign countries for avoidance or relief against Double Taxation (Section 90)
Section 90 of the Income Tax Act, 1961, empowers the central government to enter into agreements with the Government of any country for the grant of relief against double taxation or for the avoidance of double taxation. This section also empowers the Central Government to make such provisions as may be necessary for implementation of such agreement and such provisions may be published in the Official Gazette. Under this section, the central government may enter into agreement with foreign countries:
1. For the granting of relief in respect of income on which have been paid both income-tax under this act and income-tax in that country , or
2. For the avoidance of double taxation of income under this act and under the corresponding law in force in that country , or
3. For exchange of information for the prevention of evasion or avoidance of income-tax chargeable under this act or under the corresponding law in force in that country, or investigation of cases of such evasion or avoidance, or
4. For recovery of income-tax under this act and under the corresponding law in force in that country.The Central government has so far entered into agreements for relief against or avoidance of double taxation with many countries and these agreements are in operation.These agreements may be classified into two parts:(a) Agreement for relief from Double taxation(b) Agreement for avoidance of Double taxation
AGREEMENT FOR RELIEF FROM DOUBLE TAXATION
Under this category assessments provide for payment of tax in both the countries under the respective laws of those countries but later on rebate of tax is given in both the countries on doubly assessed income. In such case assessee must show that the identical income has been doubly taxed and that he has paid tax both in India and in the foreign country.
AGREEMENTS FOR AVOIDANCE OF DOUBLE TAXATION
Under these agreements the assessee has first to pay the tax and then apply for relief in the form of a refund. Each country recovers tax only on that portion of income which accrued within that country and takes into account the income accruing in other country only for rate purposes. In such cases no refund arises.
SECTION 91 provides:
(a) UNILATERAL RELIEF IN RESPECT OF FOREIGN INCOME TAXED ABROAD (SECTION 91(1))
Subject to following conditions unilateral relief is granted in cases where section 90 is not applicable:
(a) Assessee should be resident of India in the previous year(b) The income , in fact , should have accrued outside India and should not be deemed under
any provision of this Act to accrue in India(c) The income should be taxed both in India and a foreign country with hich India has no
agreement for relief against or avoidance of double taxation; and(d) The assessee should have paid the tax in such foreign country by deduction or otherwise.(b) RELIEF IN CASE OF AGRICULTURAL INCOME FROM
PAKISTAN(SECTION 91(2))
In case a resident of India has paid any tax on agricultural income which accrued or arose to him during that previous year in Pakistan, he shall be entitled to a deduction from the Indian income tax payable by him of the amount of tax paid in Pakistan or sum calculated at the Indian rate of tax whichever is less.
(c) RELIEF IN CASE OF SHARE IN THE FOREIGN INCOME OF A REGISTERED FIRM (SECTION 91(3))
An assesse receiving share in foreign income of a registered firm shall be entitled to the relief of tax on such share provided the firm receives income from a foreign country with which no agreement exists under Section 90 and assessee has paid tax in that foreign country.Relief will be allowed only on doubly assessed income at the rate of the said country or Indian rate of tax, whichever is lower.
General Tax Incentives for Industries
100% deduction of profits and gains for ten years is available in respect of the following:
i) Development or operation and maintenance of ports, airports, roads, highways, bridges, rail systems, inland waterways, inland ports, water supply projects, water treatment systems, irrigation projects, sanitation and sewage projects, solid waste management systems.
ii) Generation, distribution and transmission of power which commence before 31.3.2006.
iii) Development, operation and maintenance of an Industrial Park or Special Economic Zone before 31.3.2006.
Following tax exemptions are available in different sectors:Deduction of 100% of the profit from business of
a) Development or operation and maintenance of ports, air ports, roads, highways, bridges etc.
b) Generation, distribution and transmission of powerc) Development, operation and maintenance of an Industrial Park or SEZd) By undertakings set up in certain notified areas or in certain thrust sector industries in the
North-eastern states and Sikkim.e) By undertakings set up in certain notified areas or in certain thrust sector industries in
Uttaranchal & Himachal Pradeshf) Derived from export of articles or software by undertakings in FTZ / EHTP / STPg) Derived from export of articles or software by undertakings in SEZh) Derived from export of articles or software by 100% EOUi) An offshore banking unit situated in a SEZ from business activities with units located in
the SEZ.j) Derived by undertakings engaged in the business of developing and building housing
projects. Deduction of 50% of profits derived from the business of building, owning and operation of multiplex theatres of convention centre is also available.
k) Derived by an undertaking engaged in the integrated business of handling, storage and transportation of food grains.
l) Derived by an undertaking engaged in the commercial production or refining of mineral oil
m) Derived by an undertaking from export of woodbased handicraft 100% deduction for seven years for undertakings producing or refining mineral oil.
100% deduction from income for first five years and 30% (for persons other than Companies) 25% in subsequent five years is available in respect of the following:
a) Company which starts providing telecommunication services whether basic or cellular including radio paging, domestic satellite service, network or trunking, broad band network and internet services before 31.3.2003.
b) Industrial undertakings located in certain specified industrially backward states and districts.
c) Undertakings which begin to operate cold chain facilities for agricultural produce before 31.3.2003.
d) Undertakings engaged in the business of handling, storage, transportation of food grains.
50% deduction for a period of five years is available to undertakings engaged in the business of building, owning and operating multiplex theatres or convention centres constructed before 31.3.2005.
Tax exemption of 100% on export profits for ten years upto F.Y. 2009-10, for new industries located in EHTPs and STPs and 100% Export Oriented Units. For units set up in Special Economic Zones (SEZs), 100% deduction of export income for first five years followed by 50% for next two years, even beyond 2009-10.
Tax exemption of 100% of Export profits for ten years for new industries located in Integrated Infrastructure Development Centres or Industrial Growth Centres of the North Eastern Region.
Deduction of 50% of export profits from the gross total income. The deduction would be restricted to 30% for financial year 2003-04 and no deduction is allowable subsequently.
Deduction from the gross total income of 50% of foreign exchange earnings by hotels and tour operators. The deduction would be restricted to 30% for financial year 2003- 04 and no deduction is allowable subsequently.
50% deduction of export income due to export of computer software or film software, television software, music software, from the gross total income. Deduction in respect of certain inter-corporate dividends to the extent of dividend declared.
Exemption of any income by way of dividend, interest or long term capital gains of an infrastructure capital fund or an infrastructure capital company from investment made by way of shares or long term finance in any enterprises carrying on the business of developing, maintaining and operating infrastructure facility.
Basics of Service TaxService Tax1. Service tax is a tax on service.2. Service means value addition to a product that is intangible.3. If there no service, there no tax.4. Service tax is imposed by amending chapter V of finance act 1994 from time to time.5. There is also no provision of deduction of tax at source from service tax and therefore the service receiver does not deduct tax from the payment to service provider and deposit it to department.6. Service tax is payable on taxable service only.
Need for Service Tax1. Services Constitute a very heterogeneous spectrum of economic activities2. With the increasing role of service sector and its contribution to GDP, the government felt that this sector should not go untaxed.3. The growth of service sector at higher rate offers opportunities as well as challenges to bring under tax net, hitherto uncovered services which in turn offer revenue to the government.
4. Service tax will reduce burden on the international trade (custom duty) and domestic manufacturing sector (excise duty).5. Service tax in India Made a humble beginning from July 1, 1994 with only three services being covered in the organized sector, i.e. telephone, general insurance & stock broking.6. Since, 1994 it has been amended every year to add more services into tax net.
Different approaches to service taxThere are 2 type of approaches :-1. Comprehensive approach: - All services are taxable and a negative list is specified for services which are not taxable.2. Selective approach:-It includes only selective services which are subject to service tax . India follows a selective approach of taxing selected services only. Service Tax is levied on specified services and paid by the service provider.
Features of service Tax:-1. Indirect Tax:- It is a source of revenue for the government in form of indirect taxes.2. No separate Act:-Central Government has the power to make rules to carry out the provisions of the Act.3. Administered By CBEC: - It is administered by central board of excise and customs.4. Uniform rate:-Currently it is 10 %.5. No double taxation:- Services falling under two or more sub clauses cannot be taxed twice if service is provided only once.6. Not applicable top Jammu & Kashmir:- It is extended to whole of India except the state of J&K.7. Leviable on taxable services:- Service Tax is leviable on taxable services (i.e. those services in respect of which charge of tax has been created under the act at the prescribed rates.8. Small service providers excluded:- a threshold limit of Rs 10 lakhs has been prescribed up to which value of all taxable services provided by a service provider during financial year is fully exempted from tax.9. Taxable service/value thereof:- for this purpose , the taxable service and the value of taxable service have been specifically defined.10. Tax is generally payable by the service provider:- The act makes the person providing the service to pay service tax in such a manner except in the situations provided in rule2 (1)( d) of the service tax rules.11. Self assessment:-Provision have been made for self assessment ,rectifications, revisions ,appeals, penalties etc as well as for registration of persons liable to pay tax.12. Exemption by notification:-power have been given to the government to grant exemptions from service tax in appropriate cases , by means of specific notifications.13. Voluntary exemptions:-Under service tax ,there is reliance on collection of primarly through voluntary compliance.
Extent and application ( Sec 64)Service Tax introduced by virtue of chapter V of the finance act 1994 extends to the whole ofIndia except to the state of J & K .service tax is not payable if the services are provider in the state of J & K irrespective of the fact whether the service provider is residing in or outside J & K.
Services provided by a resident of J & K to a client residing in other parts of the country would be liable for payment of service tax . Services provided in the state of J & K from any other state are not subject to payment of service tax
Service liable to tax1. Advertising agency.2. Airport services.3. Air travel agent.4. Architect.5. Asset management including portfolio management.6. ATM operation & management.7. Auctioneer’s service.8. Banking & financial services.9. Beauty treatment10. Broadcasting.11. Business auxiliary & support services & CS services & cost accounting services.12. Chartered accountant services13. Cleaning activity14. Club or association services15. Commercial training or coaching16. Construction17. Courier18. Legal consultancy19. Stock exchange, broking20. Franchise, intellectual property
Procedure of service tax
Procedure includes the following:1. Registration:-the application for the registration of is required to be made in duplicate in form ST -1 prescribed under the rules. The following documents shall be enclosed along with registration from :-a. A copy of PANb. Proof of Addressc. Constitution of applicant [i.e AOA,MOA]
The department /applicant deposit self certified copies and department is required to issue registration certificate within 7 days of the receipt of application. In case of failure to issue registration certificates within 7 days the registration applied for is deemed to have been granted & the assesse can carry on with his activities2. Maintenance of records:-a. Invoice:- Every person providing taxable service shall issue an invoice/bill/challan not later than 14 days from the date of completion of taxable service or receipt of payment whichever is earlier. Bill /invoice challan should include :-i. Name & address & registration number of the person providing taxable services.
ii. Name & address of the person receiving taxable services.iii. Service description & classification.iv. Bill /invoice should be serially numbered & signed by authorized person.3. Payment of service tax :- The assesses has to pay tax in the bank designated by CBEC in form TR -6 or in any other manner as prescribed by CBEC. The list of Bank is available in every commissioner ate of central excise. Some banks provide the facility of e payment or cheque can also be deposited in the bank.4. Filing of return:- Every person liable to pay tax needs to self assess the tax on the service provided by him. Further a return must be furnished to superintendent of central excise . The return is to be furnished in form ST-3 .Under rule 7(1) the return is to be filed on half year basis & should be filed in triplicate on or before 25th of month following particulars half year. There can be e filing of return also.
Penalty under service taxIf service tax is not paid or paid after due date penalty can be imposed :-a) Rs 200 per day during which the failure continues.b) 2 percent per month during which the failure continues whichever is higher.
General exemptions from service taxThe central government can grant total or partial exemptions to taxable services under section93. The following general exemptions are available to service provider from payment of wholeamount of service tax :a) Services provided to the united nation and any other International organization.b) Services provided to a developer or units of special economic zones.c) Goods & material sold by services provider to recipient of service provided value oftaxable service does not exceeds 10 lakhs.d) Exemption of small service providers.e) Services provided by Reserve bank of India.f) Exemptions to technology business indicator (TBI), sciences & technology entrepreneurship parks & incubates provided that business of incubates does not exceed Rs 50 lakhs.g) Services provided by a digital cinema services provider.h) Services provided by resident’s welfare associations where the monthly contribution does not exceed Rs 3000.i) Technical testing & analysis services including vaccines & herbal remedies on human participants by a clinical research organization.
Updates according to Budget :- 2011 Service taxHighlight of this budget:a) Service tax will be payable on accrual basis from 1.04.2011. So the moment a service provider will book any invoice in his books the tax will become payable.b) Service tax is being levied on all services provided by a medium sized hospital (having more than 25 beds) irrespective of whether the patient has insurance or not.c) Service tax on Hotels have been introduced in a big way:
i) Room rentals above a declared rate of Rs. 1000 will be chargeable to service tax – with an optional abatement of 50%. ii) Services provided by air-conditioned restaurants having a license to serve alcoholic beverages – this service will get optional 70% abatement.
d) Penal provisions are made harsher with introduction of penalties even when tax is being paid under audit.
e) Introduction of prosecution provisions wherein the assesses evading tax payments for more than 6 months may face imprisonment of upto 3 years.
List of Amendments in existing law
1) No change in the rate of service tax – it remains at 10.30 %2) Two new services are being brought under the tax net:
a) RESTAURANTSServices provided by air-conditioned restaurants having a license to serve alcoholic beverages – this service will get optional 70% abatement.
b) HOTELSHotels and guesthouses giving rooms for accommodation for a continuous period less than 3 months – this service brings into the tax net only rooms having a declared (Rack) rate of more than Rs. 1000 (chargeable rate may be less). This service will get an optional 50% abatement.
3) Scope of certain existing services is being changed and in almost all cases the changes are drastic :a) CLUB OR ASSOCIATION SERVICES
EARLIER: Services provided by a club or association to ITS MEMBERS were only taxable NOW: Services provided to NON MEMBERS will also become taxable
b) AUTHORISED SERVICE STATION EARLIER:Services provided by AUTHORISED SERVICE STATION were only taxableNOW Services provided by ANY PERSON will be taxable so all small mechanics provided services for more than 10 lacs in a year will become taxable.
c) LAWYERSEARLIER: Services provided by a firm of lawyers to any individual were not taxable. Secondly legal representational services like appearing in court of law for a client were also not taxable NOW Services provided by a firm of lawyers to any person shall become taxable and legal representation services provided by any person (including individuals) to any business entity shall also become taxable. Similar change is expected to come for chartered accountants and company secretaries. Arbitration services are also brought into the tax net but still if the same are provided to individuals the same shall not be taxable.
d) COMMERCIAL TRAINING OR COACHING SERVICEThe memorandum issued along-with the Budget says that “The definition of commercial or training service is being amended to bring all unrecognised courses
within the tax net, irrespective of the fact that such courses are conducted by an institute.” But the consequent change in the section does not reflect the said change – on the contrary – the amended section says that all courses offered by a coaching centre WITH OR WITHOUT ISSUANCE of certificate will be taxable This anomaly needs to be looked into an corrected before enactment of the Finance Act.
e) HOSPITAL SERVICES Major change has been made in this entryEARLIER: 2 Services provided by a hospital were ONLY taxable:
• Services provided to patients wherein the payment was to be paid by thE insurance company
• Services of health check up or preventive care provided to an employee of a company wherein the company paid the charges to the hospital
NOW: The whole section is changed and the new entry provides that• ALL services provided by a CENTRALLY AIR-CONDITIONED (wholly
or partially) hospital having more than 25 beds for in-patient treatment during any part of the year. (The insurance company is completely brought out from the picture)
• If an independent doctor (not being an employee of the hospital) provides his services using the premises of the said hospital will also now become taxable –so now all visiting doctors of a hospital will be taxable.
• Diagnostic services provided by the said hospital with the aid of a laboratory or other medical equipments.
4) Full exemption is being provided under the works contract service for providing construction or finishing of new residential complex under JNNURM and Rajiv Awaas Yojana and within a port or airport. (Earlier this exemption was provided only under the category of Construction of residential complex and commercial construction service.
5) Rates of Service tax on air travel are being increased as under Domestic Travel - From flat Rs. 100 to 150 International Travel - From flat Rs. 500 to 750
6) Penal provisions are changed in big way in this budget – following is the gist of them:A) Section 73 (1A) is deleted wherein benefit of reduced penalty of 25% even
in case of fraud, collusion etc shall not be available.B) Instead a new section 73 (4A) is being introduced wherein it has been
provided that if during an audit, verification or investigation by the department it is found that the assessee has short paid any tax than a penalty of 1% per month upto a maximum of 25% shall be levied. If the same is paid than no show cause notice shall be issued. So now penalty will become compulsory the moment an audit party finds any short payment of tax which was not so earlier.
C) Penalty under section 76 for delayed payment of tax has been reduced from Rs. 200 per day or 2% per month to Rs. 100 or to 1% per month – whichever is higher subject to a maximum penalty of 50% of the tax amount. Earlier it was 100%.
D) Maximum penalty for non submission of records etc under section 77 has been increased from Rs. 5000 to 10000.
E) Penalty for late filing of returns has been increased from a maximum of Rs. 2000 to 20000.
F) Power to authorise a Search has now been given to a Joint commissioner (Earlier it was with Commissioner) and power to execute the search has been given to a Superintendent (earlier it was Assistant or deputy commissioner)
G) Certain section of the Central Excise Act which deal with prosecution are now made applicable to Service tax.
H) Section 89 is being introduced to bring prosecution provisions:(i) The prosecution shall apply in the following cases:
• Provision of service without invoice• Availment and utilisation of credit without receipt of
inputs or input services• Submitting false information• Non-Payment of collected amount of service tax for
a period of more than 6 months(ii) The term of the imprisonment shall be from 6 months to a maximum of 3
years.(iii) The sanction for the prosecution will be granted at the level of
chief commissioner7) The Board has issued 18 notifications to being some more changes which are as under:
a) New Rule 2A has been introduced in Works contract Composition rules whereby Service providers availing the Composition scheme shall now be eligible to take only 40% of the credit of the following 3 input services availed by them:
• Erection commissioning and installation Services• Commercial Construction Services• Construction of Residential Complex Services
b) In the earlier budget notification nos. 28/2010, 38/2010 & 42/2010 were issued wherein exemption to Construction of complex & Commercial construction service was given respectively for providing services to JNNURM and Rajiv Awaas Yojana schemes but a similar exemption was not provided to Works contract service. This anomaly has now been corrected by introducing notification no. 6/2011, 10/2011 and 11/2011.
c) Export Rules have been tweaked a bit :i) Preferential Location services offered by builders has been shifted from
customer location based criteria to immovable property criteriaii) Following services have been shifted from the performance based criteria to
location based:• Credit Rating Agency• Goods Transport Agency• Market Research Agency• Opinion Poll Agency• Technical Testing and analysis• Transport of Goods by air• Transport of Goods in containers by railways
iii) Following Services have been shifted from Location based criteria to performance based:• Rail Travel Agent
• Health/Hospital Servicesd) Import Rules have also been amended. Amendments similar to the ones made in
Export rules are made in import rules.e) Interest on delayed payment which was 13% p.a. earlier has now been increased to
18% p.a. w.e.f. 1.04.2011.f) New Notification no. 17/2011 is introduced which supersedes the earlier notification
no. 9/2009 which deals with SEZ refunds. It simplifies the refund rules and procedures related to SEZ’s.
g) Point of Taxation Rules has been introduced whereby specific rules as to when a particular transaction would become taxable have been prescribed (at the time of invoicing or at the time of receipt of payment). A detailed note on the same is under process and will be mailed very soon.
8) CENVAT credit rules have been amended in a big way and following changes are made to it:a) Definition of Capital goods has been amended. Now credit of capital goods used
outside the factory of the manufacturer for generation of electricity for captive use within the factory will be available.
b) Major change has been brought about in the definition of exempted services. Effect of 2 changes made in the definition are as under:
• Services on which a service provider has claimed abatement will now be considered as exempted services
• Value of trading in goods shall now be treated as exempted services.c) Definition of Inputs (goods) has been changed and now credit of goods used for
construction of building or a civil structure or laying of foundation will not be available except if the goods are used for providing following services:
• Port Services• Airport Services• Commercial Construction Services• Residential Construction Services• Works Contract Services
d) Definition of Input Services has been amended and following changes are incorporated:
• Credit for setting up of an office, factory or premises of service provider shall not be available
• The words “activities relating to business” have now been deleted from the definition so now credit of ALL services procured for doing the activity of business will not be available on A-la-carte basis.
• Credit of services falling in the category of Architect, Port, Other port, Airport, Commercial Construction, Residential construction and Works Contract (Specified services) shall not be available if the same are used for construction of building or a civil structure or laying of foundation. If these services are used to provide the same specified services than the service provider can claim the credit thereof.
• Services falling in the category of General Insurance business, Cab operator, Authorised Service Station and supply of tangible goods so far as they relate
to motor vehicle except when used by a service provider falling in the category of courier, Cab operator, Cargo handling, Transport of goods by road, outdoor catering and pandal and shamiana keeper.
• Credit of services falling in the category of outdoor catering, beauty treatment, health services, cosmetic and plastic surgery, membership of a club, health and fitness centre, life insurance, health insurance and travel benefits extended to employees on vacation such as Leave or Home Travel Concession, when such services are used primarily for personal use or consumption of any employee will not be available henceforth.
VALUE ADDED TAX (VAT)
VALUE ADDED TAX (VAT)
Value added tax means a tax on sale. It is another form of sales tax. It is collected on different stages of transactions involving sales of goods, tax paid on purchase .VAT is applicable only in case of sale of all taxable goods. It is a multipoint taxation system which means tax is payable at each stage.VAT has been applicable from 1st April 2005 in the state of Punjab with view to make it convenient for the manufacturer and seller of goods.
BASIC PROVISIONS
Set off. (Input Credit): At present the set off is available on the goods locally purchased within the State only. No set off would be available to the goods purchased in the course of interstate trade and commerce. It will be necessary to produce the tax invoice to claim set off. The tax should have been charged in the invoice.
Exempted Goods: Goods termed as exempted by the State Government under the proposed VAT Act. As per guide lines issued by the State Governments, no set off would be allowed on the exempted goods. It means that the tax suffered on the raw material for manufacture of exempted goods would not be refunded.
Manufacturer: The manufacturer is required to purchase raw material after paying full tax on the rate applicable on such material. Unlike the present system wherein the manufacturer can purchase the goods at a concessional rate of tax against declaration form no declaration form will be required to be issued by the Manufacturer. The input tax suffered by him would be adjusted \ set off from the sale of the finished product. The tax adjustment of input credit of the goods purchased within the State would be available on the sales made within the State and also on the interstate sales subject to the tax payable. No adjustment would be available of the input credit in case of branch transfer, consignment sale.
Trader: The trader would be required to collect tax on the sales made by him and the tax liability would be set off \ adjusted from the purchase \ input tax credit of the goods locally purchased in that State.
Issue of Invoice: Under Value Added Tax Act issue of invoice is mandatory. No set off \ input credit would be allowed unless the original tax invoice is produced wherein tax is clearly charged separately in the invoice.
Declaration Form: Use of declaration form of purchase of goods on concessional rate of tax or NIL rate of tax under the State Act is completely finished. There is no requirement of declaration form under the proposed Value Added Tax. However the Road Permits like ST 18 A and ST 18 C declaration forms would continue. Declarations forms of CST Act would also continue.
Accounting: The basic account books required for the purpose of VAT Act are Purchase and Sale Register. Both the registers would be the basis on which the calculation of payment of tax would be made. The normal practice of entering the gross value of Purchase bill would be changed. The assesse is required to enter the value of goods in the goods A\c and the amount of tax in the Tax A\c separately.
Stocks: Stock statement are required to be furnished as prescribed for the quarter ending and then monthly from January to March. Set off of tax paid stocks would be given. Tax paid stocks as on March ending would be the basis for claiming set of under the new VAT Act. No set off would be available for the tax paid stock purchased prior to 1.4.2005.
Capital Goods: Set off would also be available on the tax paid goods at the time of purchase of capital goods under the VAT Act. Basis of set off is yet to be declared. However, it is presumed that set off would be available within a span of 3 years from the date of commercial production.
Export: Export would be zero rated. Tax paid on raw material used in manufacture of goods for export would be refunded by the State Government in cash \ adjustment. The exports would became more competitive in the world market as there would be no tax henceforth on raw material used for manufacture of goods for export.
Registration: All Importers, Manufacturers, Exporters and Dealers having CST registration would be required to seek mandatory registration under the new VAT Act. The existing registered dealers are required to fill a FACT SHEET as notified by the department within a stipulated time which is at present 15.02.2006 and then they would not be required to seek fresh registration. There would be two types of registration. The first is VAT dealer’s registration and the second is composition scheme dealer registration. The dealers opting under composition scheme would not be able to charge tax in the invoice and he would pay lump sum fee as composition amount. It is apparently for retail traders and the expected limit of turn over for option under composition scheme is maximum Rs. 15 lacs.
Security Amount: Security amount for seeking registration is likely to be increased many fold in VAT Act. The security for registration under the present Act is Rs.10, 000 which is increased to Rs. 25,000.00 for small scale industry, Rs. 1,00,000formedium scale industry and Rs. 5,00,000.00 for large scale industry. Apart from it, the assessing authority would have a right to seek additional security equal to 25% of the tax liability.
Audit of Account: Every dealer having a turnover of over Rs. 40.00 lacs would be required to get his account audited by a Chartered Accountant and submit the audit report within the stipulated time. Failure to do so would attract penalty proceedings.
Penalties:
Penalties have been increased many folds in the new VAT Act. As per discussion draft on VAT Act circulated, there is more emphasis on penalties. Works Contract and Leasing: No clarification, provision or guide lines had been issued by the department till date on works contract and leasing transaction. The continuation of existing composition scheme or by what method they would be taxed in future has not been informed.
Under VAT, the tax is levied at each point of sale. The tax paid on purchasepoint is allowed to be set off, also referred to as input tax credit under VAT.
A following simple example can be considered for understanding the concept.(i) A sells to B(Rate of tax is assumed to be 10%)Sales price + Tax = Total100 + 10 = 110Tax Payment to Govt.A will pay tax at Rs.10 (The input credit available to A is notconsidered here for simplicity). Rs.10(ii) B sells to CSales price + Tax = Total150 + 15 + 165 B will pay tax to Govt. as under:Tax on sale 15Less: Tax paid on Purchase (-) 10Net Payable 05
Rs.5(iii) C sells to DSales price + Tax = Total200 + 20 = 220 C will pay tax to Govt. as under:Tax on sale 20Less: Tax paid on Purchase (-) 15Net Payable 05
Rs.5(iv) D sells to ConsumerSales price + Tax = Total250 + 25 = 275D will pay tax to Govt. as under:Tax on sale 25Less: Tax paid on Purchase (-) 20Net Payable 05
Rs.5Total Payment Rs.25
Benefits of VAT
1) Coverage-If the tax is considered on a retail level, it offers all the economic advantages of a tax of the entire retail price within its scope. The direct payment of tax spreads out over a large number of firms instead of being concentrated only on particular groups, such as wholesalers & retailers.
2) Revenue Security - Under VAT only buyers at the final stage have an interest in undervaluing their purchases, as the deduction system ensures that buyers at earlier stages are refunded the taxes on their purchases. Therefore, tax losses due to undervaluation will be limited to the value added at the last stage.
3) Under VAT, if the payment of tax is avoided at one stage nothing will be lost if it is picked up at later stage. Even if it is not picked up later, the government will at least have collected the VAT paid at previous stages. Whereas if evasion takes place at the final/last stage the state will lose only tax on the value added at that particular point.
4) Selectivity - VAT is selectively applied to specific goods & business entities. In addition, VAT does not burden capital goods because of the consumption-type. VAT gives full credit for tax included on purchases of capital goods.
5) Co-ordination of VAT with direct taxation - Most taxpayers cheat on sales not to evade VAT but to evade their personal and corporate income taxes. Operation of VAT resembles that of the income tax and an effective VAT greatly helps in income tax administration and revenue collection.
Limitations of VAT
1) Impact on GDP ratio- the implementation of Vat is closely related to other indirect tax administration and impacts the tax to GDP ratio; this is why several countries have taken a long time to implement Vat.
2) Less Revenue to government- In some cases the VAT is collected by dealer and no paid to government. As a result the set off of such Vat paid by the purchaser may not be allowed to the purchasers. A strong mechanism has to be devise to tackle such situations.
3) Complexity in refund procedure- A situation of refund would arise if no vat is payable on the final scale. As a result the set off cannot be availed. Hence, the tax paid becomes the cost or the same has to be claimed as refund. A suitable mechanism has to be framed for early refund.
4) Multiple rates of tax- vat may also contain multiple rates of tax due to multiple types of items. In countries like India wherein sales tax already covers a wide range of commodities, replacement of those taxes by a revenue neutral vat may lead to no inflammatory consequences.
5) Maintenance of different records- The dealers would have to maintain upto date records of purchase and sales in order to claim set off. Many dealers prepare only primitive accounts which may not be accepted by the department.
6) Confliction- Since central sales tax continues to remain in force, there can be conflict between VAT and CST
Basics of custom and excise duty
Central Excise Duty - Introduction
The Customs Act was formulated in 1962 to prevent illegal imports and exports of goods. Besides, all imports are sought to be subject to a duty with a view to affording protection to indigenous industries as well as to keep the imports to the minimum in the interests of securing the exchange rate of Indian currency.
Duties of customs are levied on goods imported or exported from India at the rate specified under the customs Tariff Act, 1975 as amended from time to time or any other law for the time being in force. For the purpose of exercising proper surveillance over imports and exports, the Central Government has the power to notify the ports and airports for the unloading of the imported goods and loading of the exported goods, the places for clearance of goods imported or to be exported, the routes by which above goods may pass by land or inland water into or out of Indian and the ports which alone shall be coastal ports
In order to give a broad guide as to classification of goods for the purpose of duty liability, the
central Board of Excises Customs (CBEC) bring out periodically a book called the "Indian Customs Tariff Guide" which contains various tariff rulings issued by the CBEC. The Act also contains detailed provisions for warehousing of the imported goods and manufacture of goods is also possible in the warehouses.
For a person who do not actually import or export goods customs has relevance in so far as they bring any baggageExcise duty is a tax on manufacture of goods within the country . it is a duty levied upon goods manufactured and not upon sales or proceeds of sales of goods. Therefore the duty of excise is levied on a manufacturer or producer in respect of the commodities produced or manufactured by him.
Excise duties are levied under the central excise and salt act 1944 , the excise tariff act 1985 ,and the modified value added tax scheme(MODVAT) scheme.
The rates of excise duty leviable vary depending inter alia on nature of item the item manufactured , the nature of manufacturing concern and the place of ultimate sale.
Central excise revenue is the biggest single source of revenue for government of India. The union government tries to achieve different socio-economic objectives by making suitable adjustments in the scope and quantum of levy of central excise duty. The scheme of central excise levy is suitably adapted and modified to serve different purposes of price control , sufficient supply of essential commodities , industrial growth and promotion of small scale industries.
Article 265 0f constitution of India has laid down that both levy and collection of taxes shall be under the authority of law. The excise duty is levied in pursuance of entry 45 of the central list in the government of India act, 1935 as adopted by the entry 84of list 1 of the seventh schedule of the constitution of India . the charging section is section 3 of the central excise and salt act,1944 .
The duty rate are either ad valorem (a fixed percentage of cost of production ) , specified (a fixed rate depending upon the nature of manufactured item , or a combination of both.
The MODVAT scheme , introduced in 1986 , applies to certain specific items. The objective of this scheme is to limit the cascading of duty incidence on a number of goods , subject to excise which are further used as inputs for other excise able goods from abrod
Importance of Central Excise Duty
Central excise revenue is the biggest single source of revenue for the Government of India. The Union Government tries to achieve different socio-economic objectives by making suitable adjustments in the scope and quantum of levy of Central Excise duty. The scheme of Central Excise levy is suitably adapted and modified to serve different purposes of price control, sufficient supply of essential commodities, industrial growth, promotion of small scale industries and like Authority for collecting the Central Excise duty.
Article 265 of the Constitution of India has laid down that both levy and collection of taxes shall be under the authority of law. The excise duty is levied in pursuance of Entry 45 of the Central List in Government of India Act,1935 as adopted by entry 84 of List I of the seventh Schedule of the Constitution of India. Charging section is Section 3 of the Central Excises and Salt Act,1944.
Liability to pay Central Excise Duty
Section 3 of the Central excises and Salt Act,1944 provides that there shall be levied and collected in such manner as may be prescribed, duties of excise 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.it is therefore clear that as soon as the goods in question are produced or manufactured, they will be liable to payment of Excise duty. However for convenience duty is collected at the time of removal of the goods. While Section 3 of the Central Excises and salt Act,1944 lays down the taxable event, Rules 9 and 49 of the Central excise Rules,1944 provides for the collection of duty.
Types of Excise DutiesThere are three types of Central Excise duties collected in India namely
1. 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.
2. Additional Duty of Excise
Section 3 of the Additional duties of Excise (goods of special importance) Act,1957 authorises 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 enactment's like medicinal and toilet preparations, sugar etc. and other industries development etc.
3. 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.
Excise duties in budget 2011-2012:
Union Excise Duty: .Revised Estimate of Union Excise Duties for 2010-2011 is..`137777.52 crore as against the Budget Estimate of..`132000 crore. Budget Estimate for 2011-2012 is..`164115.66 crore...
1. Basic and Special Excise Duty :.Basic Excise Duty and Special Excise Duty are leviable under the Central Excise Act at the rates specified in the Central Excise Tariff Act, 1985. The mean CENVAT rate was increased from 8% to 10% w.e.f. 27.02.2010. Excise duty on Motor Spirit (MS) and High Speed Diesel (HSD) was increased by Re.1 per litre.
2. Additional Duty of Excise on Motor Spirit:.Additional Duty of Excise on Motor Spirit is leviable by the Finance Act (No.2), 1998. This is commonly known as road cess. Receipt Budget, 2011-2012 5 Tax Revenue
3. Additional Duty of Excise on High Speed Diesel Oil: .Additional Duty of Excise on High Speed Diesel Oil is leviable by the Finance Act, 1999. This is commonly known as road cess.
4. National Calamity Contingent Duty (NCCD):.National Calamity Contingent Duty was levied on pan masala and certain specified tobacco products vide the Finance Act, 2001. The Finance Act, 2003 extended this levy to: (a) polyester filament yarn, motor car, two wheeler and multi-utility vehicle @ 1% and (b) crude petroleum oil @..`50 per metric tonne...
5. Special Additional Duty of Excise on Motor Spirit: .Special Additional Duty of Excise on Motor Spirit is leviable by the Finance Act, 2002. This is commonly known as surcharge.
6. Surcharge on Pan Masala and Tobacco Products: .An Additional Duty of Excise has been imposed on cigarettes, pan masala and certain specified tobacco products, at specified rates in the Budget 2005-06. Biris are not subjected to this levy.
7.01. Education Cess: .Education Cess is leviable @ 2% on the aggregate of duties of Excise.
7.02. Secondary and Higher Education Cess: .Secondary and Higher Education Cess is leviable @ 1% on the aggregate of duties of Excise.
Arrear Collection: RE 2010-11 and BE 2011-12 include collection of arrears of Central Excise Duties amounting to..`1323 crore and..`1100 crore respectively...
8. Clean Energy Cess: .Clean Energy Cess was imposed under section 83 of Finance Act 2010 on coal, lignite and peat produced in India @..`50 per tonne. The cess has come into force w.e.f. 01.07.2010 and is to be collected as duty of excise...
Body of central excise law
Central excise law includes
1. Central excise act 1944
2. Central excise rules 2002
3. Cenvat credit rules 2004
4. Central excise (appeal) rules 2001
5. Central excise (advance ruling) rules 2002
6. Central excise(settlement of cases)rules 2001
7. Central excise valuaton(determination of prices of excisable goods)rules 2000
8. Central excise tariff act 1985
Liability to Pay Excise DutyGoods themselves cannot pay duty so the person who create the taxable event must discharge the liability which he had created. The liability to pay tax excise duty is always on the manufacturer or producer if goods. There are three types of parties who can be considered as manufacturers-
Those who personally manufacture the goods in question
Those who get the goods manufactured by employing hired labour
Those who get the goods manufactured by other parties
The following have been held to be real manufacturers :
In case where the factories are leased out, duty liability is on the lessee as he is the person who actually manufactures the said goods
When goods are manufactured from others by supplying raw material, the duty liability will rest on the person who actually carried out the manufacturing activity and not on the person who supplied the material.
In the manufacturer is a mere dummy of the customer or supplier of raw material, then the goods are said to be manufactured on behalf of the customers / suppliers and the latter is liable to duty.
Custom Duty in IndiaThe Custom Duty in India is one of the most important tariffs. The custom duty in India is regulated by the Customs Act of 1962. The main purpose of the custom duty in India is the prevention of the illegal export and import of goods. The rates of the custom duty levied on the imported and exported goods are assigned in the Custom Act, 1962.
The duties of custom are levied on goods that are imported or exported from India ,at the rate specified under the custom tariff act 1975,as amended from time to time ,or by another law for the time being in force .for the purpose of exercising proper surveillance over imports and exports ,the central government has the power to notify the ports and airports for the unloading of the imported goods and loading of the exported goods ,the place for clearances of goods imported or to be exported ,the routs by which the above goods may pass by land or inland water into or out of India , and the ports which alone should be coastal ports .
The customs duties are levied on imports at rates specified in the annual budget. the finance act 1994 has witnessed a general reduction in the duty on capital goods ,steel, chemical drugs, pesticides and project imports.
The Acts under the custom duty in India:
Foreign Trade (Exemption from application of Rules in certain cases) Order, 1993 Customs Act, 1962
The Registrars of Companies in different states chiefly manage:
Customs Tariff Act, 1975 Foreign Trade (Development and Regulation) Act, 1992 Taxation Laws (Amendment) Act, 2006 Provisional Collection of Taxes Act, 1931 Central Excise Tariff Act, 1985 Foreign Trade (Regulation) Rules, 1993 Central Excise Act, 1944
The rules and regulations under the custom duty in India:
Foreign Privileged Persons (Regulation of Customs Privileges) Rules, 1957 Denaturing of Spirit Rules, 1972 Customs (Attachments of Property of Defaulters for Recovery of Government Dues)
Rules, 1995 Accessories (Condition) Rules, 1963
Specified Goods (Prevention of Illegal Export) Rules, 1969
Re-Export of Imported Goods (Drawback of Customs Duties) Rules, 1995
Notice of Short-Export Rules,1963
Customs Tariff (Identification, Assessment and Collection of Countervailing Duty on Subsidized Articles and for Determination of Injury) Rules, 1995
Customs and Central Excise Duties Drawback Rules,1995
Customs Tariff (Identification, Assessment and Collection of Anti-Dumping Duty on Dumped Articles and for Determination of Injury) Rules, 1995
Customs Valuation (Determination of Price of Imported Goods) Rules, 1988
Customs Tariff (Determination of Origin of Goods under the Agreement on SAARC Preferential Trading Arrangement) Rules,1995
Notified Goods (Prevention of Illegal Import) Rules, 1969
Customs Tariff (Determination of Origin of Goods under the Bangkok Agreement) Rules, 1976
Customs Tariff (Determination of Origin of the U.A.R. and Yugoslavia) Rules, 1976
Customs (Settlement of Cases) Rules, 1999
Customs( Import of Goods at Concessional Rate of Duty for Manufacture of Excisable Goods) Rules, 1996
Customs (Publication of Names) Rules,1975
Rules of Determination of Origin of goods under the Agreement on South Asian Free Trade Area (SAFTA)
Customs Tariff (Identification and Assessment of Safeguard Duty) Rules, 1997
Baggage Rules, 1998 Customs Tariff (Determination of Origin of Other Preferential Areas) Rules,1977
Customs Tariff (Determination of Origin of Goods under the Free Trade Agreement Between the Democratic Socialistic Republic of Sri Lanka and the Republic of India) Rules, 2000
The different duties under custom duty in India:
Basic Duty: This is the general kind of duty levied under the Customs Act, 62
Additional Duty (Countervailing Duty): This duty is levied under the Custom Tariff Act, section 3 (1)
Anti-dumping Duty: This duty prevents the dumping of foreign goods by the transnational companies
Protective Duty: This duty protect the interests of the Indian industrial sector
Export Duty: This duty is levied on the export of goods
Basics of Customs Duty
Customs duty on imports and exports
Customs duty is on imports into India and export out of India.of Customs Act, often called charging section, provides that duties of customs shall be levied at such rates as may be specified under ‘The Customs Tariff Act, 1975', or any other law for the time being in force,goods imported into, or exported from, India.
Similarity between excise and customs
There are many common provisions and/or similarities in provisions Central Excise and customs Law. Administration, Settlement Commission and Tribunal are common. Provisions of Tariff, principles of valuation, refund, demands, exemptions, appeals, search, confiscation and appeals are similar.
Taxable event in imports
In case of imports, taxable event occurs when goods mix with landmass of India - Kiran Spinning Mills v. CC 1999(113) ELT 753 = AIR 2000 SC 3448 (SC 3 member bench).
In case of warehoused goods, the goods continue to be in customs bond. Hence, 'import' takes place only when goods are cleared from the warehouse - confirmed in UOI v. Apar P Ltd. 112 ELT 3 = 1999(6) SCC 118 = AIR 1999 SC 2515 (SC 3 member bench).- followed inSpinning Mills v. CC1999(113) ELT 753 = AIR 2000 SC 3448member bench).
Taxable event in exports
In case of exports, taxable event occurs when goods cross territorial waters of India - UOI v. Rajindra Dyeing and Printing MillsSCC 187 = 180 ELT 433 (SC).
Territorial waters and exclusive economic zone
Territorial waters of India extend upto 12 nautical miles inside sea from baseline on coast of India and include any bay, gulf, harbour, creek or tidal river. (1 nautical mile = 1.1515 miles = 1.853 Kms). Sovereignty of India extends to the territorial waters and to the seabed and subsoil underlying and the air space over the waters.
‘Exclusive economic zone' extends to 200 nautical miles from the base-line. Area beyond that is ‘high seas’.
Indian Customs Waters
Indian Customs waters extend upto 12 nautical miles beyond territorial waters. Powers of customs officers extend upto 12 nautical miles beyond territorial waters.
Type of Customs Duties
Basic customs dutyBasic customs duty levied u/s 12 of Customs Act is generally 10% of non-agricultural goods, w.e.f. 1-3-2007.
Countervailing Duty (CVD)
CVD equal to excise duty is payable on imported goods u/s 3(1) of Customs Tariff Act to counterbalance impact of excise duty on indigenous manufactures, to ensure level paying field.
CVD is payable equal to excise duty payable on like articles if produced in India. It is payable at effective rate of excise duty.
General excise duty rate is 10.30% w.e.f. 27-2-2010 (10% basic plus 2% education cess and SAH Education cess of 1%).
CVD is payable on assessable value plus basic customs duty. In case of products covered under MRP provisions, CV duty is payable on MRP basis as per section 4A of Central Excise.
CVD can be levied only if there is ‘manufacture’.
CVD is neither excise duty nor basic customs duty. However, all provisions of Customs Act apply to CVD.
Special CVD Special CVD is payable @ 4% on imported
goods u/s 3(5) of Customs Tariff Act. This is in lieu of Vat/sales tax to provide level playing field to Indian goods. Traders importing goods can get refund. CVD is not payable if goods are covered under MRP valuation provisions/
Education Cess Education cess of customs @ 2% and SAH Education cess of 1% is payable.
Total duty Total import duty considering all duties plus education cess on non-agricultural goods is generally 26.85%
Other duties NCCD has been imposed on a few articles. In addition, on certain goods, anti-dumping duty, safeguard duty, protective duty etc. can be imposed. Cess is payable on some goods imported/exported.
Safeguard duty Safeguard duty can be imposed if large imports are causing serious injury to domestic industry. In addition, product specific safeguard duty on imports from China can be imposed.
Anti dumping duty Antidumping duty is leviable u/s 9A of Customs Tariff Act when foreign exporter exports his good at low prices compared to prices normally prevalent in the exporting country.Dumping is unfair trade practice and the anti-dumping duty is levied to protect Indian manufacturers from unfair competition.Margin of dumping is the difference between normal value (i.e. his sale price in his country) and export price( price at which he is exporting the goods).Price of similar products in India is not relevant to determine ‘margin of dumping’.‘Injury margin’ means difference between fair selling price of domestic industry and landed cost of imported products. Dumping duty will be lower of dumping margin or injury margin.Benefits accruing to local industry due to availability of cheap foreign inputs is not considered. This is a drawback.CVD is not payable on antidumping duty. Education cess and SAH education cess is not payable on anti-dumping duty.In case of imports from WTO countries, antidumping duty can be imposed only if it cause material injury to domestic industry in India.
Dumping duty is decided by Designated Authority after enquiry and imposed by Central Government by notification. Provisional antidumping duty can be imposed. Appeal against antidumping duty can be made to CESTAT.
Calculations of customs duty
General customs duty rate for non-agricultural goods s 10%. Total customs duty payable w.e.f. 27-2-2010 is 26.85% as excise duty rate is generally 10%
Assessable value = CIF Value of imported goods converted into Rupees at exchange rate specified in notification issued by CBE&C plus landing charges 1% (plus some additions often arbitrarily and whimsically made by customs).
Calculation of customs duty payable is as follows -
Duty % Amount
(A) Assessable Value Rs 10,000 (B) Basic Customs Duty 10 1,000.00 (C) Sub-Total for calculating CVD '(A+B)' 11,000.00 (D) CVD 'C' x excise duty rate 10 1,100.00 (E) Education cess of excise - 2% of 'D' 2 22.00 (F) SAH Education cess of excise - 1% of 'D' 1 11.00 (G) Sub-total for edu cess on customs 'B+D+E+F' 2,133.00 (H) Edu Cess of Customs – 2% of 'G' 2 42.66 (I) SAH Education Cess of Customs - 1% of 'G' 1 21.33 (J) Sub-total for Spl CVD 'C+D+E+F+H+I' 12,196.99 (K) Special CVD u/s 3(5) – 4% of 'J' 4 487.88 (L) Total Duty (M) Total duty rounded to Rs
Notes – Buyer who is manufacturer, is eligible to avail Cenvat Credit of D, E, F and K above.
A buyer, who is service provider, is eligible to avail Cenvat Credit of D, E and F above. .
A trader who sells imported goods in India after charging Vat/sales tax can get refund of Special CVD of 4% i.e. ‘K’ above
Features of GST
What is GST?
GST is abbreviation for Goods and Service Tax. GST is levied on all the transactions of goods and services made for a consideration. This new levy replaces almost all of the indirect taxes. In particular, it replaces the following indirect taxes:
At Central level Central Excise Duty Service Tax Additional Excise Duties CVD (levied on imports in lieu of Excise duty) SAD (levied on imports in lieu of VAT) Excise Duty levied on Medicinal and Toiletries preparations, Surcharges and cesses Central Sales Tax.
At State level VAT/Sales tax Entertainment tax (unless it is levied by the local bodies) Luxury Tax Taxes on lottery, betting and gambling Entry tax not in lieu of Octroi
Cesses and SurchargesDirect taxes, such as income tax, corporate tax and capital gains tax are not affected.
Various types of GST?
There are two types of GST
1. Unified or Single GST and
2. Dual GST.
In India, dual GST is implemented wherein Centre and State levy on the transactions of the value of Goods or Service. Under dual GST, it is levied by both the centre called as Central Goods and Service Tax (CGST) and State called as State Goods and Service tax (SGST).
GST rates
The tax will be collected in three tiers rates.
1. Goods at lower rate2. Goods at standard rate3. Services.
During the first and second year GST on goods will charged in two rates. i.e. Goods at lower
rate for necessary items and goods of basic importance ,Goods at standard rate for goods in
general. Rates of GST on service will remain same from the beginning.
Year Categories Central GST State GST Total Tax Liability
2011 April Goods at lower rate 6 6 12
Goods at standard rate 10 10 20
Services 8 8 16
2012 April Goods at lower rate 6 6 12
Goods at standard rate 9 9 18
Services 8 8 16
And from third year i.e. April 2013, if everything is going according to planning, and there is not
much burden of compensation (to state govt) on central government the tax rate will be reduced
and there will be only two rates for Goods and services.
1. Goods at standard rate2. Services
Year Categories Central GST State GST Total Tax Liability
2013 April Goods at standard rate 8 8 16
Services 8 8 16
In GST taxable events are supply of Goods and supply of services, any economic events which
is not supply of goods is considered as supply of services. a service provider or trader has to
collect tax in two element called CGST( For cental government) SGST ( for state government)
and paid separately.
Threshold limit for GST
The exemption limit of GST has been proposed to 10 Lakh Both for services and Goods. So any business with a turnover below 10 lakh will be exempted from levying GST. Current threshold for excise duty is 1.5 crore, so more manufacturers liable for GST this will help to compensate state government lose to an extent.
Working of GST
The idea of Goods and Services Tax (GST) also known as Value Added Tax (VAT) is a tax on each financial contribute in the distribution chain. The taxable event is ‘supply of goods’ and ‘supply of services’. Any transmit of right to utilize goods will comprise supply of goods, and, any supply not engaging goods will treat as supply of service. On the other hand, the tax is exercised on the value-added component of the supply. This is accomplished by working tax on the full fundamental value of the goods or service and giving set off/credit of tax undergo at
previous stage, identified as input stage, to keep away from cascading effect. Thus, the entire supply chain up to final consumer gets taxed with in-built mechanism of input stage credit. In this system, the final consumer ends up bearing the full burden of tax without any set off benefit.
Important things to consider:
Charging Tax:The dealers including (Manufacturers, Wholesalers and Retailers and Service Providers) registered under GST need to charge GST on goods and services delivered to customers at the specified rate of tax. The GST payable is comprised in the price borne by the purchaser of the goods and the service buyer. The supplier including Seller and service provider should deposit this GST amount to the Government.
Getting Credit of GST: If the recipient of goods or services belongs to a registered dealer (Manufacturers, Wholesalers and Retailers and Service Providers) and has got an appropriate tax invoice then he can claim a credit for the payment of GST amount. This “input tax credit” is setoff against any GST (Out Put), charged on goods and services by the dealer to his customers.
Ultimate Burden of Tax on Last Customer:As the last and final consumer of the goods and services obtains no credit for the GST paid to the sellers or service providers, the ultimate burden of the tax drop to him.
Registration:Dealers including the suppliers, manufacturers, service providers, wholesalers and retailers must be register for GST falling which he normally unable to charge GST and claim credit for the GST he pays. Besides he can not also issue a tax invoice.
Tax Period:The tax period should be calculated by the respective law and normally for monthly and/or quarterly. The concerned dealer has to deposit the tax on a particular tax period applicable to him if his output credit is more than the input credit after considering the opening balance, if any, of the input credit.
Refunds:The dealer is entitled to get refund subject to the provisions of law applicable in this respect if the input credit of a dealer is more than the output credit for a tax period. Depending on the provision of law the excess amount need to be brought forward to next period or should be refunded with immediate effect.
Exempted Goods and Services:Some particular goods and services may be marked as exempted goods and services and the input credit should not be claimed on the GST paid for purchasing the raw material in this regard or GST paid on services used for providing such goods and services.
Zero Rated Goods and Services:Normally, export of goods and services treated as zero-rated and the GST paid by the exporters of these goods and services is refunded in this regard. This is the fundamental distinction between Zero rated and exempted goods and services.
Tax Invoice:Tax invoice is the most vital & basic document in the GST. A dealer registered under GST can issue a tax invoice and with that invoice the credit (Input) can be claimed. Usually a tax invoice should includes the name of supplying dealer, his tax identification nos., address and tax invoice nos. coupled with the name and address of the purchasing dealer, his tax identification nos., address and description of goods sold or service provided.
Reasons behind implementation of GST
A product or service passes through many stages till it reaches the final consumer. Governments at Central and State level have, as and when the need arose, introduced many indirect taxes on various taxable events in this value chain (such as Excise duty on manufacture, VAT on sale etc). As these taxes are levied on different taxable events they have their limitations. To illustrate further, let’s take an example of Excise Duty. Excise duty is levied on ‘manufacture’ and it fails to tax the value addition at distribution level. Additionally, at present, ‘goods’ suffer two levies (Excise and VAT) whereas ‘taxable services’ suffer only one levy i.e. service tax. This leads to distortion: distortion arises because the relative prices of services would be lower as compared to goods. Even, as tax system treated goods and services differently, in certain cases there is double taxation (software being one of such case where the industry has taken conservative stand and both VAT and Service Tax is being currently levied). Also, there were restrictions on availment of credit such as a service provider cannot avail credit of VAT and a trader cannot avail credit of Service tax.The above lacunas affect free flow of goods and services. Additionally, it brings uncertainty in the trade which is not good for the economy as a whole. GST is therefore projected as a solution to all these problems.
Exempt Goods and Services
There are two types of GST exclusions: tax-free and tax-exempt
“Tax-exempt” exclusions consist of goods and services that are charged with GST at the production and distribution stages but not at the final retail stage. Manufacturers, wholesalers, and retailers can’t claim an Input Tax Credit. As such, some GST is embedded in the final price of the good or service; however, it is lower than it would otherwise be under the regular GST regime. Examples of tax-exempt exclusions include residential rents, health and dental care, and educational services.
“Tax-free” exclusions cover goods and services that are not with GST throughout the life of the product. Final consumers are not charged GST while purchasing these products from distributors. Moreover vendors get Input Tax Credits at the production and distribution stages. As a result, the good or service becomes completely free from taxation relating to the GST. Examples of tax-free exclusions include basic groceries, prescription drugs, and medical devices.
Examples of exempt goods and services include:
Goods transported by rail. Supply of transport vehicles (goods carriage) to a goods transport agency (GTA) to be
used for transport of goods by road. Transport of essential goods such as foodgrains, fertilisers and petroleum products. Edible oilseeds and edible oil, foodgrains (cereals and pulses) and flour, petroleum and
petroleum products and defence and military equipment. Transport of parcels containing newspapers (registered with the Registrar of
Newspapers). Raw jute and jute textile, seeds for food crops and fruits and vegetables, seeds for cattle
feed, jute seeds, medicine/ pharmaceutical products and relief materials meant for victims of natural or other disasters.
Features of GST
The salient features of the GST model are as follows:
Consistent with the federal structure of the country, the GST will have two components: one levied by the Centre (hereinafter referred to as Central GST), and the other levied by the States (hereinafter referred to as State GST). This dual GST model would be implemented through multiple statutes (one for CGST and SGST statute for every State). However, the basic features of law such as chargeability, definition of taxable event and taxable person, measure of levy including valuation provisions, basis of classification etc. would be uniform across these statutes as far as practicable.
The Central GST and the State GST would be levied simultaneously on every transaction of supply of goods and services except the exempted goods and services, goods which are
outside the purview of GST and the transactions which are below the prescribed threshold limits. Further, both would be levied on the same price or value unlike State VAT which is levied on the value of the goods inclusive of CENVAT. While the location of the supplier and the recipient within the country is immaterial for the purpose of CGST, SGST would be chargeable only when the supplier and the recipient are both located within the State.
The Central GST and State GST are to be paid to the accounts of the Centre and the States separately.
Since the Central GST and State GST are to be treated separately, in general, taxes paid against the Central GST shall be allowed to be taken as input tax credit (ITC) for the Central GST and could be utilized only against the payment of Central GST. The same principle will be applicable for the State GST.
Cross utilisation of ITC between the Central GST and the State GST would, in general, not be allowed.
To the extent feasible, uniform procedure for collection of both Central GST and State GST would be prescribed in the respective legislation for Central GST and State GST.
The administration of the Central GST would be with the Centre and for State GST with the States.
The taxpayer would need to submit periodical returns to both the Central GST authority and to the concerned State GST authorities.
Each taxpayer would be allotted a PAN linked taxpayer identification number with a total of 13/15 digits. This would bring the GST PAN-linked system in line with the prevailing PAN-based system for Income tax facilitating data exchange and taxpayer compliance. The exact design would be worked out in consultation with the Income-Tax Department.
Keeping in mind the need of tax payers convenience, functions such as assessment, enforcement, scrutiny and audit would be undertaken by the authority which is collecting the tax, with information sharing between the Centre and the States.
SET OFF AND CARRY FORWARD OF LOSSES
SET OFF LOSSES
1. Set off loss from one source against income from another source within the same head of income ( sec. 70 ). However there are six exceptions to this rule that a loss can be set off against any income under the same head:
A. Speculation loss (73(1))
B. Long term capital loss
C. Loss from owning and maintenance of horses
D. Loss from an exempted source of income
E. Loss in respect of casual income falling under section 56(2)(ib)
F. Any loss cannot be set off against casual incomes falling under section 56(2)(ib)
2.Set off losses of one head against the income of another head in same assessment year, Inter-head setoff ( sec. 71 )
Exceptions:
A. Speculation loss
B. Expenses on maintenance of horses for race purposes
C. Loss under head capital gains
D. Business loss not to be setoff from salary income
E. Set off of losses from casual incomes falling u/s 56(2)(ib)
F. Loss in respect of casual incomes falling under section56(2)(ib)
G. Loss from a source whose income is exempted
H. Share of loss from firm/AOP
Carry forward and set off of losses
• Provisions:
I. Carry forward of loss under the head house property (section 71 b)
a. Time limit to carry forward : 8 assessment years
b. Mode of set of: can be set off only against income under the head house property
Important points:
1.House property loss prior to assessment year 1999-2000: not allowed
2.Filing of return of house property loss on or before due date is not a necessity
II. Carry forward of non speculation “business loss” section 72(1)
a. Time limit to carry forward : 8 assessment years
b. Mode of set off: income falling under head “business and profession” (including speculation business profit)
Important points:
1.Who can carry forward and set off business loss?
2.Continuity of loss generating business is not necessary
3.Timely filing of return of loss
4.Closure of business due to specified reasons
Carry forward of speculation business loss(section 73)
a. Time limit: 4 assessment years
b. Mode of set off: against the profits of any speculation business carried on by the assessee
Important points:
1. Who can carry forward and set off speculation business loss?
2.Continuity of loss generating speculation business not necessary
3. Timely filing of return of loss
. Carry forward and set off of loss of a specified business referred to in section 35 AD
a. Time limit to carry forward : indefinite period
b. Mode of set off : against profits and gains of any specified business
Carry forward of loss under head capital gains(section 74)
a. Time limit : 8 assessment years
b. Mode of set off:
i) B/F long term capital loss : against long term capital gain
ii) B/F short term capital loss : against any capital gain
Important points
Timely filing return of loss
Carry forward of loss from activity of owning and maintaining race horses (falling under head other sources) section 74 A
a. Time limit to carry forward: upto 4 assessment years
b. Mode of set off : against income from activity of owning and maintaining of race horses
Important notes:
1.Timely filing of return of loss
2.Continuity of such activity is necessary
Unabsorbed depreciation
Depreciation which remains unadjusted as either there is no income or less income in relevant prev. year, it can be carried forward till it is fully adjusted from any income during succeeding previous years. It shall be treated as depreciation of succeeding previous years.
CAPITAL ASSET EXEMPTED PROCEDURE
Capital Gain:
A capital gain is income derived from the sale of an investment. A capital investment can be a home, a farm, a ranch, a family business, or a work of art, for instance. In most years slightly less than half of taxable capital gains are realized on the sale of corporate stock. The capital gain is the difference between the money received from selling the asset and the price paid for it.
Profits or gains arising from the transfer of a capital asset made in a previous year are taxable as capital gains under the head "Capital Gains". The important ingredients for capital gains are, therefore, existence of a capital asset, transfer of such capital asset and profits or gains that arise from such transfer.
Capital asset
a) Stock-in-trade, consumable stores or raw-materials held for the purpose of business or profession.
b) Personal effects like wearing apparel, furniture, motor vehicles etc., held for personal use of the tax payer or any member of his family. However, jewellery, even if it is for personal use, is a capital asset.
c) Agricultural land in India other than the following:
Land situated in any area within the jurisdiction of municipality, municipal corporation, notified area committee, town area committee, town committee, or a cantonment board which has a population of not less than 10,000 according to the figures published before the first day of the previous year based on the last preceding census.
Land situated in any area around the above referred bodies upto a distance of 8 kilometers from the local limits of such bodies as notified by the Central Government (Please see Annexure 'A' for the notification).
d) 6 1/2 per cent Gold Bonds, 1977, 7 per cent Gold Bonds, 1980, National Defense Gold Bonds, 1980 and Special Bearer Bonds, 1991 issued by the Central Government.
e) Gold deposit bonds issued under the Gold Deposit Scheme 1999 notified by the Central Government.
Transfer
Transfer includes:
i) Sale, exchange or relinquishment of a capital asset.ii) Extinguishment of any rights in a capital asset.
iii) Compulsory acquisition of the capital asset under any law.
iv) Conversion of a capital asset into stock-in-trade
v) Part performance of a contract of sale
vi) Transfer of rights in immovable properties through the medium of co-operative societies, companies etc
vii) Transfer by a person to a firm or other or Body of a person to a Association of Persons (AOP) Individuals (BOI)
viii) Distribution of capital assets on Dissolution.
ix) Distribution of money or other assets by a Company on liquidation
Profits or GainsThe incidence of tax on Capital Gains depends upon length for which the capital asset transferred was held the transfer. Ordinarily a. capital asset held for 36 or less is called a 'short-term capital asset' and if the period exceeds 36 months, the asset is known as term capital asset'. However, shares of a Company, the of Unit Trust of India or any specified Mutual Fund or security listed in any recognized Stock Exchange are to considered as short term capital assets if held for 12 or less and long term capital assets if held for more 12 months.
Transfer of a short term capital asset gives rise to "Short Term Capital Gains' (STCG) and transfer of a long capital asset gives rise to 'Long Term Capital Gains' LTCG). Identifying gains as STCG and LTCG is a very important step in computing the income under the head Gains as method of computation of gains and tax on the gains is different for STCG and LTCG.
Short Term Capital Gain (STCG)Short Term Capital Gains is computed as below :
Computation of short - term Capital Gains
1. Find out full value of consideration 2. Deduct the following :
a. expenditure incurred wholly and exclusively in connection with such transferb. cost of acquisition; and c. cost of improvement
3. From the resulting sum deduct the exemption provided by sections 54B, 54D, 54G 4. The balancing amount is short-term capital gain.
Long Term Capital Gains (LTCG)
Long Term Capital Gains is computed as below :
Computation of long - term Capital Gains
1. Find out full value of consideration 2. Deduct the following :
a. expenditure incurred wholly and exclusively in connection with such transfer b. indexed cost of acquisition; and c. indexed cost of improvement
3. From the resulting sum deduct the exemption provided by sections 54, 54B, 54D, 54EC, 54ED, 54F and 54G
4. The balancing amount is long-term capital gain
The following table is all about capital gain exemption, under what section you can avail it, Conditions to be satisfied, quantum of exemption. You can calculate capital gain tax exemption easily with the help of following table.
Under Section
Allowed Assessee
Conditions to be satisfied Quantum of exemption
54 Individual/HUF
1. Transfer should be of a residential houseincome of which is chargeable under the
head ‘Income from house property’.
2. It must be a long-term capital asset.
3. Purchase of another residential house
should be within one year before or 2
Actual amount invested in new asset or the capital gain whichever is less.
years after, or construction should be
within three years after the date of
transfer.
54B Individual 1. Transfer should be of agricultural land.2. It must have been used in the 2 years
immediately preceding the date of
transfer for agricultural purposes either
by the assessee or his parent.
3. Another agricultural land should be
purchased within 2 years after the date of
transfer.
See : Factor determine when an agricultural land is capital asset or not for calculation of capital gain tax.
—do—
54D Any assessee which is an industrial undertaking
1. There must be compulsory acquisition.2. The property compulsorily acquired
should be land and building forming part
of an industrial undertaking.
3. The asset must have been used in the 2
years immediately preceding the date of
transfer of the assessee for the purpose of
Actual amount invested in new asset or the capital gain whichever is less.
the business of the undertaking.
4. Within a period of 3 years after the date
of compulsory acquisition any other land
or building should be purchased or
constructed for the use of existing or
newly set up industrial undertaking.
54EC Any assessee 1. The asset transferred should be a long-term capital asset
2. Within a period of 6 months after the
date of transfer, the capital gain must he
invested in the specified assets i.e. bonds
redeemable after 3 years issued by NHAl
or RECL.
Actual amount invested in new asset or the capital gain whichever is less.However, maximum amount which can be invested in any financial year cannot exceed Rs. 50,00,000
54F Individual/HUF
1. The asset transferred should be a long-term capital asset, not being a residential
house.
2. Within a period of I year before or 2
years after the date of transfer, a
residential house should be purchased or
constructed within a period of 3 years
If the cost of the newresidential house is not
less than the net
consideration then the
whole of the capital gain.
Otherwise,
after the date of transfer.
3. The assessee should not own more than
one residential house on the date of
transfer.
4. The assessee should not within a period
of one year purchase or should not
within a period of 3 years construct any
residential house other than the new
asset.
Ami. invested
ITCG x—————– :——-
Net consideration price
54G Any assessee being an industrial undertaking
1. Machinery, plant, building, or land usedfor the business of an industrial
undertaking situated in an urban area
should have been transferred.
2. Transfer should be due to shifting to any
area other than an urban area.
If the cost of the new assets and expenses incurred for shifting are greater than the capital gain, the whole of such capital gain. Otherwise capital gain to the extent
3. Within a period of 1 year before or 3 years after the date of transfer purchased machinery, plant or acquired building or land or constructed building and completed shifting to the new area.
of the cost of the new asset.
54GA Any assessee being an industrial
1. Machinery, plant, building, or land usedfor the business of an industrial
If the cost of the new assets and expenses incurred for shifting
undertaking undertaking situated in an urban area
should have been transferred.
2. Transfer should be due to shifting to any
Special Economic Zone whether
developed in any urban area or any other
area.
3. Within a period of 1 year before or 3
years after the date of transfer purchased
machinery, plant or acquired building or
land or constructed building and
completed shifting to the new area.
are greater than the capital gain, the whole of such capital gain. Otherwise capital gain to the extent of the cost of the new asset.
Notes : Capital Gain Scheme.—If the new asset is not acquired under sections 54, 54B, 54D, 54F, 54G and 54GA or the full amount could not be invested upto the due date of furnishing the return of income, the assessee can deposit the desired amount under the Capital Gain Scheme on or before the due date of return and thus can acquire the asset within the stipulated time out of money withdrawn from such scheme at a later date. In the case of section 54EC the Capital Gain Scheme is not applicable.Consequences if the new asset acquired is transferred within 3 years of its acquisition Under sections 54, 54B, 54D, 5->G and 54GA.—For computation of new Capital Gain (which will be short-term), the cost of acquisition of such new asset shall be reduced by the amount of Capital Gain exempt under sections 54, 54B, 54D and 54G earlier.Under section 54F.—Besides the new Capital Gain (which will be short-term), the Capital Gain exempt earlier under section 54F, shall be long-term capital gain of the previous year in which new asset is transferred.Under section 54EC.—If such security acquired is converted into money or any loan is taken against such securities within 3 years, the Capital Gain exempt under section 54EC for such securities earlier shall be long-term Capital Gain of the previous year in which such conversion takes place or the loan is taken.Consequences if the amount deposited in Capital Gain Scheme is not utilised within the stipulated time of 3 years (2 years in case of section 54B).—The unutilised amount shall be Capital Gain (short-term or long-term depending upon original transfer) of the previous year in
which such period has expired. However, in case of section 54F, proportionate amount shall be taxable.
CLUBBING OF INCOME
CLUBBING OF INCOME UNDER THE INCOME TAX ACT, 1961
Clubbing of income means Income of other person included in assessee’s total income, for example: Income of husband which is shown to be the income of his wife is clubbed in the income of Husband and is taxable in the hands of the husband. Under the Income Tax Act a person has to pay taxes on his income. A person cannot transfer his income or an asset which is his one of source of his income to some other person or in other words we can say that a person cannot divert his income to any other person and says that it is not his income. If he do so the income shown to be earned by any other person is included in the assessee’s total income and the assessee has to pay tax on it.
TRANSFER OF INCOME WITHOUT TRANSFER OF ASSET (SEC. 60)
Section 60 is applicable if the following conditions are satisfied: • The taxpayer owns an asset • The ownership of asset is not transferred by him. • The income from the asset is transferred to any person under a settlement, or agreement.
If the above conditions are satisfied, the income from the asset would be taxable in the hands of the transferor
Illustration: Mr. X owns Debentures worth Rs 1,000,000 of ABC Ltd., (annual) interest being Rs. 100,000. On April 1, 2005, he transfers interest income to Mr. Y, his friend without transferring the ownership of these debentures. Although during 2005-06, interest of Rs. 100,000 is received by Mr. Y, it is taxable in the hands of Mr. X as per Section 60.
REVOCABLE TRANSFER OF ASSETS (SEC 61)
‘Revocable transfer’ means the transferor of asset assumes a right to re-acquire asset or income from such an asset, either whole or in parts at any time in future, during the lifetime of transferee. It also includes a transfer which gives a right to 144re-assume power of the income from asset or asset during the lifetime of transferee. If the following conditions are satisfied section 61 will become applicable. • An asset is transferred under a “revocable transfer”, • The transfer for this purpose includes any settlement, or agreement
Then any income from such an asset is taxable in the hands of the transferor and not the transferee (owner).
Illustration: If A transfers house property to his close relative B. the condition of transfer was that B can enjoy the income of the said property for himself for any such time till he is the owner of such property but A reserves the right to take the property back from B in case he is in financial problem in the event of which has to surrender the income as well as the asset to A.
REMUNERATION FROM A CONCERN IN WHICH SPOUSE HAS SUBSTANTIAL INTEREST [SEC 64 (1) (ii)]
If the following conditions are fulfilled this section becomes applicable. • If spouse of an individual gets any salary, commission, fees etc (remuneration) from a concern • The individual has a substantial interest in such a concern • The remuneration paid to the spouse is not due to technical or professional knowledge of the spouse.
Then such salary, commission, fees, etc shall be considered as income of the individual and not of the spouse.
Illustration: X has a substantial interest in A Ltd. and Mrs. X is employed by A Ltd. without any technical or professional qualification to justify the remuneration. In this case, salary income of Mrs. X shall be taxable in the hands of X.
INCOME FROM ASSETS TRANSFERRED TO SPOUSE [SEC. 64(1) (IV)]
Income from assets transferred to spouse becomes taxable under provisions of section 64 (1) (iv) as per following conditions:-
• The taxpayer is an individual • He/she has transferred an asset (other than a house property) • The asset is transferred to his/her spouse • The asset is transferred without adequate consideration. Moreover there is no agreement to live apart.
If the above conditions are satisfied, any income from such asset shall be deemed to be the income of the taxpayer who has transferred the asset.
Illustration: X transfers 500 debentures of IFCI to his wife without adequate consideration. Interest income on these debentures will be included in the income of X.
INCOME FROM ASSETS TRANSFERRED TO SON’S WIFE [SEC. 64 (1) (VI)]
Income from assets transferred to son’s wife attracts the provisions of section 64 (1) (vi) as per conditions below:-
• The taxpayer is an individual. • He/she has transferred an asset after May 31, 1973. • The asset is transferred to son’s wife. • The asset is transferred without adequate consideration.
In the case of such individuals, the income from the asset is included in the income of the taxpayer who has transferred the asset.
Illustration: Mr. X the father-in-law of transfers a bank deposit to Ms. Y the daughter-in-law of Mr. X any income which will accrue to the said deposit would be considered as income of Mr. X and not Ms. Y.
INCOME FROM ASSETS TRANSFERRED TO A PERSON FOR THE BENEFIT OF SPOUSE [SEC. 64 (1) (VII)]
Income from assets transferred to a person for the benefit of spouse attract the provisions of section 64 (1) (vii) on clubbing of income. If:
• The taxpayer is an individual. • He/she has transferred an asset to a person or an association of persons. • Asset is transferred for the benefit of spouse. • The transfer of asset is without adequate consideration.
In case of such individuals income from such an asset is taxable in the hands of the taxpayer who has transferred the asset.
Illustration: If X transfers a house property to a trust formed by him with the condition that the entire income of the house property which was been received should be given to the wife of Mr. X. In this case the income of this house property would not be taxed in the hands of Mrs. X but would be taxed in the hands of Mr. X.
INCOME FROM ASSETS TRANSFERRED TO A PERSON FOR THE BENEFIT OF SON’S WIFE [SEC. 64 (1) (VIII)]
Income from assets transferred to a person for the benefit of son’s wife attract the provisions of section 64 (1) (vii) on clubbing of income. If,
• The taxpayer is an individual. • He/she has transferred an asset after May 31, 1973. • The asset is transferred to any person or an association of persons. • The asset is transferred for the benefit of son’s wife. • The asset is transferred without adequate consideration.
In case of such individual, the income from the asset is included in the income of the person who has transferred the asset.
INCOME OF MINOR CHILD (SEC. 64 (1A) & 64(2))
Illustration: X transfers his self acquired property yielding an annual income of Rs. 100000 to his Hindu Undivided Family, consisting of X, Mrs. X, his major son Y and minor son Z. Income of Rs. 100000 will be included in the income of X by virtue of this section. If however the property is partitioned among the family members, income derived from converted property by Mrs. X will be included in the income of X under section 64(2), share of minor Z will be included in the income of X by virtue of section 64 (1A) after allowing exemptions under section 10(32) Rs. 1500 or the income clubbed, whichever is less on the assumption that X’s income is more than income to the transferee also.
SECTIONNATURE OF TRANSACTION
CLUBBED IN THEHANDS OF
CONDITIONS/EXCEPTIONS
RELEVANT REFERENCE
60Transfer of Income without transfer of Assets.
Transferor who transfers the income.
Irrespective of:1. Whether such transfer is revocable or not.
2. Whether the transfer is effected before or after the commencement of IT Act.
1. Income for the purpose of Section 64 includes losses.
2. Section 60 does not applyif corpus itself is transferred.
61 Revocable transfer of Assets.
Transferor who transfers the Assets.
Clubbing not applicable if:
1. Trust/transfer irrevocable during the lifetime of beneficiaries/transferee or
2. Transfer made prior to 1-4-
Transfer held as revocable
1. If there is provision to re-transfer directly or indirectly
1961 and not revocable for a period of 6 years.
Provided the transferor derives no direct or indirect benefit from such income in either case.
whole/part of income/asset to transferor;
2. If there is a right to reassume power, directly or indirectly, the transfer is held revocable and actual exercise is not necessary.
3. Where no absolute right isgiven to transferee and assetcan revert to transferor inprescribed circumstances,transfer is held revocable.
64(1)(ii) Salary, Commission, Fees or remuneration paid to spouse from a concern in which an individual has a substantial* interest.
Spouse whose total income (excluding income to be clubbed) is greater.
Clubbing not applicable if:Spouse possesses technical or professional qualification and remuneration is solely attributable to application of that knowledge/qualification.
1. The relationship of husband and wife must subsist at the time of accrual of the income.
2. Income other than salary,commission,
fees or remune-ration is not clubbed underthis clause
64(1)(iv)
Income from assets transferred directly or indirectly to the spouse without adequate consideration.
Individual transferring the asset.
Clubbing not applicable if:The assets are transferred;1. With an agreement to live apart.
2. Before marriage.
3. Income earned when relation does not exist.
4. By Karta of HUF gifting co-parcenary property to his wife.
5. Property acquired out of pin money.
1. Income earned out of Income arising from transferred assets not liable for clubbed.
2. Cash gifted to spouse andhe/she invests to earninterest.
3. Capital gain on sale ofproperty which was receivedwithout consideration fromspouse
4. Transaction must be real.
64(1)(vi)Income from the assets transferred to son’s wife.
Individual transferring the Asset.
Condition:The transfer should be without adequate consideration.
Cross transfers are also covered
64(1)(vii),(viii) Transfer of assets by an individual to a person or AOP for the
Individual transferring the Asset.
Condition: 1. The transfer should be without adequate consideration.
1. Transferor need not necessarily have taxable
immediate or deferred benefit of his:(vii) – Spouse.(viii) – Son’s wife.
income of his own.
2. Wife means legally weddedwife.
64(1A) Income of a minor child [Child includes step child, adopted child and minor married daughter].
1. If the marriage subsists, in the hands of the parent whose total income is greater; or;
2. If the marriage does not subsist, in the hands of the person who maintains the minor child.
3. Income once included in the total income of either of parents, it shall continue to be included in the hands of some parent in the
Clubbing not applicable for:— 1. Income of a minor child suffering any disability specified u/s. 80U.
2. Income on account of manual work done by the minor child.
3. Income on account of any activity involving application of skills, talent or specialized knowledge and experience.
1. Income out of property transferred for no consideration to a minormarried daughter, shall notbe clubbed in the parents’hands.
2. The parent in whose handsthe minor’s income isclubbed is entitled to anexemption up to Rs. 1,500per child. [Section 10(32)]
subsequent year unless AO is satisfied that it is necessary to do so (after giving that parent opportunity of being heard)
64(2)
Income of HUF from property converted by the individual into HUF property.
Income is included in the hands of individual & not in the hands of HUF.
Clubbing applicable even if:The converted property is subsequently partitioned; income derived by the spouse from such converted propertywill be taxable in the handsof individual.
Fiction under this section mustbe extended to computation ofincome also.
* An individual shall deemed to have substantial interest in a concern for the purpose of Section 64(1)(ii)
IF THE CONCERN IS A COMPANYIF THE CONCERN IS OTHER THAN A COMPANY
Person’s beneficial shareholding should not be less than 20% of voting power either individually or jointly with relatives at any time during the Previous Year. (Shares with fixed rate of dividend shall not be considered)
Person either himself or jointly with his relatives is entitled in aggregate to not less than 20% of the profits of such concern, at any time during the previous year.
Note: The clubbed income retains the same head under which it is earned.
Procedure for computation of Total Income
Heads of Income
Under chapter 4 of Income Tax Act, 1961 (Section 14), income of a person is calculated under various defined heads of income. The total income is first assessed under heads of income and then it is charged for Income Tax as under rules of Income Tax Act.
The direct tax which is paid by individual to the Central Government of India is known as Income Tax. It is imposed on our income and plays a vital role in the economic growth & stability of our country. For years the Government is generating revenue through this tax system.
The word 'Tax' originated from the 'Taxation.' which mean 'Estimate.' Hence, 'Income Tax' mean 'Income Estimate,' which helps the government to know the actual economic strength of a person. It is also a way to set up an economic standard for general people. It helps the Government to know the distribution of money among country's people.
According to Section 14 of Income Tax Act, 1961 there are following heads of income under which total income of a person is calculated:
» Heads of Income: Salary( 15-17)» Heads of Income: House Property(22-27)» Heads of Income: Profit In Business/ Profession(28-44)» Heads of Income: Capital Gains(45-55)» Heads of Income: Other Sources(56-59)
Salary Income Tax - Heads of Income: Salary
What is Salary: Income under heads of salary is defined as remuneration received by an individual for services rendered by him to undertake a contract whether it is expressed or implied. According to Income Tax Act there are following Sec 15 conditions where all such remuneration are chargeable to income tax:
When due from the former employer or present employer in the previous year, whether paid or not
When paid or allowed in the previous year, by or on behalf of a former employer or present employer, though not due or before it becomes due.
When arrears (sum unpaid) of salary is paid in the previous year by or on behalf of a former employer or present employer, if not charged to tax in the period to which it relates.
[For the removal of doubts, it is hereby declared that where any salary paid in advance is included in the total income of any person for any previous year it shall not be included again in the total income of the person when the salary becomes due.
Any salary, bonus, commission or remuneration, etc or received by, a partner of a firm from the firm shall not be regarded as “salary” for the purposes of this section.]
What Income Comes Under Head of Salary: Under section 17 of the Income Tax Act, 1961 there are following an income which comes under head of salary:*Salary (including advance salary) *Wages *Fees *Commissions *Pensions *Annuity *Perquisite *Gratuity *Annual Bonus *Income from Provident Fund *Leave Encashment *Allowance *Awards
What is Leave Encashment: Leave encashment is the salary received by an individual for leave period. It is a chargeable income whether he is a government employee or not. Under section 10(10AA) (i) there is also a provision of exemption in case of leave encashment depending upon whether he is a government employee or other employees
What is Annuity:It is an annual income received by the employee from his employer. It may be paid by the employer as voluntarily or on account of contractual agreement. It is not taxable until the right to receive the same arises. Under section 56, Income Tax Act, 1961 other annuities come under a will or granted by a life insurance company or accruing as a result of contract which comes as income under from other sources.
What is Gratuity: It is salary received by an individual paid by the employee at the time of his retirement or by his legal heir in the case of death of the employee.
What is Allowance: It is the amount received by an individual paid by his/her employer in addition to salary. Under section 15 of the Income Tax Act, 1961 these allowance are taxable excluding few conditions where they are entitled of deduction/ exemptions.
Under Income Tax Act following types of allowance are definedHouse Rent Allowance:Under sections 10(13A) of Income Tax Act, 1961 allowance is defined as an amount received by
an employee paid by his/ her employer as a rent of his/her house. It is a taxable income. There is no exemption in tax if he is living in his own house or house for which he is not paying rent. There are following amount which are exempt from tax: Actual house rent paid by that individual Rent paid for the accommodation over 10% of the salary 50% of the salary if house is placed at Delhi, Mumbai, Kolkata, Chennai or 40% of the salary in it is placed in any other city
Other Special Allowances Children Education Allowance Tribal Area Allowance Hostel Expenditure Allowance Remote Area Allowance Counter Insurgency Allowance Border Area AllowanceAllowances for there is provisions of exempt in income tax are: Allowance given to a citizen of India, who is a government employee, for rendering services outside India Allowances given to Judges of High Courts & Judges of Supreme Court Allowances received by an employee of UNO
Deductions from Salary income: Certain deductions are available while determining the taxable salary income.
The income chargeable Sec 16 under the head “Salaries” shall be computed after making the following deductions:
a deduction in respect of any allowance in the nature of an entertainment allowance specifically granted by an employer to the assessee who is in receipt of a salary from the Government, a sum equal to one-fifth of his salary (exclusive of any allowance, benefit or other perquisite) or five thousand rupees, whichever is less;]
a deduction of any sum paid by the assessee on account of a tax on employment within the meaning of clause (2) of article 276 of the Constitution, leviable by or under any law.
A) Standard Deduction
Income tax slabs 2010-2011 (for Senior Citizens) in India:Income Tax Slab (in Rs.)
Tax
0 to 2,40,000 No Tax2,40,001 to 3,00,000 10%3,00,001 to 5,00,000 20%
B) Professional TaxProfessional tax, which is paid, is allowed as deduction.
C) Arrears (sum unpaid, amount overdue) salary If salary is received in arrears or in advance, it can be spread over the years to which it relates and be taxed accordingly as per section 89(1) of the Income tax Act.
Heads of Income: House Property
What Is Heads of House Property: According to Chapter 4, Section 22 - 27 of Income Tax Act, 1961 there is a provision of income under head of house property. In every section from 22-27 there are detail specification of house property income. It is defined as income earned by a person through his house or land.
What Income Comes Under Head of House Property: sec22Annual value of building or land owned by assessee. There is a charge on the potential of property to generate income not on the rent received. But if property is used for making profit in business then it will be taxable not under this head but will be taxable under head of profit in business/ profession.
How to calculate annual value of property: sec 23According to annual value, house property is calculated as
Annual value of a house is zero if property is in the occupation of the owner for his residence for the whole year & if no other benefit is availed by owner from his property. There will be no deductions as given under section 24 except deduction interest on borrowed capital
If the owner lets out the house or a part thereof for any period of time during the previous year the annual value of the property or part has to be calculated for the whole year and the proportionate annual value of the period for which the house or any part thereof was in the occupation of the owner for his own residence shall be deducted from the gross
Income tax slabs 2010-2011 (for Senior Citizens) in India:Income Tax Slab (in Rs.)
Tax
0 to 2,40,000 No Tax2,40,001 to 3,00,000 10%3,00,001 to 5,00,000 20%
annual value. The assessee in such cases cannot claim deduction under section 24 in excess of the annual value so determined
The assessee occupies more than one house for his residence; the above exemption is applicable only to one such house at the option of the assessee. The annual value of the other house or houses shall be computed as if the house or houses are let
In case where the assessee has only one residential house but it cannot be occupied by the owner by reason of that owing to his employment, business or profession carried out on at any other place, he has to reside (exist) at that other place in a building not belonging to him, the annual value of such house shall be taken to be nil if the house is not actually let and no other benefit is derived by the owner from such house. The assessee cannot claim any deduction in such case as allowable under section 24 of the Act except for interest on borrowed capital subject to a maximum of Rs. 15,000/-
Deductions from income from house property sec 24
Income chargeable under the head “Income from house property” shall be computed after making the following deductions, namely:—
a sum equal to thirty per cent of the annual value; where the property has been acquired, constructed, repaired, renewed or reconstructed
with borrowed capital, the amount of any interest payable on such capital
[Explanation.—Where the property has been acquired or constructed with borrowed capital, the interest, if any, payable on such capital borrowed for the period prior to the previous year in which the property has been acquired or constructed, as reduced by any part thereof allowed as deduction under any other provision of this Act, shall be deducted in equal installments for the said previous year and for each of the four immediately succeeding previous years]
Heads of Income: Profit in Business/ Profession
According to Income Tax Act, 1961 income under this head is defined as the income earned by assessee as a profit or gain in his business or profession. Income under this head must follow these conditions: sec 28
There must be a business/ profession Business/ profession is being carried by assessee Business/ profession have been carried out by assessee in assessment year for which
income tax is filling
What Income Comes Under Head of Profit in Business
Profits and gains of assessee from any business or profession during assessment year Any payment or compensation due or received by a person for his services to
organization as a part of his business Making profit in trade Income of professional or organization against services provided
by that professional/ organization
Cash received or due by any person against exports under government schemes Any benefit whether it is not in cash coming from business/ profession Any profit, salary, bonus or commission received by company partners
Heads of Income: Capital Gains
What is Capital Gain: According to Income Tax Act, 1961 heads of capital gain is defined as gains derived on transfer of capital asset. Capital Gain is the profit or gain of an assessee coming from the transfer of a capital asset effected during the previous year or assessment year. "Capital Asset" and transfer are predefined in income tax act.
What is Capital Asset:Under section 2(14) of the Income Tax Act,1961 Capital Asset is defined as property of any kind held by assesse including property held for his business or profession. It includes all type real property as well as all rights in property. It is also defined as gains on transfer of assets in which there in no cost of acquisition like:
Goodwill of business generated by assessee Tenancy rights Right to manufacture Processing & production of any article or things
Assets Which Don't Come Under Heads of Capital AssetsAccording to Income Tax Act,1961 there are few assets which don't form a part of Capital Assets, which are as follows:
Stock of goods and raw materials used by assessee for his business or profession Those properties which are movable like wearing apparel, furniture, automobile, phone,
household goods etc. held by assessee. But Jewelry which is also an movable assets comes under heads of Capital Assets
Agricultural property in India. But agriculture land coming under municipal limits (in area having population more than 10,000) comes under Capital Assets. Agriculture lands within 8 Km from municipal limit also comes under Capital Assets if it is notified by the central government of India
Few Gold Bonds issued by government Few special bonds issued by central government like Special Bearer Bonds, 1991
Transfer of Capital AssetsUnder Section 2(47) of The Income Tax Act, 1961 transfer of capital assets is defined as:
Sale, exchange and relinquishment of assets Extinguishment of any rights in capital assets Acquisition of capital assets or rights
Conversion of capital asset by its owner as stock in trade of his business, it may also be a term of transfer
Any transaction by which an assessee become enable to act as a member of cooperative society
Any transaction by which an assessee acquire shares in cooperative society
Heads of Income: Other Sources
Every type of income comes under a specified heads. But there are few incomes, which don't come under any of following heads:
Salary House Property Profit In Business/ Profession Capital Gains
So under Section 56(2) of Income Tax Act, 1961 all such income comes in this heads of income. There are following incomes which are taxed under this heads
Income coming as a dividend paid by a company to an assessee Income coming from winning in lottery, crossword puzzles, races, card games, gambling
or other such sports Income coming as an amount received by assessee from his employer as a fund for
welfare of employee Income as an interest on securities Income coming by letting on hire machinery, plant, furniture, building or other goods
Income coming from insurance policy
Income Tax Deduction
Under the scheme of computation of total income under the Income Tax Act, the income falling under each head is to be computed as per the relevant provisions of the Act relating to computation of income under that head (Refer Chapter IV). The aggregate of income under each head is known as 'Gross Total Income ' out of which certain deductions are permitted to arrive at the Total Income'. These deductions are explained in this Chapter.
Deduction is the amount, which is reduced from the gross total income before computing tax.There are other deductions such as for donations, for repayment of loans taken for educational purposes etc.
Deductions in respect of certain payments
(a) Provident Fund, life insurance premium, pension Plans (Sec. 80C)
Premium paid upto Rs 10,000 and maximum amount of Rs. 1, 00,000/-in a year, in respect of Savings like LIC, PF, NSCs, Tuition fee , Housing loan principals as shown below in tabular form.
(b) Payments for medical treatment of handicapped dependents (Sec. 80DD and 80DDA)
Where an assessee being an individual or a Hindu Undivided family resident in India incurs any expenditure for the medical treatment, nursing, training and rehabilitation of a handicapped dependent, deduction of Rs. 40, 0007- is allowed from gross total income. The deduction includes payment or deposit under an approved scheme of the L.I.C. or the U.T.I. providing for payment of annuity or lump sum amount for the benefit of the handicapped dependent in the event of assessee's death.
(c) Where an Indian resident incurs any expenditure for the medical treatment
Where an Indian resident incurs any expenditure for the medical treatment of specified disease or ailment for himself or a dependent relative, he is allowed a deduction of an amount actually incurred subject to maximum of Rs. 40,000/-. If he or any dependent relative is senior citizen, the deduction can go upto Rs. 60,000. The amount of deduction is to be determined after reducing the amount received under medical insurance (Sec. 80DDB).
(d) Repayment of loan taken as a student for pursuing higher studies (Sec. 80E)
Any repayment of the principal amount of loan taken from a financial institution or a recognized charitable organization for higher studies and interest thereon is allowed as a deduction upto a maximum amount of Rs. 40,000/- in a year. The relief is available to persons who have undertaken graduate or post graduate courses in any branch of engineering, medicine or management or post-graduate courses in any university in pure sciences, applied sciences, mathematics or statistics. This deduction is allowed for a maximum period of 8 years beginning with the year in which repayment starts
(e) Donations to certain Funds, Charitable Institutions etc. (Sec. 80G)
Donations/contributions made to recognized charitable trusts/institutions and certain specified Funds are allowed as deduction. Donations/contributions to other recognized charitable trusts and specified funds qualify for deduction of 50% of the amount donated or contributed. Deductions in respect of certain donations, such as donations to National Minorities Development and Finance Corporation are subject to overall qualifying limit of 10% of the 'Gross Total Income'.
(f) Rent payment (Sec. 80GG)
Expenditure in excess of 10% of total income incurred by an assessee (not in receipt of house rent allowance) on payment of rent in respect of residential accommodation occupied by him for his own residence is allowed deduction upto Rs. 2,0007- per month or 25% of total income, whichever is less.
From Gross Income (I) deduct the following as Applicable:
80C Savings like LIC, PF, NSCs, Tuition fee , Housing loan principal, infra-structure bonds etc.
Max of Rs. 1,00,000 alongwith Section 80CCC
80CCC Pension Fund premium paid Max of Rs. 10,000
80CCF Infra-Structure Bonds Max of Rs. 20,000
80D - Medical Insurance Premium on health for self and dependents- Additional amount On dependent Senior Citizen
- Max of Rs.1 5,000- Max of Rs. 5,000
80DD Medical treatment of Handicapped dependent Max of Rs. 50,000
80DDB Actual Expenditure towards medical treatment for self and dependents
Actual Expenditure or Rs.40,000 and in case of Senior Citizen it extends to Rs.60,000/- whichever is less
80E Repayment of Loan taken for Higher Education of Self or Dependent
Max of Rs. 40,000
80GG House Rent Paid by employee 1. House rent paid @ Rs.2000 p.m. 2. 25% of (I) above3.Actual Rent paid 10% of (I) above
80U Employee who suffers from total blindness or permanent physically handicapped (Medical Certificate to be produced)
Rs. 50,000
Total the above deductions = D Total Income before 80G = (I- D)Deduction U/s 80G is restricted to 50% or 100% of Donation amount subject to a maximum of 10% of (I - D) = E Total Taxable Income = [(I - D) – E]
COMPUTATION OF TOTAL INCOME
I. Income from salaries
Salary or (Pension)
Perquisites excluding fringe benefits
Profits in lieu of salary
Gross salary
Deductions U/s 16
Entrainment Allowance
Tax on employment
Salary Income
Section
u/s17(1)
u/s 17(2)
u/s 17(3)
Rs.
* * *
* * *
(+) * * *
* * * *
(+) * * *
_______
Rs.
* * * *
(-) * * *
_____
Rs.
xxxxx
u/s 16 (ii)
u/s 16 (iii)
II.
Income from House Property
Annual Rental Value
Less Municipal Taxes
Net Annual Value
Deductions -30%
Income from house property
u/s24
* * * *
* * * *
_____
* * * *
* * * *
_____
X x x x
III. Profits and Gains of Business or Profession
Net profit as per P &L account
Add expenses debited but not allowed under the Act
Add Incomes taxable but not credited
Less Expenses allowed but not debited
Less Incomes credited but not taxable under this head
Business profit
(+) or (-)
•
• * * * * *
(+) * * * * *
* * * *
(-) * * * *
________
xxxxx
IV Capital Gains
Short Term Capital Gain
Long Term Capital Gain
Income under the head ‘Capital Gains
CIF=551
* * * *
* * * *
______
xxxxx
V. Income from other sources
General Incomes
Specific Incomes
Family Pension
Less: expenses allowed
Income from other sources
u/s 56(1)
u/s 56
(2)
u/s 57
** * *
• * * *
_______
(-) * * * *
_______
Add : income of other persons Xxxxxx
GROSS TOTAL INCOME XXXXX
VI. DEDUCTIONS TOTAL INCOME
u/s 80 C to 80 U
(-)****
XXXX
BUDGET 2011- IMPACT ON PERSONAL
TAXATION
1. Introduction
The budget proposed for the year 2011-12 is moving towards the philosophy of Direct Tax
Code (DTC) which will come into force from 1st April 2012. With DTC, there may not be a
necessity to bring frequent amendments in the tax laws as Direct Taxes Code bill aims to
consolidate and rearrange various provisions in an orderly manner to make them consistent
with the general scheme of the tax laws and bring simplified procedures. Keeping the
implementation of DTC in mind, there is no relief for women taxpayers as the DTC proposes
the maximum limit of Rs. 2, 00,000 which is same for both men and women assesses
eliminating the gender discrimination. . The budget announced slight changes in the basic
exemption limit for individual men and senior citizen but also imposes additional service tax
on some items and also nominal central excise duty of 1 per cent imposed on 130 items
entering in the tax net, which will definitely affect the purchasing power of the common man.
2. The Personal taxation proposed tax slab
The budget proposal for the year 2011-12 in respect of the tax slabs are as under:-
(Figures in rupees)
AssessesTax Rates Existing Proposed in the budget
Individual Exempt 1,60,000 Rs. 1,80,000
10% 1,60,000 – 3,00,000 1,80,000 – 5,00,000
20% 3,00,001 – 5,00,000 5,00,001 – 8,00,000
30% 5,00,001 and above 8,00,001 and above
Women Exempt 1,90,000 Rs. 1,90,000
10% 1,90,000 – 3,00,000 1,90,000 – 5,00,000
20% 3,00,001 – 5,00,000 5,00,001 – 8,00,000
30% 5,00,001 and above 8,00,001 and above
Sr. Citizen(age
more than 60
years)
Exempt 2,40,000 Rs. 2,50,000
10% 2,40,000 – 3,00,000 2,50,000 – 5,00,000
20% 3,00,001 – 5,00,000 5,00,001 – 8,00,000
30% 5,00,001 and above 8,00,001 and above
Super senior
citizen(more
than 80 years
old)
Exempt Rs. 2,50,000 Rs 5,00,000
It may be noted that lowest slab of Rs. 1, 60,000 for individual is raised to Rs. 1, 80,000, Rs.1,
90,000 for women remained unchanged and Rs. 2.40,000 for senior citizen is increased to 2,
50,000. Also, a new category of super senior citizen is framed and their exemption limit is
increased to Rs 5, 00, 000.
3.Simplification in tax returns filing
Salaried individual salary up to Rs. 5 Lacs (not yet confirmed via notification) having no other
income except salary income would be exempt from filing of return of income/ Income Tax
Returns, where the tax liability is fully deducted by their employers A new revised income tax
return form 'Sugam' to be introduced for small tax papers. Relaxation in e-filing norms for small
tax payers have been proposed in the budget. Maximum penalty for delay in filing of returns has
been increased from Rs.2, 000 to Rs 20,000.
4. The Allowable Deduction for tax rebate
Currently an assessee could avail deduction under 80C, upto an amount of Rs. 1,00,000 on
account of savings in pension scheme, housing loan principal repayment, savings in public
provident fund, payment towards life insurance premium, unit linked investment plan, national
savings certificates, national savings scheme, infrastructure bonds, equity linked savings
scheme, five year term deposit with banks, tuition fees etc. No change has been proposed on this
and the limit of Rs, 1, 00,000 is retained as it is. Contributions by the Central Government or the
employer to prescribed pension scheme excluded from the current bundled limit of Rs.1, 00,000
in computing the deductions from taxable income for employee thereby allowing additional
deduction to employees to that extent.
Under section 80 CCF, an individual assess can enjoy a deduction of an additional amount of
Rs. 20,000 over and above the existing limit of Rs, 1,00,000 by investing in long term
infrastructure bonds notified by the Central Government. This provision was there in last year’s
budget and the tenure has been increased to one more year.
5. Interest subsidy for low-cost home buyers
The government proposed in the Union Budget 2011-12 that low-cost housing loans up to Rs 15
lacs will be eligible for 1% interest subsidy. The existing interest rate subsidy is on loans of Rs
10 lacs where cost of house was Rs 20 lacs. Under budget proposal, norms for cost of house
have been also raised to Rs 25 lacs. So, next year, home buyers will get 1% interest subsidy on
loans up to Rs 15 lacs where cost of house was up to Rs 25 lacs.
1% interest sop loans up to Rs 15 lacs
Priority sector lending: housing loan limit raised to Rs 25 lacs for vs. Rs 20 lacs.
6. Allowable deductions / rebate at a glance
The following table shows the deductions / rebate at a glance which exist viz a viz proposed in
the budget.
Figures in rupees
Section Existing Proposed Increase
80C Maximum investment limit 1,00,000 1,00,000 0
80CCF subscription to long term notified
infrastructure bonds
20,000 20,000 0
80D Medical Premium (scope widened –
any contribution to Central Health Scheme
is also included
15,000 15,000 0
80D Medical premium on the health of
parent / parents
15,000 15,000 0
80D Medical premium in case of parent /
parents being senior citizen
20,000 20,000 0
80DD Expenditure on dependent disabled
more than 40%
50,000 50,000 0
80DD Expenditure on dependent for severe
disability
1,00,000 1,00,000 0
80DDB : expenditure for medical treatment
for diseases under rule 11DD for self or
dependent
50,000 40,000 0
80DDB expenditure for medical treatment
for diseases under rule 11DD for self or
dependent being senior citizen
60,000 60,000 0
80E Interest on education loan (for self /
spouse and children)
No limit No limit -
80U Permanent disability benefit for self
(adhoc amount
50,000 50,000 0
80U disability exceeding 80% 1,00.000 1,00,000 0
80G deduction on donations made As per IT rules -
Education Cess: -
All taxes are subject to an education cess, which is 2% of the total tax payable. With effect
from assessment year 2008-09, Secondary and Higher Secondary Education Cess of 1% is
applicable on the sub total of taxable income and exists for the assessment year 2011-2012.
Note:-
- Disabilities: u/s 80DD: over 40% & also includes:- autism, cerebral palsy & multiple
disability & mental retardation under Disability Act 1995 and
- u/s 80DDB: Specified diseases are:- Neurological diseases being dementia, dystonia,
musculorum, deformans, motor neuron disease, ataxia, chorea, hemiballisums, aphasia &
Parkinsons disease, Cancer, AIDS, chronic renal failure, hemophilia & thalass aemia.
7. Rebate on account of House property
The deduction of Rs. 1, 50,000/- on home loan interest repayment in the financial year for self
0ccupied properties & the entire interest without ceiling for rented properties would qualify for
deduction under section 24 of the Income Tax. 1961.
8. Medical facilities / Medical reimbursements
The existing exemption of Rs. 15,000 towards medical treatment reimbursement subject to
production of bills and medical treatment also continues.
9. Conveyance allowance
Conveyance allowance up to Rs. 800 per month (Rs. 9,600 per year) is tax free if provided as
conveyance allowance by the employer. For getting this rebate no bills are required for this
amount pursuant to section 10 of the Income Tax Act, 1961. The budget proposal for the year
2011-12 did not alter this too.
10. Leave Travel allowance
The current provision remains on this head which is as under:-
The rebate i.e. the exemption is available for the amount actually incurred on performance of
travel on leave to any place in India by the shortest route to that place. This is subject to a
maximum of the air economy fare or AC first Class fare (if journey is performed by mode other
than air) by such route, provided that the exemption shall be available only in respect of two
journeys performed in a block of 4 calendar years.
11. Children education allowance
The current provision remains on this head which is as under:-
Children education up to Rs.100 per month for two children (Rs. 2,400 per year) is tax free if
provided as children education allowance by the employer pursuant to section {10 (14(i)} of the
Income Tax Act, 1961.
Any allowance granted to an employee to meet the hostel expenditure on his child at Rs.300 per
child up to a maximum of two children is also exempt from tax.
12. Special allowance / Technical Pay
The current provision remains on this head which is as under:-
Special pay / technical pay granted by the employer for pursuit of specified purposes for which
the same is being spent, then the amount qualifies for deduction under the Income Tax Act of
1961 pursuant to section {10 (14(ii) }of the Income Tax Act, 1961. In case of Technical pay
provided by Government organization, by and large there is a Government order is issued in this
respect and the concerned employee has to claim it by getting the same certified by his higher
officials that the expenses in fact has been expended for the purpose specified.
The various allowances which are currently exempt under section 10 (14) of the Income Tax
Act of 1961 would continue such as:-
Allowance granted to meet cost of travel on tour or transfer.
Allowance granted on tour or journey in connection with transfer to meet the daily
charges incurred by the employee.
Allowance granted to meet conveyance expenses incurred in performance of duty,
provided no free conveyance is provided.
Allowance granted to meet expense incurred on a helper engaged for performance of
official duty.
Academic, research or training allowance granted in educational or research institutions.
Allowance granted to meet expenditure on purchase/maintenance of uniform.
13. Professional Tax deducted from salary
The current provision remain on this head which is as under
Most of the States in India collects “tax on employment” on a per-professional basis which is
known as professional tax and this is usually a slab amount based on gross income. Such
professional taxes paid are deductible from income tax pursuant to section 16(iii) of the Income
Tax Act 1961.
14. House Rent Allowance
The current provision remain on this head which is as under:-
When the employer pays house rent allowance to the employee as part of the salary and if the
same is utilized by the employee for his stay in a rental accommodation, then the income tax
rebate is available based on the criteria laid down by the Income Tax Act 1961.
The rebate on the house rent is calculated as under for rebate purposes pursuant to section 10
(13) (A) of the Income Tax Act, 1961:-
The income tax rebate on the house rent allowance received is one of the least of the following.
(a) actual house rent allowance received {section 2A(a)}, or
(b) rent paid in excess of one-tenth of salary {section 2A(b)}, or
(c) An amount equal to:-
- where such accommodation is situated at metro cities (i.e. Bombay, Calcutta, Delhi or
Madras) one half of the amount of salary due to the assessee in respect of the relevant
period, and
- where such accommodation is situated at non-metro cities (i.e. any other place than
Bombay, Calcutta, Delhi or Madras) one two- fifth of the amount of salary due to the
assessee in respect of the relevant period {Rule 2A(c)}
Salary for this purpose is basic+ dearness allowance if the terms of employment so provides
(e.g. where it is taken into account while calculating P.F and allowance etc.,) but excludes all
other allowances and perquisites.
14.1. Rebate on House Rent Allowance will not be available in the following cases
The rebate on house rent allowance would not be available in the following circumstances:-
(i) residential accommodation occupied by the assessee is owned by him; or
(ii) The assessee has not actually incurred expenditure on payment of rent (by
whatever name called) in respect of the residential accommodation occupied by him.
The assessee shall be required to produce the rent receipts in proof of actual payment. However,
for the purpose of claiming deduction of house rent allowance at source, employees drawing
house rent allowance up to Rs. 3000/- per month are exempted from production of rent receipts.
For the purpose of regular assessment, the employees shall be required to produce the rent
receipts in all cases. (the above is on the basis of circular issued by CBTD bearing no. 798 dated
30th October 2000)
15. Leave encashment while in service
The provision of Leave encashment while in service is taxable would continue to be applicable
while the same is exempted at the time of retirement subject to fulfilment of certain conditions.
16. Indirect tax- Service Tax
Service tax rate remains unchanged at 10 percent. Introduction of Two New Taxable Services
(effective from a date to be notified upon enactment of Finance Bill 2011)
• Services provided by air conditioned restaurants with licenses to serve liquor
• Services provided by hotels, guest houses, etc. with respect to providing accommodation.
Exemptions from Service Tax (effective 1 March 2011):
• Services rendered to exhibitors participating in an exhibition outside India have
been exempted from service tax
• Works contract services rendered within a port, or other port or airport have been
exempted from service tax (earlier the exemption was limited to services provided
in relation to the construction of ports)
• An abatement of 25 percent from the taxable value has been provided in respect
of services rendered in relation to the “transport of coastal goods” and goods
transported through “national waterways” or “inland water” (without claiming
Cenvat credit)
The limits for the maximum amount/ rate at which service tax can be levied on air
Travel services have been revised as follows (amounts in Rs.):
S. NO Type of Air travel Existing Revised
1 Domestic(economy) 100 150
2 International(economy) 500 750
3 Domestic(other than economy) 100 10%
17.Visa Regulations(Not required from examination point of view)
1. Employment Visa
• The Government of India has removed the cap on the number of employment
Visas that may be granted to foreign nationals. Earlier the number of employment visas that
could be granted was restricted to 1 percent of the total workforce subject to a maximum of 20
and a minimum of five.s
• The Government of India has mandated that an employment visa may be granted to a foreign
national only if his/her salary is in excess of USD 25,000 per annum. However, the threshold
salary limit is not applicable to ethnic cooks, language (other than English) teachers/translators,
and staff working for a high commission/consulate in India.
2. Business Visa
In 2009, the Government of India directed all foreign nationals in India holding a business visa
and working on a project/contract based assignment to return to their home countries. The
Government of India also clarified in detail the purpose, duration and various scenarios under
which business visas may be granted. The following additional clarifications have been issued
by the Government of India regarding business visas:
• A business visa with a multiple entry facility can be granted for a maximum period of five
years and the in case of nationals from the USA, for a maximum period of 10 years.
• MHA, State Governments, Union Territories, Foreigner Registration Offices, etc. can grant
extension of business visas on a year-to-year basis up to a total period of five years from the
date of issue of the initial visa. However, the first extension of the business visa will only be
granted by the MHA.
3. Entry (X) Visa
Generally the spouse/dependents of a foreign national are granted an entry (X) visa if they
intend to accompany the foreign national to India. The following additional clarifications have
been issued by the Government of India on entry (X) visas:
• An entry (X) visa may be granted to the spouse/dependents of foreign national who is coming
to India/already in India on any other type of visa, i.e. business, employment, etc.
• An entry (X) visa may be granted to a foreign national of Indian origin and his/her
Spouse/dependents who wish to come to India for visiting relatives, holidays, Sightseeing, etc.
• The validity of the entry (X) visa shall be concurrent with the visa of the principal visa holder
or a shorter duration but limited to five years from the date of initial issue.
• Foreign nationals holding an entry (X) visa cannot accept any employment in India or
undertake/ indulge in any business/economic activity in India.
5. Conference Visa
The Indian immigration laws provide for grant of a special type of visa known as conference
visa to foreign nationals who intend to visit India to attend a conference, seminar or workshop
(‘event’). The following additional clarifications have been issued by the Government of India
on the conference visa:
• Eligibility
The foreign national who intends to visit India with the sole objective of attending such event
must be of assured financial standing.
• Procedure
- Along with the visa application the foreign national should submit an invitation letter from the
event organizer.
- Specified foreign nationals and foreign nationals who are required to visit ‘restricted’ or
‘protected’ areas or any areas affected by terrorism, militancy, etc. should obtain a prior security
clearance from the MHA.
- If the organiser of the event is a ministry/department of the Central or State Government, the
request for security clearance needs to be submitted by the organiser at least 30 days prior to the
commencement of the event. In other cases, where the organiser is a Non-Governmental
Organisation or private institution, the request for security clearance needs to be submitted at
least 60 days in advance.
• Duration
- The ‘conference visa’ would be issued for the duration of the event and the necessary
travelling time. However, if the foreign national wishes to combine tourism with attending the
event, the participant may be granted a maximum six-month visa and the visa would be subject
to such conditions as applicable to a ‘tourist visa’.
- If security clearance is required from the MHA, the visa would not be granted for a duration
longer than that specifi ed by the Ministry of External Affairs/ MHA or the minimum period
required.
6. Tourist Visa
A tourist visa is generally granted to a foreign national whose primary objective of visiting India
is sightseeing, recreation, casual visit, etc. and does not involve any economic or business
activity. Key developments on the tourist visa front are as follows:
• The ‘visa-on-arrival’ has been extended to citizens of six more countries, namely Cambodia,
Laos, Vietnam, Philippines, Myanmar and Indonesia. This facility could earlier be availed by
citizens of fi ve countries, namely Japan, Singapore, Finland, Luxembourg and New Zealand.
• The Government of India has mandated that a foreign national holding a tourist visa, and who
intends to visit India within two months of his/her last departure, needs to obtain a specific
permission from the Indian consulate in his/her home country. On grant of permission, if the
foreign national visits India, it shall be necessary for him/her to register with the Foreigner
Registration Office within 14 days of arrival in India.
No doubt, the current budget proposal has widened the tax slab and it is a clear indication that
the Government is moving towards the Direct Tax Code bill of 2009 and this will leave more
money in the hands of the individual – in turn the higher spending would take place and
economic growth also would take place. The widened tax slab change and more avenue of
saving through infrastructure bond up to an additional amount of Rs.20,000 might cheer most of
the tax payers but leaving the basic exemption limit untouched would be a great burden to the
senior citizens.
DEDUCTIONS UNDER SECTION 80
The Deductions under section 80C are divided under two categories:
A. Deductions in respect of certain payments.B. Deductions in respect of certain income.
DEDUCTIONS IN RESPECT OF CERTAIN PAYMENTS
1. Deductions regarding approved savings in P.F. Life Insurance Premium, etc [Section 80C]Savings play a vital role in the fast economic development of any country. To encourage savings, an incentive in the form of a deduction out of one`s taxable income has been allowed. To chanelise those savings, various schemes have been framed and if the assesses deposit those savings in these approved schemes, a deduction shall be allowed.Deduction u/s 80C shall be allowed only to following assesses: i) An individualii) A Hindu Undivided Family
RATE OF DEDUCTION
Total amount deposited in various approved ssaving schemes or Rs. 1,00,000 p.a. w.e. is less shall be allowed as deduction. This limit of Rs. 1,00,000 also includes the amount of deduction allowed to the assessee u/s 80CCC and 80CCD.
QUALIFYING AMOUNT FOR DEDUCTION u/s 80C
Amount saved and deposited by the employee or assessee in the following savings schemes shall qualify for deduction u/s 80C
a) Deposits made in provident fundsi. Deposits in statutory provident Fund (S.P.F): Amount deposited by the
employee in this fund during the previous year fully qualifies for deductions.ii. Deposits in Recognised Provident Fund (R.P.F): amount deposited during the
previous year fully qualifies the deductions.iii. Deposits made by employee in Unrecognised Provident Fund (U.R.P.F): since
this fund is not recognised by the Commissioner if Income Tax, so any amount deposited or saved by the employee in the fundwill not qualify for any deduction.
iv. Deposits made in Public Provident Fund (P.P.F): The Provident Fund account can be opened in the name of the employee (assessee), spouse and children and amount deposited by the assessee during the previous year in any of these accounts shall qualify upto a maximum of Rs. 70,000.
b) Payment of Life Insurance Premium Actual amount of premium deposited by the employee or on his behalf by his employer or 20% of su, assured w.e. is less shall qualify for deduction. Life Insurance
policies can be obtained in the name of assessee, spouse and children in case of HUF in the name of any or all the co-partners in the HUF.The children means all the sons and daughter of the assessee whether minor or major, whether dependent upon the assessee or independent or may be married or unmarried. It also includes steps or adopted children.
c) Amount deducted out of Govt employee`s salary towards deferred annuityIn case of any salary has been deducted out of salary of govt employeefor securing a defee=rred annuity for him or making a provision for his spouse or children, the amount so deducted but not exceeding 20% of his salary will qualify for deduction u/s 80C.
d) Payment made towards group insuranceAny amount deducted or deposited by employer towards employee`s group insurance shall fully qualify for deduction.
e) Deposits made in approved Superannuation FundTerm Deposits with certain banks with not less than 5 years duration and as per scheme framed by central government shall also qualify for deduction.
f) Amount deposited or invested in equity linked saving scheme (ELSS)Any amount invested in equity linked saving scheme qualifies upto actual amount invested. In case any amount was invested in ELSS notified for rebate u/s 88 shall also qualify for deductions under this section .
g) Payment of deferred annuityAny payment made by the assessee to effect or keep in force contract for deferred annuity will qualify for deduction u/s 80C.
h) Deposits made in Unit Linked Insurance Plan (ULIP)Any amount deposited by the assessee in ULIP of UTI or LIC mutual fund shall fully qualify for deduction. Amount can be deposited in the name of assessee, spouse and children.
i) Amount invested in National Savings Certificates-VIII issuesAmount invested in the National Savings Certificates-VIII issues fully qualifies for the deductions u/s 80C. Interest accrued on these certificates purchased earlier is deemed to be re-invested, hence such interest also fully qualifies for deduction every year.
j) Amount paid to LIC under Jeevan Dhara, Jeevan Akshay Policies, etc.
Any amount paid to LIC under Jeevan Dhara, New Jeevan Dhara I, New Jeevan Akshay, New Jeevan Akshay I, New Akshay II plans fully qualifies for this deduction. Investment in these plans can be made in the name of assessee and in case of HUF, in the name of any of its members.
k) Amount invested in notified Pension Fund set up by mutual funds or UTIAny amount invested by an individual in notified funds set up by Mutual Funds or UTI shall be shall fully qualify for the deductions u/s 80C.
l) Amount deposited in National Housing BankAny amount deposited as a subscription to Home Loan Account Scheme of National Housing Bank or contribution to any notified pension fund set up by the National Housing Bank will fully qualify for deduction u/s 80C.
m) Any subscription in deposit scheme of central governmentAny subscription to any such security to central government or any such deposit scheme as central govt may notify in Official Gazette, specifying in this behalf will qualify the deduction u/s 80C.
n) Repayment of House Building Loan Any amount repaid under house building loan taken from Govt., LIC, Bank, HDFC, HUDCO, or other housing finance institutions or employer.
ORAmount repaid as full price or instalment of price of a house purchased from govt. or an approved agency shall qualify up to actual amount repaid.The amount repaid must not include interest on loan or ground rent but shall include stamp duty and registration charges.
o) Payment of tuition fees of children Any amount paid as tuition fees (excluding any payment towards any development fees or donation or payment of similar nature) whether at the time of admission or thereafter to:a) Any school, college or university or any other educational institution situated in
India,b) For the purpose of full time education of any two children of the individual
The amount which shall qualify under this section, shall not exceed actual amount paid as tuition fee for two children only.
p) Subscription to bonds of NABARDAny subscription to bonds issued by National Bank Of Agriculture and Rural Development as Central Govt. may notify in Official Gazette, will qualify for deductions u/s 80C.
2. Deduction in respect of contribution to Pension Fund [Section 80CCC]a) This deduction is allowed to individual only.b) This deduction is allowed if certain amount is paid or deposited in the relevant
previous year with LIC or any other insurer to effect a contract of annuity or pension out of a fund set up u/s 10(23AAB)
c) The rate of deduction is actual amount paid under this scheme (excluding any interest or bonus accrued during the year ) or Rs. 1,00,000 w.e is less. The aggregate amount of deduction allowed u/s 80CCC and 80CCD cannot exceed Rs. 1,00,000.
d) In case any amount is received by the assessee or his nominee under this scheme as pension or any amount is withdrawn by surrender of this plan either in full or in part in any previous year whole of such amount shall become taxable in the year in which such pension is received or withdrawal is made.
3. Deduction in respect of contribution to pension scheme of central government [ Section 80CCD ]a) This deduction shall be allowed only to an assessee, being an individual employed by
the central government and employed by any other employer on or after 1-1-2004 if he has in the previous year paid or deposited any amount in his account under a pension scheme notified or as may be notified by the central government.
b) The amount to be deducted shall be i. The whole of the amount so paid or deposited ; or ii. 10% of his salary in the previous year
Whichever is lessc) In case central government make any contributions to his account as reffered above,
the assessee shall be allowed a deduction in the computation of his total income.d) Where any amount standing to the credit of the assessee in his account referred above
in respect of which deduction has been allowed as per above together with the amount
accrued thereon if any, is received by the assessee, or his nominee, in whole or in part in any previous year:i. On account of closure or his opting out of pension scheme referred to above,
orii. As pension received from annuity plan purchased or taken from such closure
or opting out
The whole of the amount of which deduction has been allowed as per above shall be deemed to be the income of the assessee or his nominee, as the case may be, in the previous year in which such amount is received and shall accordingly be charged to tax as income of that previous year.
e) Where any amount paid or deposited by the assessee has been allowed as a deduction as per above such amount shall not qualify for rebate under Section 88.
f) For the purpose of this section, “salary” includes dearness allowance, if the terms of employment so provide, but excludes all other allowances and prerequisites.
4. Restriction on total amount of deductions u/s 80C, 80CCC and 80CCD (insertion of new section 80CCE)The aggregate amount of deductions u/s 80C, section 80CCC and section 80CCD shall not in any case, exceed one lakh rupees.
5. Deduction in respect of Medical Insurance Premia [Section 80D]Any Insurance Ppremia paid by the individual or HUF by any mode other than cash for an insurance on the health of self, spouse or any other member of the family or dependent parents or dependent children of the assesse or Rs. 15,000 p.a. whichever is less shall be allowed as deduction. Such insurance should be in accordance with schemes framed by General Insurance Corporation such as Mediclaim or by any other insurer where sxheme is approved by Insurance Regulatory Authority of India.In case any amount is paid by an assessee to ensure the health of a person who is senior citizen i.e who has attained the age of 65 yrs at any time during the previous year the rate of deduction is the actual premium paid or Rs. 20,000 p.a. whichever is less.
6. Deduction in respect of maintenance including medical treatment of dependent that is person with disability [Section 80DD]a) The deduction is allowed to an individual who is resident of India or HUF.
b) The deduction is allowed if they have incurred.c) Any expenditure for the medical treatment (including nursing), training and
rehabilitation of a dependent, being a person with disability, ord) Paid or deposited ny amount under a schedule framed in this behalf by LIC or any
other insurer or administrator of UTI or the specified company for the maintenance of the dependent being a person with disability.
RATE OF DEDUCTION i. The assessee shall be allowed a fixed deduction of a sum of Rs. 50,000 from his
gross total income in respect of the previous year.ii. Where such dependent is a person with severe disability the deduction shall be
allowed for Rs. 75,000.
CONDITIONS
i. The scheme as referred above provides for payment of annuity or a lumpsum amount for the benefit of the dependent, being a person with disability, in the event of death of the individual or a member of HUF in whose name subscription of the scheme has been made.
ii. The assessee nominates either the dependent, being a person with disability, or any other person or a trust to receive the payment on behalf for the benefit of the dependent, being a person with disability.
iii. If the dependent, being a person with disability, predeceases the individual or the member of HUF an amount equal to amount paid or deposited as per above shall be deemed to be the income of the assessee of the previous year in which such amount is received by the assessee and shall accordingly be chargeable to tax as the income of that previous year.
iv. The assessee, claiming a deduction under this section, shall furnish a copy of the certificate issued by the medical authority in the prescribed form and manner, along with the return of income under section 139, in respect of the assessment year in which the deduction has been claimed.
v. In case where the condition of disability requires reassessment of its extent after a period stipulated in the aforesaid certificate, no deduction under this section shall be allowed for any assessment year relating to any previous year beginning after the expiry of previous year during which the aforesaid certificate of disability had expired, unless a new certificate is obtained from medical authority in the form and manner, as may be prescribed and a copy thereof is furnished along with the return of income.
vi. “Disability” shall have a meaning assigned to it in clause (i) of Section 2 of the Persons with Disabilities(Equal Opportunities, Protection of Rights and Full Participation) Act, 1995 and includes “autism”, “cerebral palsy”, “multiple
disabilities” referred to in clauses(a), (c) and (h) of section 2 of National Trust for Welfare of Persons with Autism, Cerebral Palsy, Mental Retardation and Multiple Disabilities Act 1999.
vii. “Medical Authority” means the medical authority as referred to in clause (p) of Section 2 of the Persons with Disabilities(Equal Opportunities, Protection of Rights and Full Participation) Act, 1995 or such other medical authority as may, by notification, be specified by the central govt for certifying “autism”, “cerebral palsy”, “multiple disabilities”, “person with disability” and “severe disability” referred to in clauses(a), (c), (h), (i) and (o) of section 2 of National Trust for Welfare of Persons with Autism, Cerebral Palsy, Mental Retardation and Multiple Disabilities Act 1999.
viii. “Person with Disability” means a person referred to in clause (t) of section 2 the Persons with Disabilities(Equal Opportunities, Protection of Rights and Full Participation) Act, 1995 or clause (o) of section 2 of National Trust for Welfare of Persons with Autism, Cerebral Palsy, Mental Retardation and Multiple Disabilities Act 1999.
ix. “Person with Severe Disability” means:1) A person with 80%, or more of one or more disabilities, as referred to in
sub-section 4 of section 56 of Persons with Disabilities(Equal Opportunities, Protection of Rights and Full Participation) Act, 1995.
2) A person with severe disability referred to in clause (o) of section 2 of National Trust for Welfare of Persons with Autism, Cerebral Palsy, Mental Retardation and Multiple Disabilities Act 1999.
x. “Dependent” means :1) In case of an individual, dependent means the spouse, children, parents,
brothers and sisters of the individual or any of them.2) In case of HUF, a dependent means a member of HUF.
Such person is wholly or mainly dependent upon individual or HUF for support and maintenance. Such person does not claimed any deductions u/s 80U in that previous year.
7. Deductions in respect of medical treatment, etc. [Section 80 DDB]a) This deduction is allowed to an individual or HUF who is resident in India only.b) If they have incurred during the previous year, or actually paid the amount for the
medical treatment of such disease or ailment as may be specified in the rules made in this behalf by the board.
c) The expenditure must be incurred for himself or a dependent, in case the assessee is an individual.
d) The expenditure may be incurred for any member of a HUF, in case the assessee is a HUF.
8. Deduction in respect of interest on loan taken for higher education [Section 80E]Deduction u/s 80 E regarding interest paid on a loan taken to pursue higher education shall be allowed if following conditions are fulfilled:a) Assessee is an individualb) Assessee has taken a loan to pursue higher education of his own, spouse or any of
his/her child.c) Loan has been taken from any financial institution or an approved charitable
institution.d) Assessee has paid interest on such loan during the previous year.e) Assessee has paid interest out of his taxable income of that year.
The deductions specified above all shall be allowed in computing the total income in respect of initial assessment year and seven assessment years immediately succeeding the initial assessment year or until the interest referred above is paid by the assessee in full, whichever is earlier.[Section 80E(2)]
For the pupose of this section :
a) “Approved Charitable Institution” means an institution specified in, or, as the case may be, an institution established for charitable purposes and notified by the central govt under section 10(23C) or an institution referred to in section 80G(2)(a);
b) “financial institution” means a banking company to which the Banking Regulation Act, 1949 applies (including any bank or banking institution referred to in section 51 of that act) or any other financial institution which the central govt may, by notification in Official Gazette, specify in this behalf;
c) “higher education” means full time studies for any graduate or post-graduate course in engineering, medicine, management or for post-graduate course in applied sciences or pure sciences including mathematics and statistics;
d) “initial assessment year” means the assessment year relevant to the previous year, in which the assessee starts paying interest on loan.
9. Deduction in respect of donations to certain Funds, charitable Institutions , etc. [Section 80G]Section 80G grants partial deduction in respect of amount given as charitable donations and it is allowed to all assesses. The sum paid to following as donations during the previous year qualify under this section: 80G(20: a) any sum paid by the assessee in the previous year as donations to:
i. The National Defence Fund set up by central govt. Orii. The Prime Ministers Drought Relief Fund, oriii. The Prime Ministers National Relief Fund, oriv. The National Children Fund, orv. The Indira Gandhi Memorial Trust, vi. The National Foundational for Communal Harmonyvii. A University or any educational institution of national eminence as may be
approved by prescribed authorityviii. The Chief Minister`s Earthquake Relief Fund Maharashtraix. Any fund set up by the State Govt. of Gujarat exclusively for providing relief
to the victims of earthquake in Gujaratx. The Zila Saksharta Samitixi. The National Blood Transfusion Council or to any State Blood Transfusion
Council which has its sole object of control, supervision, regulation or encouragement in India of the services related to operation and requirement of blood banks
xii. Any fund set up by the State Govt. to provide medical relief to poorxiii. Any Central Welfare Fund, The Indian Naval Benevolent Fund or the Airfore
Central Welfare Fund established by the armed forces of the union for the welfare of the past and present members of such forces or their dependents
xiv. The Andhra Pradesh Chief Minister`s Cyclone Relief Fundxv. The National Illness Assistance fundxvi. National Sports fund to be set up by the Central Govtxvii. National Cultural Fund to be set up by the Central Govtxviii. Technology Development and Application Fund to be set up by the Central
Govtxix. The National Trust for Welfare of Persons with Autism, Cerebral Palsy,
Mental Retardation and Multiple Disabilities constituted under sub-sectio (1) of section 3 of the National Trust for Welfare of Persons with Autism, Cerebral Palsy, Mental Retardation and Multiple Disabilities Act, 1999
xx. The Govt. or any local authority, to be utilised for any charitable purpose other than the purpose of promoting family planning
xxi. Any authority referred to in clause (20A) of Sec-10, for the purpose of satisfying the need of housing accommodation or planning, development or cities, towns or villages or both
xxii. Any corporation referred to u/s 10 (26BB) i.e. a corporation set up to promote the interest of the minorities
xxiii. The Govt. or any such local authority, institution or association as may be approved in this behalf by the Central Govt. to be utilised for the purpose of promoting family planning.
b) Any sum paid by the assessee in the previous year as donation for the renovation or repair of any such temple, mosque, gurudwara, church or other place as notified by the central govt in the Official Gazette to be of historic, archaeological or artistic importance or to be a place of public worship of renown throughout any state or states .
c) Any sum paid by assessee being a company, in the previous year as donation to the Indian Olympic Association or any other association or institution as notified by the central govt u/s 10(23) for:i. The development of infrastructure for sports and games in india,ii. The sponsorship of sports and games in india.iii. Any sum paid by the assessee during the period beginning on the 26th day of
January 2001and ending on 30th day of September 2001
10. Deduction in respect of expenditure incurred on payment of House Rent [Section 80GG]This deduction is allowed to individuals only for rent paid. The assessee must be living in a rented house due to his employment, business or profession. He should not be getting any HRA. He or his spouse should not have any self occupied house in india. He or his spouse, minor child or HUF do not own a house at a place where the tax payer resides.
11. Deduction in respect of any payment made to certain scientific institutions or an institution having rural development programme as its object [Section 80 GGA]The deduction shall be available to every such assessee, who during the previous has made any payment:a) To the scientific research association which has as its object the undertaking of
scientific research, or to a university, college or any other institution, to be used for scientific research and such bodies as are approved for the purpose of sec-35(i), (ii) ;
aa) Any sum paid by the assessee in the previous to a university, college or institutions to be used for research in Social Science or Statistical Research
b) (i) to an association or institution which has its object the undertaking of any programme or rural development, to be used for carrying out any programme of rural development approved for the purpose of Sec-35CCA provided he furnishes the certificate as mentioned in sec-35CCA from such association or institution; or(ii) to an institution or association which has its object the training of persons for implementing programmes of rural development and any such body is approved for the purpose of sec-35CCA (2)
bb) Any sum paid by the assessee to a public sector company or a local authority or to an association or institution approved by the National Committee, for carrying out any eligible project or scheme referred to in sec-35AC
c) Any sum paid by the assessee in the previous year to a rural development fund to be set up and notified by the Central Govt. for the purpose of clause (c) of sub-section (1) of sec-35CCA
d) National Poverty Eradication Fund (so notified)
This deduction will not be allowed in case of those assesses whose gross total income includes income which is chargeable to tax under the head “Profits and Gains of Business or Profession”
12. Deduction in respect of Infrastructural Projects [Section 80IA]Section 80IA of the Income Tax Act, provides tax holiday for a certain period to an industrial undertaking or enterprises carrying on the business of developing, maintaining and operating any infrastructural facility, etc.
VARIOUS PROVISIONSWhere the gross income of the assessee includes any profits and gains derived by an undertaking or an enterprise any eligible business; a deduction of an amount equal to stated percentage of profits and gains derived from such business, shall be allowed for statted consecutive assessment years. [80IA(1)]
ELIGIBLE BUSINESS The deduction is allowed in undertakings engaged in:
Category I:[Section 80IA(4)(i)]
Carrying on business of a. Developing;b. Operating and maintaining; orc. Developing, operating and maintaining any
infrastructural facility
Category II:[Section 80IA(4)(ii)]
Providing telecommunication services (whether basic or cellular), radio, paging, domestic satellite services & internet services, etc.
Category III;[Section 80IA (4)(iii)]
Developing, operating and maintaining an industrial park or Special Economic Zones notified by the Central Govt.
Category IV: a. Generation,
[Section 80IA (4)(iv)] b. Generation & distribution of power,c. Laying of new transmission lines for power
distribution,d. Undertakes substantial renovation and
modernisation of the existing transmission or distribution lines
Category V:[Section 80IA (4)(v)]
Undertaking set up for reconstruction of power generating plant
Category VI:[Section 80IA (4)(vi)]
Undertaking laying and operating a cross country natural gas distribution network.
“Infrastructural Facility” means:a) A road including toll road, a bridge or a rail system;b) A highway project including housing or other activities being an integral part of the
highway project;c) A water supply project, water treatment system, irrigation project, sanitation and
sewerage system or solid waste management system;d) A port, airport, inland waterway or inland port or navigational channel in the sea.
“Telecommunication Service” means:
Any undertaking which has started or starts providing telecommunication services whether basic or cellular, including radio paging, domestic satellite services, network of trunking, broadband network and internet services on or after the 1st day of April, 1995, but on before the 31st day of March, 2005.
Transfer of Business: in case the undertaking or enterprise which is claiming this deduction is transferred to another assessee, for transferee all the conditions shall remain applicable in the same manner as if no transaction has taken place.
Only Source of Income [Section 80IA (5)]: Deduction for above mentioned business shall be allowed as if it is the only source of income for the assessee.
Compulsory Audit [Section 80IA (7)]: For non company assesses it shall be compulsory to get their accounts audited if they want to claim this deduction.
Deduction u/s 80IA: A new provision inserted by Taxation Laws (Amendment) Act, 2005
An undertaking owned by Indian Company and set up for reconstruction and revival of power generating plant if:
a) Such Indian Company is formed before 30-11-2005 with majority equity participation by public sector companies for the purpose of enforcing the security interests of the lenders to the company owning the power generating plant and such Indian Companies is notified before 31-12-2005 by the Central Govt.; and
b) Such company begins to generate or transmit or distribute power before31st March, 2007. Transfer of Goods [Sec 81IA (8)]: in case any goods are to be transferred
from eligible business to any other business or vice versa, it should be done at market value. In case these are transferred at any other price the Assessing Officer can adopt Fair Market value.
No deduction under any other section [Sec 80IA (9)]: in case an assessee claims deduction under this section for any profits and gains, no deduction shall be allowed under any other section for same profits and gains.
Higher Profits [Sec 80IA (10)]: in case any arrangement is made to have higher profits of eligible business the Assessing Officer shall allow the deductions only on real profits.
Power to withdraw [Sec 80IA (11)]: the Central Govt. has the power to withdraw this deduction at any time from a class of undertakings or enterprises by issuing a notification in the Official Gazette.
Amalgamation or Demerger [Sec 80IA (12)]: in case of amalgamation or demerger all the conditions shall apply to the amalgamating company of the resulting company as if Amalgamation or demerger has not taken place.
13. Deductions in respect of profits & gains from business of collecting and processing of bio-degradable waste [Section 80 JJA]
Eligible Business: collecting and processing or treating of bio-degradable wastes for generating power or producing bio-fertilizers, bio-pesticides or making pellets or briquettes for full or organic manure.Form of Organisation: the deduction is available to all industrial undertakings / enterprises whether in corporate or non-corporate sector i.e. sole proprietor, partnership firm, etc.Rate of deduction: 100% of profits & gains from such business as included in gross total incomePeriod of deduction: the deduction is available for a period of 5 yrs beginning with the assessment year relevant to the previous year in which such business commences.
14. Deductions in respect of wages paid for additional company jobs [Section 80 JJAA]
Eligible Business: industrial undertaking engaged in the manufacture or production of article or thing.Form of Organisation: the deduction is allowed to Indian company only which implies that foreign companies and non-corporate assessees cannot claim this deduction.Conditions to be satisfied:
a. No split up or reconstruction or amalgamation : the undertaking has not been formed by splitting up or reconstruction of the business already in business or amalgamation with another undertaking.
b. Employment of a specified number of new regular workmen : the industrial undertaking should employ more than 100 new regular workmen during the previous year. However, an existing industrial undertaking must also employ new workers to the tune of atleast 10% of existing number of workmen employed in such undertaking as on the last day of the preceeding year.
c. Submission of audit report: The assessee has to furnish with the return of Income the report of accountant u/s 288(2) to claim this deduction.
d. Rate of Deduction : 30% of additional wages paid to the additional new workmen. Additional wages means the wages paid to new regular workmen in the excess of 100 workmen employed during the previous year. However, in the existing undertaking, the additional wages shall be Nil, if the increase in the number of regular workmen employed during the year is less than 10% of the existing number of workmen employed in such undertaking as on last day of previous year.
e. Period of deduction : the deduction shall be allowed for a period of 3 previous years including the previous year in which the employment is provided.
15. Deduction in case of person with disability [Section 80 U]i) This deduction is allowed to an individual who is resident of India;ii) Who, at any time during the previous year, is certified by the medical authority to
be a person with disability;iii) Every individual claiming a deduction under this section shall furnish a copy of
the certificate issued by the medical authority along with the return of income u/s 139, on respect of the assessment year for which the deduction is claimed;
iv) If the condition for disability requires reassessment of its extent after a period mentioned in aforesaid certificate, no deduction under this section shall be allowed for any assessment year relating to the previous year beginning after the
expiry of the previous year during which the aforesaid certificate of disability had expired, until a new certificate is obtained from the medical authority in the form and manner, as may be prescribed, and a copy thereof is to be furnished along with the return of income under section 139;
v) Rate of deduction: an individual fulfilling all above mentioned conditions shall be eligible for a fixed deduction of Rs. 50,000. In case the individual suffers from a severe disability (disability above 80%) then a higher deduction of Rs. 75,000 shall be allowed.
vi) “Disability”: Shall have a meaning assigned to it in clause (i) of section 2 of the Persons with Disabilities (Equal Opportunities, Protection and Rights and Full Participation) Act, 1995, and includes “autism”, “cerebral palsy” and “multiple disabilities” referred to in clause(a), (c) and (h) of section 2 of the National Trust for the Welfare of Persons With Autism, Cerebral Palsy, Mental Retardation and multiple Disabilities Act, 1999.
vii) “Medical Authority”: Means the medical authority as referred to in clause (p) of section 2 of the Persons with Disabilities (Equal Opportunities, Protection and Rights and Full Participation) Act, 1995, or such other medical authority as may be, by notification, be specified by the Central Govt. for certifying “autism”, “cerebral palsy”, “multiple disabilities”, “disabilities” and “sever disability” referred to in clause (a), (c), (h), (i) and (o) of section 2 of the National Trust for the Welfare of Persons With Autism, Cerebral Palsy, Mental Retardation and multiple Disabilities Act, 1999.
viii) “Person with Disability”: Means the person referred to in clause (t) of section 2 of the Persons with Disabilities (Equal Opportunities, Protection and Rights and Full Participation) Act, 1995, or clause (O) of section 2 of the National Trust for the Welfare of Persons With Autism, Cerebral Palsy, Mental Retardation and multiple Disabilities Act, 1999.
ix) “Person with Severe Disability”: Meansa) A person with 80%, or more of one or more disabilities, as referred to on
sub-section 4 of section 56 of the Persons with Disabilities (Equal Opportunities, Protection and Rights and Full Participation) Act, 1995; or
b) A person with severe disability referred to in clause (o) of section 2 of the National Trust for the Welfare of Persons With Autism, Cerebral Palsy, Mental Retardation and multiple Disabilities Act, 1999.
Exempted incomeExempted income: Any Income which does not form part of total income is exempted income and are given under sections10-13B. Such incomes are either wholly exempted from tax or exempted upto a certain limit. Therefore such incomes, either whooly or up to the exempted limit; are not included in the Total income of an assesses while computing his Total Income.
Exempted Income Under section 10
Agricultural income[sec10(1)]- Agricultural income received by assassee during previous year is exempted. However, iit is defined under sec 2(1A).
Income received by member of HUF[sec10(2)]
Any sum received by an individual of HUF either out of HUF’s income or income of HUF’s estate is exempted from tax.
It is important to note that main objective of sec 10(2) is to avoid double taxation as HUF is a taxable entity and it’s income is taxable in its hand.
Share of profit received by a partner from a partnership firm[sec10(2A)]
Share of profit received by a partner from a partnership firm is exempted from tax.
Again, main objective of sec 10(2A) is to avoid double taxation as firm is a taxable entity and it’s income is taxable in it’s hand.
The value of any travel concession or assistance (LTC/LTA) received by,or due to an individual[sec10(5) and Rule 2B]
The value of any travel concession or assistance received by an individual,or due to,him is exempted in following cases:
(1)From his employer for himself and his family, in connection with his proceeding on leave to any place in india(while in service)
(2) From his employer or former employer for himself and his family, in connection with his proceeding to any place in india after retirement from service or after the termination of service.
Therefore journey may be perfomed while in service or after retirement.
Amounts of exemption: It depends upon the mode of Transporation
Mode of Transporation Amount of ExemptionAir
Amount of economy class air fare of national carrier by the shortest route; or the amount spent; whichever is less
RailAmount of air conditioned first class air fare by the shortest route;or tee amount spent; whichever is less
Any mode of transporation where;(a) place of original journey and
destination are connected by rail
Amount of air conditioned first class air fare by the shortest route;or tee amount spent; whichever is less
(b) place of original journey and destination are not connected by rail:(1) where a recognized public transport system exists
(2) where no recognized public transport system exists
First class or deluxe class fare by shortest route;or the amount spent; whichever is less
Amount of air conditioned first class air fare by the shortest route(as if journey had been performed by rail);or tee amount spent; whichever is less
Income of a foreigner in india[sec10(6)]
Following income of a person who is not citizen of india is exempted:
(a) Remuneration received by diplomats(b) Remuneration received by foreign national who is an employee of foreign enterprise(c) Non-resident employee of a foreign ship(d) Remuneration of an employee of foreign govt. during his stay in india
Tax on royalty or technical fee paid on behalf of foreign companies[sec10(6A)]
Conditions: Following conditions fulfilled for claiming exemption under sec10(6A)
(a) Assessee must be a foreign company(b) It must received income by way of royalty or technical fee(c) Such royalty or technical fee must be paid by govt. or concern(d) It must be paid under an agreement entered in to on or after april,1976 but before june
Tax on certain income paid on behalf of Non-resident or foreign companies[sec10(6B)
Where income other than salary, Royalty or technical fee is received by a Non-resident or a foreign company from indian govt. and tax on such income is paid by the payer then such tax will not be taxable in the hands of foreign company.
Conditions: Following conditions fulfilled for claiming exemption under sec10(6A)
(a) Assessee must be a foreign company(b) It must received income other than salary, royalty or technical fee(c) Such income must be paid by govt. or concern(d) It must be paid under an agreement entered in to on befor june 1,2002by the center govt.
of india with the govt. of a foreign state.
Tax paid on income from leasing of aircraft[sec10(6BB)]
Conditions: Following conditions fulfilled for claiming exemption under sec10(6BB)
(a) Assessee must be foreigngovt. Company or enterprise.(b) Must have given aircraft or an engine on lease to indian company engaged in the business
of operation of aircraft(c) Income must be given by indian company for lease of aircraft and not for providing
spares,facilities or services in connection with the operation of leased aircraft.(e) It must be paid under an agreement entered in to on or after april,1997 but before april
1,1999
Income under co-operative technical assistance programmes,etc[sec10(8)]
(a) The remuneration received by him directly or indirectly from the govt of that foreign state for such duties;and
(b) Any other income of such individual which accrues or arises outside india,and is not deemed to accrue or arise in india, in respect of whichsuch individualis a required to pay any income or social security tax to the govt. of that foreign state.
Remuneration or fee received by a consultant[sec10(8a)and Rule 16B]
Following incomes arising to a consultant is exempted:
(a)The remuneration received by him directly or indirectly, out of the funds made available to an international organization under a technical assistance grant agreement between such international and the govt. of that foreign state; and
(b) Any other income of such individual which accrues or arises outside India, and is not deemed to accrue or arise in India, in respect of which such individuals a required to pay any income or social security tax to the govt. of that foreign state
Remuneration or fee received by foreign employee of the consultant[sec10(8b)and Rule 16B]
(a)The remuneration received by him directly or indirectly, for such duties from any consultant referred to in sub-section(8A);and
(b) Any other income of such individual which accrues or arises outside india,and is not deemed to accrue or arise in india
Income of any family member of any individual mentioned under sec10(8),10(8A)and 10(8B)[sec10(9)]
The income of any family member of any individual mentioned under sec sec10 (8), 10(8A) and 10(8B) accompanying him to India, which accrues or arises outside India, and is not deemed to accrue or arise in india, in respect of which such member is required to pay any income or social security tax to the govt. of that foreign state or country or origine of such member is exempted.
Death-cum-retirement gratuity [sec10(10)]
Any death- cum-retirement gratuity is exempted in following cases:
(a) Received by the govt. employee.
(b) Received under the payment of gratuity Act,1972 to the extent provided under the provision of that Act.
(c) Received by any other employee on his retirement or on his becoming in capacited prior to such retirement or on termination of his employment, or any gratuity received by his widow, children or dependants on his death, is exempted to the extent it does not exceed one-half month’s salary for each year of completed service.
Tax Treatment of Gratuity : Tax treatment of gratuity depends upon the nature of employee:
(1) Government employee [Section 10(10)(i)]
(2) Non-government employee :
(a) Non –government employee covered under the payment of Gratuity Act, 1972 [Section 10(10)(ii(]
(b) Non-government employee not covered under the Payment of Gratuity Act, 1972 [Section 10(10)(iii)]
(1) Government employee [section 10(10)(i) ] : Any death –cum- retirement gratuity received by the government employee is fully exempted. However , government means central, state government or local authority but does not include statutory corporations.
(2) Non- government employee :
(a) Non- government employee covered under the of payment of Gratuity Act 1972 [Section 10(10)(ii) : any death –cum-payment gratuity received the Non-government employee covered under the payment of Gratuity Act, 1972 is exempted to the extent of permitted limit.
Pension [Section 10(10-A) ]
Any payment in commutation of pension is exempted if it is received by :
1. Government Employee.2. A non govt. Employee3. From a fund under section 10(23AAB)
Type of Pension: (a) Commuted pension(b) Uncommuted pension
Tax Treatment of the pension:Tax Treatment of Uncommuted Pension : Uncommuted Pension is always taxable under section 17(1)(ii).
Tax Treatment of Commuted Pension : Tax Treatment of Commuted Pension depends upon the nature of the employee.
(1) The government employee {Section [10(10A)(i)] Entire commuted pension received by the government employee is exempted from the tax . It is immaterial whether assessee has or not received any gratuity. Government means Central, state government or local authority and statutory coporation. However, according to Government Rules full pension can not be commuted. Therefore exemption under the law and uncommuted pension will be taxable
(2) Non government employee [Section 10(10A)(ii) ] : The amount of exemption depends upon whether assessee had received gratuity or not during the relevant previous year i.e.:
(a) where Non government employee receives gratuity also then one third of the Commuted pension which he is normally entitled to recive is exempted from tax , and
(b) where Non- government employee does not received any gratuity then one-half Commuted Pension which he si normally entitled to receive is exempted from tax.
(3) Any Commuted Pension received from a fund under section 10(23AAB) e.g., fund set up by LIC of India or any other insurer and approved by the prescribed authority is fully exempted. However, here assessee (receiver of pension ) can be any person.
Leave salary or leave encashment [Section 10 (10AA)]
Leave salary or leave encashment received government and non government employee at the time of retirement is exempted.
Leave salary / leave encashment : An employee gets different leaves such as medical leave, casual leave, etc. Another type of leave is earned . As name indicates employee has to earn that leave after working for few days (depending upon services ). If earned leaves are not utilized then depending upon the Services Rules, these may either lapse or are allowed to be enchased every year or may be accumulated . The leaves accumulated throughout the service period may encashed at the time of retirement or leaving the jobs. Such encashment of leaves standing to the credit of employee is known as leaves or leave encashment.,
Tax Treatment of Leave salary or leave Encashment : Tax Treatment of Leave salary or leave Encashment depends upon the nature of employee.
(1) Government employee [Section 10(10AA)(ii)} Any payment received by the Government employee as leave salary or leave encashment in respect of the period of the earned leave standing to his credit at the time of his retirement on superannuation
or otherwise is fully exempted from tax. However Government or State Government only and does not includes local authority statutory corporations.
(2) Non-government employee [Section 10(10AA)(ii)] : Any payment received Non-government employee as Leave salary or leave Encashment in respect of the earned leave standing to his credit at the time of his retirement on superannuation or is exempted to a permitted limit.
Retrenchment Compensation [ Section 10 (10B)]
Retrenchment compensation received by the workman under following is exempted :
1. The Industrial disputes Act 1947 or2. Any other Act or rules order of the notification issued their under3. Any standing order or under any award, contract of service of otherwise
Retrenchment Compensation : it means :
1. Compensation received by a workman at the time of the closing down of the undertaking in which he is employed [Explanation (a) to Section 10(10B) ]
2. Compensation received by a workman , at the time of the transfer( whether by agreement or by operation of law) of the ownership or management of the undertaking( in which he is employed ) by the employer to a new employer where:
(a) The service of the workman has been interrupted by the such transfer; or
(b) The term and condition of service applicable to the workman after such transfer are in any way less favorable than those applicable to him immediately before the transfer5; or
(c) The new employer is under the terms of such transfer or otherwise , legally not liable to pay to the workman , in the event of his retrenchment , compensation on the basis that his service has been continuous and has not been interrupted by the transfer [Explanation (b) to Section 10(10B).
Retrenchment Compensation received beyond exempted limit :
Retrenchment Compensation received in excess of minimum of above mentioned amount will be taxable under Head “Salary” Section 17(3) i.e profit in lieu of salary. However, assessee can claim relief under section 89.
Section 10(10B) shall not apply in respect of any compensation received by a workman in accordance with any scheme approved by the Central Government
Compensation to victim of Bhopal Gass disaster { Section 10 (10BB)]
Any payments made under the Bhopal Gas disaster Act 1985 and any scheme frame under this Act is exempted.
However, any payment made to any assessee in connection with the Bhopal Gas leak is disaster to the extend such assessee has been allowed as deduction under this Act on account of any loss of damage cause to him by such disaster shall not be exempted
Compensation of the Voluntary retirement [ Section 10 (10C) / Rule 2BA]
Any amount received by any employee of the following employer on his VRS or termination his service in accordance with the scheme of VRS / Voluntary separation shall be exempted
1. Public Sector Company2. Any other company3. An authority establish under a Central , State or Provincial Act or4. Local authority.5. Cooperative Society.6. University establish under Central State or provincial Act.7. Any State Government or Central Government.
Guidelines for exemptions : Exemption can be claimed if following Guideline laid down under rule 2BA of Income –tax rules, 1962 are fulfilled :
(a) Employee must have completed 10 years service or 40 years of age.(b) The scheme applies to all employee including workers and executives of a company or
authority or co-operative society except directors company or co-operative society.(c) The scheme of voluntary retirement (VRS) or voluntary separation must be resulting I
overall reduction of existing strength of the employees;(d) The vacancy caused by voluntary retirement (VRS) or voluntary separation must not be
filled up;(e) The retiring employee of a company shall not be employee in another company or
concern belonging to same management.(f) The amount receivable on account of voluntary retirement (VRS)or voluntary separation
must not exceed
Meaning of Salary : For the purpose of HRA, salary means Basic last drawn by the employee and includes dearness allowance if terms of employment so provide. However, it does not include perquisites and any other allowance.Exemption can be claimed only once : this exemption can be claimed only once therefore , where exemption has been allowed to an employee under this Section for any assessment year, no exemption shall be allowed to him in any other assessment year.
Different schemes of voluntary retirement for different employee : the Employer can frame different schemes of voluntary retirement for different employees. However, these schemes must be in conformity with the guidelines prescribed by the government in Rule2BA.
Voluntary compensation received beyond exempted limit : Voluntary compensation received in excess of minimum of above mentioned amount will be taxable under Head “Salary”. However, assessee can claim relief under section 89 [State Bank of Travancore v CBDT (2006) 282 ITR 587 (Ker.),ITO v Chander Kant S. Dharma (2005) 149 Taxman 82 (Kar.); also see Firturam Yadav v CIT (2007) 15 SOT 75 (Nag)]
Tax on non – monetary perquisites paid by his employer [Section 10 (10CC )]
Where assessee is individual and received non monetary perquisites with in the meaning section 17(2) and the tax on such non monetary perquisites is actually paid by his employer than tax so paid shall be exempted in the hands of the employee.
Any sum received under LIC policy [Section10 (10D)]
Any sum including bonus received under LIC policy is excepted
Any lump sum payment from the Provident Fund [Section 10(11)]
Any lump sum payment received by assessee from a PF to which the PF Act 1925 applies or from any other PF set up and notified by the Central government is exempted
Any lump sum payment from the Provident Fund [Section 10(12)]
The accumulated balance due any becoming payable to an employee participating in a RPF, to the extent provided in Rule 8 Part A of the fourth schedule Is exempted.
Any payment from an approved superannuation Fund[Section 10(13)]
Any payment received by the assessee from an approved superannuation fund is exempted .
HRA[Section 10(13A) / Rule 2 A
HRA is received by an employee is exempted.
Amount of exemption : Amount of exemption :under this Section is the list of the following
HRA actually received ; or
Rent paid in excess of 1/10 of salary ;or
½ (50%) of salary where such rented residential accommodation is situated in metropolitan cities (Delhi, Mumbai, Kolkata, Chennai); or
2/5(40%) of salary where such rented residential accommodation is situated at any other place.
Meaning of Salary : For the purpose of HRA salary means Basic salary last drawn by the employee and including dearness allowance if terms of employment so provide. It is also includes commission based on fixed percentage of turnover achieved by the employee as per the term of contract. However it does not include perquisites and any7 other allowance.
Salary to be determined on due basis : Basic salary, dearness allowance and commission are to be calculated on due basis in respect of the period when accommodation is occupied by the assessee. The salary of any other period is not to included even if it is received and taxed in the relevant previous year.
Important factors for HRA exemption : HRA exemption depends upon following factors :
(a) HRA actually received
(b) Rent paid
(c) Salary
(d) Place of residence
Therefore if there is no change in these factors in the relevant previous year then HRA will be calculated annually. However where there is change in any of these factors in the relevant previous year then HRA will be calculated monthly.
When exemption is not allowed : No exemption is allowed in following cases :
(a) Where assessee lives in the residential accommodation which is owned by him; or
(b) Where assessee does not pay rent ; or
(c) Where rent paid is not excess of 1/10 of salary.
Interest, Premium or Bonus on specified investment Section 10(15) ]
Interest, premium or bonus specified investment received by the following person is exempted under section 10 (15).
1. Any assessee2. An individual or HUF3. NRI etc.
Rent for leasing an aircraft [Section 10(15A)]
Conditions: Following conditions fulfilled for claiming exemption under sec10(6BB)
(d) Assessee must be foreign govt. Company or enterprise.(e) Must have given aircraft or an engine on lease to indian company engaged in the business
of operation of aircraft(f) Income must be given by indian company for lease of aircraft and not for providing
spares,facilities or services in connection with the operation of leased aircraft.(f) It must be paid under an agreement entered in to on or after april,1997 but before april
1,1999
Allowance to MPs / MLAs Section 10(17)
1. DA received by MP or of MLA or of any Committee2. Any allowance received by the MP under the member of the Parliament
Rule 19863. Any constituency allowance received by the MLA.
Award or Reward Section 10(17A)
Any payment made whether in cash or in kind shall be exempted from tax.
Pension received by gallantry award winner of family pension by the family member Section 10(18)
1. Pension received by individual who was employee Central and State govt. has been awarded ParamVir Chakra of Mahavir Chakra or other gallantry award as notified by the Central Govt.
2. Family pension received by any member of the family of the individual.
Income of the local authority Section 10(20)
1. Income from house property2. Capital Gains3. Income from the other sources
Income of approved scientific research association
Any income of the scientific research association from a time being approved for the purpose of section 35(1) II is exempted
Income of specified new agency Section 10(22B)
Any news agency setup in India for collection of the distribution of news as a Central govt. may by notification in the official gazette , specify in this behalf is exempted.
Income of the professional association and institution Section 10(23A)
Income of an association or institution establish in India where object is control, supervision, regulation of encouragement of the profession of law, medicine , accountancy ,engineering or architecture of other profession as Central Govt. may specify in this behalf , time to time , by the notification in the official gazette is exempted
Income of the arm forces fund Section 10(23AA)
An income received by any person on behalf of any regimental fund or non public fund establish by the arm forces or their dependents is exempted.
Income of the LIC pension Fund Section 10(23AA)
Any income of a fund setup by the LIC of India on or after August 1, 1996 is exempted.
Income of the European economic community section 10(23BBB)
Any income of this community derived in India by the way of the interest , dividends or capital gains from investments made out of its fund is exempted.
Income of the IRDA Section 10(23BBE)
An income of the IRDA establish under section 3(1) of the IRDA Act 1999 is exempted .
Income of the north eastern development finical corporation Ltd Section 10(23BBF)
Income of the north eastern development finical corporation Ltd formed and registered under the companies Act 1956 is exempted
Income of mutual fund registered under the securities and exchange board of the India Act, Section 10(23D)
Any income of mutual funds under this Act is exempted .
Income of the investor protection fund setup by recognized stock exchange in India Section 10 (23EA)
Any contribution received, from recognized stock exchange and the member their of, by the investor protection fund set up by recognized stock exchange in India either jointly or separately, as notified by the Central govt. in his behalf is exempted.
Investor Protection fund set up by commodity exchange in India Section 10(23EC)
Any contribution received from commodity exchange and the members therfo, by the investor protection fund set by commodity exchange in India either jointly or separately, as notified by the Central govt. in his behalf is exempted
Income of venture capital fund Section 10(23F)
Any income by way or dividend or long term capital gains of venture fund is exempted.
Income of registered union Section 10(20)
Any income chargeable to tax under the heads “ Income from house property “ and “income from other sources is exempted
Income of provident superannuation and gratuity fund Section 10(25)
Any income received by the trustees on behalf of a recognized provident fund , approved provident fund, approved superannuation fund , gratuity fund is exempted.
Income of the Employee Sate Insurance fund Section 10(25A)
Any income of the employee state insurance fund set up under the provision of the employees state insurance Act, 1948 is exempted
In come a member of Scheduled Tribe Section 10(26)
Any income of a member of Scheduled tribe as defined in article 366(25) of the constitution, residing in following area is exempted.
Any income of a residential of Ladak district Section 10(26A)
Any income accruing or arising to ay person who is resident in the Ladak district from any source in the said district of Ladak is exempted.
Income of an individual being a sikkimese
Any income of an individual who is sikkimese which accrues of arises to him in following manner is exempted.
1. For any source in the State Sikkim.2. By way of the dividends or security.
Income of corporation for promoting the interest of member of the SC or ST or backward classes section 10(26B)
Income of a corporation for promoting the interest of the members of minority community Section 10 (26 BB)
Income of cooperative society promoting the interests o the member of the SC or ST or both Section 10(27)
Income of the some boards and authorities section 10 (29A)
Income by way of any subsidy received from the tea board section 10(30)rule 8(2)
Income by way of any subsidy received from the coffee rubber board section 10(31).
Income of minor child including in the total income of parent section 10(32)
Where income of minor child is included in the total income of a parent under section 64(1A), then assessee (parent) can claim exemption to the extent such income does not exceed one thousand five hundred rupee in respect of each minor child child whose income is so included.
In other words the amount of exemption under this Section, per minor child whose income is so included.
Income of minor child.
Rs. 1500.
Capital gains arising from compulsory acquisition of agriculture land Section 10(37)
Long term capital gain from shares or units Section 10(38)
Specified income arising from any international sporting event Section 10(39)
Income of subsidiary company received from an Indian holding company engaged in the business of generation or transmission , etc. power Section 10(40)
Capital gain from asset of an undertaking engaged in the business of generation or transmission, etc. of power Section 10(41)
Specified income of some bodies and authorities section 10(42)
Loan received by an individual in a transaction of reverse mortgage Section 10(43)
New pension scheme interest Section 10(44)
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