Welingkar Institute of Management

IN THE WONDERLAND OF FUNDAMENTALS OF DIRECT TAXES

January 30th , 2014

Kanu H Doshi Dean, Finance

Fundamentals of Taxation :
No levy of tax , cess , octroi , duty by whatever name can be imposed & collected by any agency of Central or State Govt or Local body from Individuals or corporates or firms unless permitted specifically by the Constitution of India .

Our Constitution permits Central & State Govts to impose Taxes .

Thus we have Central Taxes like Income Tax / Wealth Tax /Excise/ Customs /Service Tax in Union List . Then we have Sales Tax , Tax on Agriculture , Octroi in State List .

Concurrent list would cover subjects like Education/Law & Order

Enumerate the two :

Direct Taxes :
Income Tax Wealth Tax Gifts Tax Expenditure Tax Estate Duty Profession Tax

Indirect Taxes :
Excise Customs Sales Tax Octroi Service Tax

Distinguish between Direct & Indirect Taxes :

Direct Taxes :
I. II. III. IV. V. VI. VII. VIII. IX. X. XI. XII. XIII. On Inflow On Person Collected Directly Basic Exemption Slabs Equitable Deflationery Evasion possible Tax Planning Possible Visible Sensitive Rich & Famous Direct Taxes Code

Indirect Taxes :
Outflow Product Indirectly None Flat Inequitable Inflationery Difficult Difficult Invisible Insensitive AAM Admi Goods & Services Tax

Two Systems of Taxation :

I.

Progressive :
Basic , Slabs , More than proportionate increase in tax .

II. Integrated :Prof Nicolas Kaldors Report

Income tax Act 1961 (1922) Expenditure Tax Act , 1957 Wealth Tax Act , 1957 Gift tax Act , 1958 Estate Duty Act , 1953

 Disintegration Levy of Sur Charge

Certain basic principles of taxation :

There is no equity inTaxation . Considerations of morality & unfairness do not come in & are not relevant . All are equal in tax . Rich,Poor,Widow . Similarly incomes from all sources are taxable , legal as well as illegal (smuggling , drugs ) . Under the Constitution Tax can be imposed & recovered retrospectively but not penalty . Prospective , retrospective , Retroactive . Penalty falls in Criminal law where equity is a valid consideration .

General :

There is method in madness called Taxation . Tax laws are Accounting oriented hence CAs do well . In Criminal Law , Lawyers do well because

Direct Tax collected individually and seperately Indirect Tax collected or levied on the commodity or product/goods/or services. Direct Tax hits us directly

Indirect Tax hits us indirectly through the price of the product and services.

Indirect Tax is harshest on the poor because irrespective of income / status of the user / consumer incidence is same. Direct Tax is on inflow or income. Indirect Tax is on outflow .

Two basic Characteristics of our Direct Tax system :

Progressive

and Integrated

Progressive system of direct taxation is a system in which proportion of tax increases more than proportionately of the amount which attracts the tax.

Thus at present the tax on Income of :

On Rs.2,00,000 On Rs.3,00,000 On Rs.5,00,000 On Rs.8,00,000 On Rs. 10,00,000 NIL Rs. 10,000 Rs. 30,000 Rs. 90,000 Rs. 1,30,000

In Statistics, we have Progression .Hence the World Progressive.

TAX PAYABLE
Income 5,00,000 8,00,000 A/c year 2012-13 30,000 90,000 Effective Tax rate in % 6% 11 %

10,00,000
20,00,000 25,00,000

1,30,000
4,30,000 5,80,000

13 %
21 % 23 %

Ongoing Voluntary Disclosure Scheme! Declare more and more!! Ongoing Voluntary Scheme! Declare more and more!!

This is based on the simple principle of ability to pay or what the traffic can bear.With every increase in our income, after meeting the basic necessities, our capacity (ability) to pay tax increases more than proportionately and hence the quantum of tax also increases under the system.

We have the following slabs at present :

(i) GENERAL:

First Income of Rs.2,00,000 On Income of Rs2,00,000 to 5,00,000 On Income of Rs.5,00,000 to 10,00,000 On Income over Rs.10,00,000 (ii) SENIOR CITIZENS (60 years) Income upto Rs.2,50,000 (iii) Very senior citizen (80 yrs) Income upto 5,00,000

TAX NIL 10% 20% 30%

NIL NIL

 Sur Charge is a portion of tax. Tax is portion of Income.It is always a percent of Tax while tax is per cent of Income . Only for a special specific purpose, hence technically temporary. It does not disturb the basic rates of 10,20 & 30%. Now Payable by only companies at 5% if income exceeds Rs. 1 crore It is imposed for raising funds for calamaties like say Bangladesh War, Kargil War, Super Cyclone of Orissa, Gujarat Earthquake of 26 Jan 2000 and Tsunami of 26 Dec 2004 Surcharge collection not shared with the States and remain only with the Central Govt Northcote Parkinson in the Laws, Outlaws & Inlaws: All levies, when imposed, temporary and on a modest scale! Become Permanent and increase

Sur Charge :

Three types of Amendments

(I) Prospective:

These come into effect from a future date e.g. on 28th Feb ,2014 FM amends section 37 to provide that salary paid after July 1 2014 to any employee employed after 1.3.2014 over Rs 10 lacs per month will not be allowed to be tax deductible

(II)Retrospective:
Those which come into effect from past date and completed assessments are redone. eg. On 28.2.2014 FM says salaries paid from 1st April 2002 over Rs 10 lacs per month will not be allowed to be tax deductible

(III) Retroactive: Transactions/Contracts done in the past also affected but from the future date. Eg on 28.2.2014, FM states that appointments made after 1.4.2002 and employees paid over Rs 10 lacs p.m, will be disallowed after 1.7.2014.

Inclusive & Exhaustive Definitions

(I)Income includes salary, Interest,

rent Bottomless, Limitless (II)CBDT means Central Board of Direct Taxes Final, Conclusive

Highest Marginal Rate of Tax on Income over Rs 10 lacs is 30% Average Rate of Tax on Income of Rs 10 lacs is 13%(Tax is Rs 1,30,000)

Integrated System of Taxation. We have had the following Direct Taxes from time to time :

(i) (ii) (iii) (iv) (v)

The Income Tax Act, 1961 (1922 Act) The Expenditure Tax Act, 1957 The Gift Tax Act, 1958 The Wealth Tax Act, 1957 The Estate Duty Act, 1953 Highest marginal Income Tax rate in the financial year 1973-74 was 97.75% + 3% Wealth tax which together exceeded 100% of a tax payers income. Not thru error but by design. Socialistic Pattern of Society of P. Nehru

Professor Nicolas Kaldor, an eminent English Economist from UK at the invitation of Pandit Nehru, our first Prime Minister, came to India in 1956 and studied our Indian Tax system and submitted his Report titled Indias Tax Reform. He noticed that we in India in our wisdom had imposed income tax on income by virtue of Indian Income Tax Act, 1922 and also imposed Estate Duty by the Act of 1953, modeled on English Death Duty Act on property passing on death.

In order to plug a loophole in the Estate Duty Act through GIFTS prior to the death of the person, he suggested levy of Gift Tax on Gifts during the life time of the tax payer.

Similary, to plug loophole in our Income Tax Act, he suggested levy of Wealth Tax on our Wealth. Wealth is Income saved after payment of tax and spending it on our needs. Wealth put to productive use generates income e.g. FD with a Bank Rs.2,00,000 @ 10% = Rs.20,000 income per year. There is a direct relationship between Income and Wealth and hence a check through a tax on Wealth serves automatically as a check over the Income.

On the same principle, a persons expenditure is a good guide of a persons income. Hence, the expenditure tax on expenditure incurred. Rationale was that if a person filed his Return of Income, Return of Wealth, Return of Gifts and Return of Expenditure, Income Tax Officer would be in a better position to make a meaningful assessment of his Income and collect proper and full income tax on his true income.

These taxes could be summarized as :

(i) If we earn income, we pay Income Tax; (ii) If we spend that income, we pay Expenditure Tax; (iii) If we gifted that income, we pay Gift Tax; (iv) If we retained that income, we pay Wealth tax; & (v) If we died leaving behind that wealth, there was Estate Duty to be paid on it.

(i) (ii) (iii) (iv)

Expenditure tax was abolished Estate Duty w.e.f. Gift Tax w.e.f. Wealth Tax diluted w.e.f.

01.04.1960 15.03.1985 01.10.1998 01.04.1992

Expenditure tax was removed because cost of collection of tax exceeded the tax itself. Same for Estate Duty. However, real reason for deleting Estate Duty was that it prevented NRIs to keep deposits in India and invest in India because estate duty was payable on such funds even if NRI died outside India. (Indian in Dubai moved by Mrs.Indira Gandhis appeal). As of today in Feb, 2014 we have now the Income Tax Act, 1961 and Wealth Tax Act, 1957

Wealth Tax is levied on market value of the following assets owned by the Tax payer(Ind, HUF, CO):
(i)
(ii)

Vacant land (Not being agricultural)

Jewellery (Gold, Diamonds, Silver, Precious Stones) (Sarabhais)

(iii) House Property (ONE is Exempt) (iv) Motor Car (Infosys) aircraft, boat, (not being for hire) (v) Cash over Rs.50,000 Wealth Tax is @1% of the market value of Wealth exceeding Rs.30 Lacs every year.

Gift Tax came back through back door w.e.f. 1.9.2004 as Income Tax on gift of sum of money over Rs.25,000 per year from non close relatives.

THANK YOU