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BEP: II Busincss Envivonmcnt & Po!

icy
Facu!ty: KULBIR SINGH
lnLroducLlon dlrecL Laxes
A iax wlicl is paid by ile peison on wlom ii is legally
imposed and ile buiden of wlicl cannoi be slified io
any oilei peison is called a diieci iax.
}.S. Mill defines a diieci iax as "one wlicl is demanded
fiom ile veiy peisons wlo, ii is iniended oi desiied,
slould pay ii".
Tlus, ile impaci, ilai is, ile iniiial fiisi buiden and
ile incidenceile uliimaie buiden of ile diieci iax is
on ile peison limself.
Faculty: KULBR SNGH 2
lnLroducLlon lndlrecL Laxes
An indiieci iax, is a iax, ile buiden of wlicl can be slified
io oileis
Tle impaci and incidence of indiieci iaxes aie on diffeieni
peisons.
An indiieci iax is levied on and collecied fiom a peison
wlo manages io pay ii on io some oilei peison oi peisons
on wlom ile ieal buiden of ile iax falls. Tle iax payei is
noi ile iax beaiei.
Commodiiy iaxes aie geneially indiieci iaxes as iley aie
imposed on pioduceis oi selleis, bui ileii incidence falls
upon ile consumeis as sucl iaxes aie wiapped up in ile
piices.
Faculty: KULBR SNGH 3
lrecL lndlrecL Lax laws
Faculty: KULBR SNGH 4
NatuvcoI Tax Govcvnmcnt Act Authovity
Divcct
ncome iax ncome Tax Aci, ii Ceniial Boaid of Diieci Tax
Wealil iax Wealil Tax Aci, i Ceniial Boaid of Diieci Tax
Gifi iax Gifi Tax Aci, i Ceniial Boaid of Diieci Tax
Indivcct
Ceniial Excise Ceniial Excise 8 Sali Aci,
i
Ceniial Boaid of Excise
and Cusioms (CBEC)
Cusioms Cusioms Aci, i: CBEC
Ceniial Sales Tax Ceniial Sales Tax Aci, i Union Goveinmeni
Siaie Sale Tax Respeciive Siaie Sales Tax
Acis
Respeciive Siaie
Goveinmenis
lncome 1ax
ncome iax was iniioduced in ndia in io bui was
disconiinued afiei a few yeais in i.
i was ieiniioduced in i, and since ilen ii las been an
iniegial paii of ile ndian iax sysiem.
n i, ile iaie siiuciuie was slified io a slab sysiem.
Since ilen, ile iaies, exempiions, and oilei dimensions of
ilis iax lave undeigone endless ievision.
Tle ndian ncome Tax Sysiem i wlicl was in foice up
io and including, ile assessmeni yeai ii-: was iepealed
wiil effeci fiom Apiil i, i:.
n iis place a new Aci cabled ile ncome Tax Aci, ii was
iniioduced and is ile opeiaiive Aci foi and fiom ile
assessmeni yeai i:-.
Faculty: KULBR SNGH 5
lncome 1ax
Asscssmcnt
O Tle ncome Tax Aci is a maclineiy foi compuiing ile ioial income
of ile pievious yeai fiom vaiious souices as classified in Seciion i.
O Tle ncome Tax Aci does noi, lowevei, piesciibe ile iaies ai wlicl
iax is io be claiged ile ioial income is compuied undei ile ncome
Tax Aci, wlicl is a peimaneni enacimeni, ile iax payable on sucl
income las io be woiled oui ai ile iaies laid down in ile Finance
Aci, wlicl is an annual enacimeni.
O An assessmeni. Compiises iwo siages:
O (a) compuiaiion of ioial income, and
O (b) deieiminaiion of ile iax payable ileieon.
O Wlen boil ilese siages aie compleied, an assessmeni is said io lave
been made.
Faculty: KULBR SNGH 6
lncome 1ax
Asscssmcnt Ycav [Scction i ()j
O Tle yeai in wlicl ile income of ile pievious yeai wlicl ended
befoie ile commencemeni of ile assessmeni yeai, is io be
assessed.
O Tle assessmeni yeai compiises a peiiod of iwelve monils
coiiesponding io a io a financial yeai, commencing fiom Apiil i,
and ending on Maicl i.
Pvcvious Ycav [Scction j
O Tle financial yeai immediaiely pieceding ile assessmeni ye slall
be ile unifoim pievious yeai.
O n ile case of a newly sei-up business oi piofession duiing ile
financial yeai, ile pievious yeai will end on Maicl i, even ilougl
ile peiiod compiised in ile pievious yeai may be less ilan i:
monils.
Faculty: KULBR SNGH 7
lncome 1ax
Asscsscc [Scction i()j
O An assessee is a peison by wlom any iax oi any oilei sum of money (sucl as inieiesi.
Penaliy) is payable undei ile ncome Tax Aci oi in iespeci of wlom any pioceeding undei
ile Aci las been ialen foi ile assessmeni of lis income oi loss oi of ile income oi loss of
any oilei peison in iespeci of wlicl le is assessable oi of ile amouni of iefund due io lim
oi io sucl oilei peison.
O Undei Seciion :(i) of ile ncome Tax Aci, peisons (ilai is, assessees) aie divided inio ile
following caiegoiies:
O ndividual
O Hindu undivided family
O Company |as defined imdei Seciion :(i of ile ncome Tax Aa (foi example, any
ndian company).
O Fiim |a paiineislip of iwo oi moie peisons ( (bui noi exceeding :o peisons caiiying
on a business oi piofession consiiiuied undei ile ndian Paiineislip Aci, i:j
O Associaiion of peisons oi a body of individuals (ilai is, a combinaiion of peisons
foimed foi piomoiing a joini veniuie oi joini enieipiise, execuiois of an esiaie,
iiusiees of a iiusi, and so on)
O Local auiloiiiy (foi example, municipaHiy, local boaids, and so on)
O Eveiy aiiificial juiidical peison noi falling in any of ile pieceding caiegoiies (ilai is, a
Hindu deiiy).
Faculty: KULBR SNGH 8
lncome 1ax
Rcsidcntia! Status oI an Asscsscc
O Tle income liabl : liable io iax in ile land of an assessee is
deieimined on ile basis of iesideniial Siaius. | Foi ilis puipose,
ile assessees aie divided inio ile following iwo caiegoiies:
O Resideni in ndia
O Non-iesideni in ndia
ndividuals and Hindu undivided families wlo aie iesideni in ndia
aie again classified:
O Oidinaiily iesideni
O Noi oidinaiily iesideni
Faculty: KULBR SNGH 9
lncome 1ax
Rcsidcnt in India
O In vcspcct oI Individua!s.
O Taxaiion of individuals is deieimined by ileii iesideniial siaius. An individual is
a "iesideni" if le siays in ndia in ile fiscal yeai (Apiil i io Maicl i) eiilei:
O Foi i: days oi moie, oi foi o days oi moie (i: days oi moie foi NRs) and las
been in ndia in aggiegaie foi days oi moie in ile pievious foui yeais.
O In vcspcct oI HUF, Fivm and Othcv association oI Pcvsons
O A Hindu undivided family, fiim, oi oilei associaiion of peisons is said io be
iesideni in ndia in any pievious yeai excepi wleie duiing ilai yeai ile coniiol
and managemeni of iis affaiis is siiuaied wlolly ouiside ndia |Seciion (:)j.
O In vcspcct oI a Company.
O A company is said io be iesideni in ndia in any pievious yeai ii ii saiisfies any of ile
following iwo condiiions:
O i is an ndian company, oi
O Duiing ilai yeai, ile coniiol and managemeni of iis affaiis is siiuaied wlolly in ndia
|Seciion ()j
Faculty: KULBR SNGH 10
lncome 1ax
Non-Rcsidcnt in India
O An individual wlo does noi saiisfy eiilei of ile above iequiiemenis is a "non-
iesideni".
O A iesideni individual is consideied io be "ovdinavi!y vcsidcnt" in any fiscal yeai if
le las been iesideni in ndia foi nine oui of ile pievious ien yeais and, in addiiion,
las been in ndia foi a ioial of o days oi moie in ile pievious seven yeais.
O Residenis wlo do noi saiisfy ilese condiiions aie called individuals "not ovdinavi!y
vcsidcnt".
O Remuneiaiion foi woil done in ndia is iaxable iiiespeciive of ile place of ieceipi.
Remuneiaiion includes salaiies and wages, pension, fees, commissions, piofiis in
lieu of oi in addiiion io salaiy, advance salaiy, and peiquisiies.
O Allowances, defeiied compensaiion, and iax equalizaiion aie also iaxable.
Peiquisiies aie iaxes beneficially.
Faculty: KULBR SNGH 11
lncome 1ax
Pcvmancnt Account Numbcv
O Peimaneni Accouni Numbei (PAN) is a numbei by wlicl ile Assessing Officei can
ideniify any peison. Pi , ncome Tax Depaiimeni is alloiiing PAN undei ile New
Seiies io all assessees wlicl consisis of ien alplanumeiic claiaciei and is issued in'
ile foim of a laminaied caid. P PAN S uliimaiely mean io supplani ile Geneial
ndex Regisiei Numbei wlicl is cuiienily in use. Tle Geneial ndex Regisiei
Numbei is a numbei given by an Assessing Officei io an assessee in ile Geneial
ndex Regisiei .
O As pei Seciion iA of ile Aci obiaining PAN is a musi foi ile following peisons:
O Any peison wlose ioial income oi ile ioial income of any oilei peison in
iespeci of wlicl le S assessable undei ile Aii exceeds ile maximum amouni
wlicl is ooi claigeable io iax.
O Any peison wlo is caiiying on any business oi piofession wlose ioial sales,
iuinovei oi gioss ieceipis aie oi is lilely io exceed Rs lall in any pievious yeai.
O Any peison wlo is iequiied io fuinisl a ieiuin of income undei Seciion i() of
ile Aci.
O Tle iequiiemeni foi applying foi alloimeni of PAN undei ile New Seiies las
now been exiended io ile wlole of ndia.
Faculty: KULBR SNGH 12
91L 1O
Tax levied on ile iaxable income of a company is called
coipoiaie iax (also named supei iax).
Tle income iax liabiliiy of a slaieloldei does noi ieduce on
accouni of ile company laving paid a iax on iis own income.
Tle iaxabiliiy of a company's income depends on iis domicile:
ndian companies aie iaxable in ndia on ileii woildwide income.
Foieign companies aie iaxable on income ilai aiises oui of ileii
ndian opeiaiions, oi, in ceiiain cases, income ilai is deemed io
aiise in ndia.
Royaliy, inieiesi, gains fiom sale of capiial asseis locaied in ndia
(including gains s fiom sale of slaies in an ndian company),
dividends fiom ndian companies and fees foi ieclnical seivices
aie all iieaied as income aiising in ndia.
Faculty: KULBR SNGH 13
orporaLe 1ax
Taxab!c Incomc
Tle main souice of income of a company is geneially fiom
"business". A company would also eain income undei ile
following leads:
ncome fiom louse piopeiiy
ncome fiom capiial gains
ncome fiom oilei souices
Taxable income is calculaied accoiding io ile iules
foi eacl class of income and ilen aggiegaied io
deieimine ile ioial iaxable income.
Faculty: KULBR SNGH 14
orporaLe 1ax
Dcductibi!ity oI Expcnsc
Wlile calculaiing income fiom business oi piofession, expense
incuiied wlolly and exclusively foi business puiposes aie
geneially deduciible. Tlese include depieciaiion on fixed
asseis, inieiesi paid on boiiowings in ile financial yeai, and so
on.
Ceiiain expenses aie specifically disallowed oi ile amouni of
deduciion is iesiiicied. Tlese expenses include:
Enieiiainmeni expenses,
nieiesi oi oilei amounis paid io a non-iesideni wiiloui
deduciing iax,
Coipoiaie iaxes paid, and
ndiieci geneial and adminisiiaiive cosis of a foieign lead office.
Faculty: KULBR SNGH 15
orporaLe 1ax
Sct-oII and Cavvy-Fovwavd oI Losscs
O Business losses incuiied in a iax yeai can be sei off againsi any oilei
income eained duiing ilai yeai, excepi capiial gains.
O Unabsoibed business losses can be caiiied foiwaid and sei off
againsi business piofiis of subsequeni yeais foi a peiiod of eigli
yeais,
O ile unabsoibed depieciaiion elemeni in ile loss can, lowevei, be
caiiied foiwaid indefiniiely.
O Howevei, ilis caiiy-foiwaid benefii is noi available io closely-leld
(piivaie) companies in wlicl ileie las been no coniinuiiy of
business oi slaielolding paiiein.
O Also, any clange in beneficial inieiesi in ile slaies of ile company
exceeding i pei ceni disqualifies ile piivaie company fiom ile
caiiy-foiwaid benefii.
Faculty: KULBR SNGH 16
JealLh 1ax
O Wealil iax is levied on non-pioduciive asseis wlose value exceeds
Rs i. million.
O Pioduciive asseis sucl as slaies, debeniuies, banl deposiis, and
invesimenis in muiual funds aie exempi fiom wealil iax.
O Howevei, ile goveinmeni levies wealil iax on nonpioduciive asseis
lile iesideniial louses, jewelleiy, bullion, moioi cais, aiiciafi, uiban
land, and so on.
O Foieign naiionals aie exempi fiom wealil iax on non-ndian asseis.
O Tle wealil iax is an annual levy by ile Ceniial goveinmeni on ile
nei value of non-agiiculiuial piopeiiy of an assessee. Tle iaxable
wealil is esiimaied as ile iniiial wealil plus appieciaiion and nei
addiiion io ii duiing ile yeai undei consideiaiion.'
Faculty: KULBR SNGH 17
Lxclse uLles
An excise duiy is a iax on ile manufaciuie of goods wiilin ile
couniiy. Excise duiies aie levied undei ile Ceniial Excise and
Sali Aci, i, Excise Taiiff Aci, i, and Modified Value
Added Tax (MODVAT) scleme
Excise duiy ilai can be levied vaiy depending iniei ala on ile
naiuie of ile iiem manufaciuied, ile naiuie of ile
manufaciuiing concein, and ile place of uliimaie sale.
Tle duiy iaies aie eiilei ad valoiem (ilai is, a fixed peiceniage
of ile cosi of pioduciion), specified (a fixed iaie depending on
ile naiuie of manufaciuied iiem), oi a combinaiion of boil.
n ile Finance Aii, i, ileie las been a slifi in ile basis of
iaxaiion fiom specific io ad valoiem iaies, wiil a ieduciion in
excise duiy pioposed on a laige numbei of iiems.
Faculty: KULBR SNGH 18
usLoms 1arlff
Cusioms duiies aie levied on impoiis ai iaies specified in ile Annual
Budgei,
Tle maximum iaie of cusioms duiy foi i- is pei ceni, excepi
on baggage. Tle Finance Aci, i, wiinessed a geneial ieduciion in
ile duiy on capiial goods, sieel, clemicals. Diugs, pesiicides, and
piojeci impoiis (see Appendix).
Tle ndian iaiiff sysiem is based on ile Cusioms Coopeiaiion
Council (Biussels) Nomenclaiuie, wiil mosi iaxes being ad valoiem
in naiuie.
n ile pasi, ndia las imposed ligl cusioms iaiiffs wiil a view io
siimulaie domesiic indusiiy. Tlese duiies weie as ligl as oo pei
ceni foi specified iiems in ile laie ios lave been piogiessively
ieduced ovei ile lasi few yeais io a maximum of pei ceni.
n addiiion, ileie aie seveial sclemes undei wlicl iiems can be
impoiied ai concessional iaies of duiies, foi example, ile Expoii
Piomoiion Capiial Goods (EPCG) scleme.
Faculty: KULBR SNGH 19
elkar ommlLLee
ecommendaLlons
O Tle Kellai Commiiiee (:oo:) iecommended some fuiuie clanges in ile iax
enviionmeni (indiieci iax) n ile couniiy.
i) Slifi io a iwo-slab cusiom duiy siiuciuie ai ile iaie of :o pei ceni on
finisled goods and io pei ceni on iaw maieiials by :oo-o
:) Applicaiion of CENVAT ai ilen iaie of i pei ceni foi all non-food. pei
ceni on food pioducis
) mplemeniaiion of VAT
) Exempiion of public uiiliiies fiom seivice iax
) Tax ielief of expoii-oiienied uniis and uniis in ile Special Economic Zones
(SEZs) foi all pioducis
) Diasiic ieduciion in ile muliipliciiy of iax iaie siiuciuies
) Plased wiildiawal of special addiiion duly of pei ceni and i pei ceni
ovei and above ile i pei ceni ( CENVAT)
) Avoiding inciease in impoii iaiiff, may be imposed only up io pei ceni
) Simplificaiion of iax pioceduie io piomoie iax coveiage and impiove iax
compliance
Faculty: KULBR SNGH 20
enLral Sales 1ax cL 1936
O Tle Ceniial Sales Tax Aci foimulaies piinciples
i) foi deieimining wlen a sale oi puiclase of goods iales
place in ile couise of iniei-Siaie iiade oi commeice oi
ouiside a Siaie oi in ile couise of impoii inio oi expoii
fiom ndia,
:) io piovide foi ile levy, colleciion and disiiibuiion of iaxes
on sales of goods in ile couise of iniei-Siaie iiade oi
commeice and io declaie ceiiain goods io be of special
impoiiance of iniei-Siaie iiade oi commeice and
) specify ile iesiiiciions and condiiions io wlicl Siaie laws
imposing iaxes on ile sale oi puiclase of sucl goods of
special impoiiance slall be subjeci.
Faculty: KULBR SNGH 21
O Sales iax is levied on ile sale of a commodiiy wlicl is
pioduced oi impoiied a and sold foi ile fiisi iime. f ile
pioduce is sold subsequenily wiiloui being piocessed fuiilei,
ii is exempi fiom sales iax.
O Sales iax is levied by eiilei ile Ceniial oi ile Siaie
goveinmeni. Ceniial sales iax pei ceni is geneially levied on
all iniei-Siaie sales.
O Siaie sales iaxes, ilai apply on sales made wiilin a Siaie, lave
iaies ilai iange fiom io i pei ceni.
O Sales iax is also claiged on woils coniiacis in mosi Siaies and
ile value of coniiacis subjeci io iax and ile iax iaie vaiies fiom
Siaie io Siaie.
O Howevei, expoiis and seivices aie exempi fiom sales iax.
Faculty: KULBR SNGH 22
,I1 ,odlfled Ialue dded
1ax
O Modified Value Added Tax oi MODVAT was iniioduced wiil
effeci fiom Apiil i,i, as an impiovemeni ovei ile Piofoima
Ciedii Scleme wlicl was in opeiaiion piioi io ilai daie.
O Tle scleme piimaiily aims ai avoiding ile "cascading effeci" of
duiy-on-duiy, and ai ensuiing ilai duiy is paid only on ile
value added ai eacl siage of pioduciion insiead of on ile gioss
value including ile duiy paid in ile eailiei siages. Tlis is
aclieved by allowing ile manufaciuiei io avail ciedii on ile
duiy paid in ile eailiei siages and io Uiilize ile ciedii iowaids
paymeni of duiy on ile goods cleaied by lim, piovided ile
condiiions and iequiiemenis laid down in ile scleme aie
saiisfied.
Faculty: KULBR SNGH 23
LnI1
O Tle yeai i wiinessed ile iniioduciion of a majoi
iesiiuciuiing of excise iaies, b by biinging down ile
numbei of iaies undei basic excise duiy io jusi iliee (
pei ceni i, i pei ceni, and : pei ceni). As a measuie
of fuiilei iaiionalizaiion, ile Budgei pioposals foi ile
yeai :ooo-:ooi pioposed io esiablisl a single iaie
Ceniial Value-Added Tax (CENVAT) ai ile Ceniie.
Faculty: KULBR SNGH 24
Ialue dded 1ax
O i las become a common piaciice aiound ile woild io
adopi Value Added Tax (VAT) in place of excise duiies and
sales iaxes.
O i las iwo-iiei value added iax iegime.
O VAT is pievaleni in ovei i:o couniiies.
O Tle Ceniial Goveinmeni, as a policy, las implemenied
VAT.
O Howevei, Sales Tax can be levied only by Siaies and noi by
ile Ceniial Goveinmeni.
O Tle iole of Ceniial Goveinmeni only io convince and
guide ile Siaies io implemeni VAT.
Faculty: KULBR SNGH 25
Ialue dded 1ax
O VAT is esseniially a foim of sales iax.
O i is a mulii-poini and mulii-siage iax, levied only on ile value
addiiion io a pioduci, ai eacl siage of pioduciion and disiiibuiion
clain.
O Tleie will be deduciion fiom iaxes paid eailiei in ile clain.
O Ai pieseni sales iax is levied ai a single poini eiilei ai ile lands of
pioducei, disiiibuioi, oi wlolesalei.
O Tle consiiiuiional posiiion in ndia is ilai ile Ceniial goveinmeni
can iax goods ai ile manufaciuiing siage and seivices, wleieas ile
Siaies can iax goods ai only a few seivices meniioned in ile
Consiiiuiion (sucl as enieiiainmeni, iianspoii of goods by ioad).
O Tle Siaies now claim ilai iley slould be given ile powei io levy
iaxes on seivices.
Faculty: KULBR SNGH 26
Ialue dded 1ax
O n ile exisiing sales iax siiuciuie, ileie aie pioblems of double iaxaiion of
commodiiy and muliipliciiy of iaxes, iesuliing in a cascading iax buiden.
O Foi insiance, exisiing siiuciuie, befoie a commodiiy is pioduced, inpuis aie
fiisi iaxed. Afiei ile commodiiy is pioduced wiil inpui iax load, ile ouipui
is iaxed again. Tlis causes an unfaii double iaxaiion wiil cascading effecis.
O Undei VAT, a sei-offs given foi inpui iax as well as iax paid on pievious
puiclases. Undei pievailing sales iax siiuciuie, ileie is in seveial Siaies
also a muliipliciiy of iaxes, sucl as iuinovei iax, suiclaige on sales iax,
addiiional suiclaige, and so on.
O Wiil ile iniioduciion of VAT, ilese oilei iaxes will be abolisled. n
addiiion, Ceniial sales iax will also be plased oui. As a iesuli, ile oveiall
iax buiden will be iaiionalized, and piices in geneial will also fall.
O VAT will ieplace ile exisiing sysiem of inspeciion by a sysiem of buili-in
self-assessmeni by ile dealeis and audiiois, Tle iax siiuciuie will become
simple and moie iianspaieni. Tlai will impiove iax compliance and also
augmeni ievenue giowil.
Faculty: KULBR SNGH 27