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ASSIGNMENT-1

CORPORATE TAXATION
AND VALUATION
(UNIT 1)

Submitted to: Submitted by:


Ms. Shiksha Mittal Sandeep Kumar Singh
PGDM (4th) Finance
Enrl No.: ABS/PGDM/JULY17/130

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Q1. What are the different types of taxes? Differentiate between them providing valid reasons
for the same.

Ans. Taxes are generally an involuntary fee levied on individuals and corporations by the
government in order to finance government activities. Taxes are essentially of quid pro quo
in nature. It means a favour or advantage granted in return for something.

(A) DIRECT TAXES :-

1. Income tax :
a. Income tax is the most common and most important tax that an Indian must pay.
b. It is charged directly on the income of a person.
c. The rate at which it is charged varies, depending on the level of income.
d. Income tax is charged on an income known as “taxable income”, which is:
Taxable income = (total income) – (applicable deductions and exemptions).

The different heads of income under which income tax is chargeable are:
e. Income from house and property.
f. Income from business or profession.
g. Income from salaries.
h. Income in the form of capital gains.
i. Income from other sources.
It is levied differently for different people depending on their residency status.

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2. Corporate tax :

a. Levied on companies who exist as separate entities from their shareholders.


b. Foreign companies are taxed on income that arises, or is deemed to arise, in India.
c. It is charged on royalties, interest, gains from sale of capital assets located in India,
fees for technical services and dividends.
d. Includes Minimum Alternative Tax (MAT) which was introduced to bring Zero Tax
companies under the income tax net, whose accounts were made in accordance with
the Companies Act.
e. Includes Fringe Benefit Tax (FBT) which is a tax that companies pay on the fringe
benefits provided (or deemed to have been provided) to employees.
f. Incudes Dividend Distribution Tax (DDT) which is a tax levied on any amount
declared, distributed or paid as dividend by any domestic company. International
companies are exempt from this tax.
g. Includes Securities Transaction Tax (STT) which is a tax levied on taxable securities
transactions. There is not surcharge applicable on this.

3. Wealth tax :

a. Wealth tax is charged on the benefits derived from property ownership.


b. The same property will be taxed every year on its current market value.
c. Wealth tax is charged whether the property in earning an income or not.
d. The tax is levied on the individuals, HUFs, and companies alike.
e. Chargeability depends on residential status.

The following will not be taxed as they are “working assets”:

a. Assets held as stock in trade.


b. Property held as a commercial complex.
c. Gold deposit bonds.
d. House property held for business or profession.
e. House property let out over 300 days in a year.

4. Capital gains tax :

a. Taxed on the income derived from the sale of assets or investments.


b. Capital investments cover homes, farms, businesses, works of art, etc.
c. Capital gains = (money received from sale) – (cost of capital investment).
d. Categorized as short-term gains (gains on assets sold within 36 months of
acquisition) and long-term gains (gains on assets sold after 36 months of acquisition
and holding).
e. Voluntary tax that is paid by the taxpayer when the asset it sold.

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(B) INDIRECT TAXES :-

1. Sales tax :

a. As the name suggests, sales tax is a tax that is levied on the sale of a product.
b. This product can be something that was produced in India or imported and can even
cover services rendered.
c. This tax is levied on the seller of the product who then transfers it onto the person
who buys said product with the sales tax added to the price of the product.

The limitation of this tax is that it can be levied only ones for a particular product, which
means that if the product is sold a second time, sales tax cannot be applied to it.

2. Service tax :
Like sales tax is added to the price of goods sold in India, so is service tax added to services
provided in India

As per Service Tax Law it is mandatory for the following categories of persons to obtain
registration:-

a. Every person liable to pay service tax under Reverse Charge


b. An input service distributor
c. Every provider of taxable service whose aggregate value of taxable service exceeds 9
lakhs in a financial year.

(2a.) GST (Goods and Service Tax) :

a. The Goods and Services Tax (GST) is the largest reform in India’s indirect tax
structure since the market started opening up about 25 years ago.
b. The GST is a consumption-based tax, as it is applicable where consumption takes
place.
c. The GST is levied on value-added goods and services at each stage of consumption in
the supply chain.
d. The GST payable on the procurement of goods and services can be set off against the
GST payable on the supply of goods and services, the merchant will pay the
applicable GST rate but can claim it back through the tax credit mechanism.

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3. Value Added Tax (VAT) :

a) VAT, also known as commercial tax is not applicable on commodities that are zero
rated (eg. food and essential drugs) or those that fall under exports.
b) This tax is levied at all the stages of the supply chain, right from the manufacturers,
dealers and distributors to the end user.
c) The value added tax is a tax that is levied at the discretion of the state government
and not all states implemented it when it was first announced.
d) There are 3 schedules and each schedule has its own VAT percentage. For Schedule 3
the VAT is 1%, for schedule 2 the VAT is 5% and so on. Goods that have not been
classified into any category have a VAT of 15%.

4. Custom duty & octroi :

a. When you purchase anything that needs to be imported from another country, a
charge is applied on it and that is the customs duty.
b. It applies to all the products that come in via land, sea or air. Even if you bring in
products bought in another country to India, a customs duty can be levied on it.
c. The purpose of the customs duty is to ensure that all the goods entering the country
are taxed and paid for.

5. Excise duty :

a. This is a tax that is levied on all the goods manufactured or produced in India.
b. It is different from customs duty because it is applicable only on things produced in
India and is also known as the Central Value Added Tax or CENVAT.
c. This tax is collected by the government from the manufacturer of the goods.
d. It can also be collected from those entities that receive manufactured goods and
employ people to transport the goods from the manufacturer to themselves.

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DIFFERENCE BETWEEN DIRECT TAXES & INDIRECT TAXES:-

BASIS DIRECT TAX INDIRECT TAX


The tax that is levied by the The tax that is levied by the
government directly on the government on one entity
Meaning
individuals or corporations are (Manufacturer of goods), but is
called Direct Taxes. passed on to the final consumer by
the manufacturer.

The incidence and impact of the The incidence and impact of the tax
direct tax fall on the same person fall on different persons.
Incidence

Nature They are progressive in nature. They are regressive in nature.

Both Social and Economical. Social Only Economical. When an indirect


objective of direct tax is the tax is levied on a product, both rich
distribution of income. A person and poor must pay at the same rate. A
earning more should contribute person earning 10 lakh a month pays
more in the provision of public the same tax on the Wheat purchase
Objective service by paying more tax. This as the person earning 3000 Re a
provision is also known as month. This principle is called
progressive taxation. regressive taxation.

Impact Not at all Inflationary. Is inflationary.


Income Tax, Corporation Tax and VAT, Service tax, GST, Excise duty,
Wealth Tax. entertainment tax and Customs Duty.
Example

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Q2. What has been the history of taxation? Also explain the changes which have occurred since
the implementation of Income Tax Act, 1961.

Ans. Income Tax Act, 1860

• Consequent upon the financial difficulties created by the events of 1857,Income Tax was
introduced in India for the first time by the British in the year 1860.

• The Act of 1860 was passed only for five years and therefore lapsed in 1865.

• It was replaced in 1867 by a licence tax on professions and trades and the latter was
converted into a certificate tax in the following year.

• It was later abolished in 1873. Licence tax traders remained in operation till 1886 when it
was merged in the income tax Act of that year.

Income Tax Act, 1886


• The Act of 1886 levied a tax on the income of residents as well as non residents in India.

• The Act defined agricultural income and exempted it from tax liability in view of the
already existing land revenue a kind of direct taxes.

• The Act of 1886 exempted life insurance premiums paid by an assessed on policies on his
own life.

• Another important provision of this Act was that Hindu undivided family was treated as a
distinct taxable entity.

Income Tax Act, 1918


• The Act of 1918 brought changes to receipts of casual or non recurring nature pertaining
to business or professions.

• Although income tax in India has been a charge on net income since inception, it was in
the Act of 1918 that specific provisions were inserted for the first time pertaining to
business deductions for the purpose of computing net income.

• The Act of 1918 remained in force for a short period and was replaced by new Act in
view of the reforms introduced by the Govt. of India Act, 1919.

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Income Tax Act, 1922
• The organizational history of the income tax department dates back to the year 1922.

• One of the important aspects of the 1922 Act was that, it laid down the basis, the
mechanism of administering the tax and the rates at which the tax was to be levied would
be laid down in annual finance acts. This procedure brought in the much needed
flexibility in adjusting the tax rates in accordance with the annual budgetary requirements
and in securing a degree of elasticity for the tax system

• Before 1922 the tax rate were determined by the Income tax act itself and to revise the
rates the act itself had to be amended. The Income tax Act,1922 gave for first time a
specific nomenclature to various income tax authorities and laid the foundation of a
proper system of administration as per provisions of income tax act 1922.

Income Tax Act,1961


• The present law of income tax in India is governed by the Income Tax Act, 1961 which is
amended from time to time by the annual finance Act and other legislations pertaining to
direct tax.

• The act which came into force on April 1, 1962, replaced the Indian income tax Act,
1922, which had remained in operation for 40 years. Furthermore, A set of rules known
as Income Tax Rules, 1962 have been framed for implementing the various provisions of
the Act.

Changes, which have occurred since the implementation of Income, tax act,
1961
Income Tax is levied on the income of different categories of persons as per the provisions of the
Income Tax Act, 1961, after computing the income the rates of Income Tax applicable of that
assessment year is applied to find out the tax liability. The collection of Income Tax is mainly through
personal Income Tax and corporate Income Tax, the share of corporate tax being the largest one. In
other words, Income Tax is one of the major source of revenue for the Government. The responsibility
for collection of Income Tax vests with central Government.

The act of 1922 remained in force till 1961, meanwhile in 1956 the government had referred the Act to
the law commission in order to recast it on logical lines and to make it simple without changing the basic
tax structure. Based on the law commissions report, the income tax bill giving effect to its
recommendations was submitted in the Lok Sabha in April 1961. The bill received the assent of the

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president on 13 Sep. 1961. The present income tax Act is the Act 1961. According to section 1 of the
income tax Act 1961, extends to the whole of India including the state of Jammu Kashmir, it came into
force on 1 April 1962. The liability of tax is determined by total income in the previous year, limits of
taxation, rates, status of assesses (e.g. individuals, HUF, firm, company etc.) residential status and
various heads of income (salary, house property, business, capital gains and other sources). The income
tax scheme also provides for detection of offences and penalization also justice to aggrieved assesses.

Q3. What are the various issues related to taxation? What changes would you suggest to combat
these issues? Validate your answer.

Ans. Issues related to taxation in India are:-

1. High Rate and Low Yield of Direct Taxes:


It may be noted in this context that tax avoidance refers to arranging one’s financial
affairs within the law so as to minimize taxation liabilities, as opposed to tax-evasion
which is failing to meet actual tax liabilities through, e.g., not declaring income or profit.

2. Low Contribution of Income Tax:


Tax evasion seems to be the primary reason. Another reason is the high exemption limit
in a country where per capita income is very low. In India, the exemption limit has been
raised from time to time, but the levels of national and per capita incomes have failed to
increase proportionately.

3. Double Taxation of Dividends:


Moreover, due to double taxation of dividend, the rate of domestic saving and capital
formation has failed to increase appreciably. Companies pay corporation and other taxes
(such as excess profit tax or surtax) to the Government.

4. Absence of Agricultural Income Tax:


Agriculture is the dominant sector of the Indian economy. Since agriculture is a State
subject, the introduction of the agricultural income tax system at the Central level has not
been possible. This is another reason for undue reliance on indirect taxes.

5. Importance of Indirect Taxes:


In India, importance of indirect taxes has increased over the years which implies that the
importance of direct taxes has diminished.

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6. Widening the Indirect of Tax Net:
There is tax such as State sales tax on an item on which union excise duties has already
been paid. There is, for instance, not only excise duty or sales tax on finished cars but
also on tyres, tubes and other components. Due to the multiplicity of levies the cascading
effect cannot be avoided. Thus, indirect taxes have caused cost-push inflation in India.

7. Regressive Nature:
Moreover, indirect taxes have become more and more regressive over the years. Such
taxes are usually imposed on consumption goods. In general, poor people have a high
propensity to consume than the rich people. In fact, the marginal propensity to consume
gradually decreases with an increase in income.

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