Taxation law in India - Notes

Taxation is a well known term in our society. We all directly or indirectly pays taxes in our daily life. Some universities teaches Taxation law or Principles of Taxation Law in 6th Semester of LL.B courses. But it is difficult to find a note on Indian Taxation on internet which covers LL.B syllabus. So, I have tried to prepare a complete note with the help of some other websites. Hope it will help the students and others. Let's read,

Basic Concept:
Tax: Any money the government takes from a person (legally) for doing any economic activity is tax. Generally, this is a percentage of the money a person receive or give. Taxes are either direct, where the money goes directly from a person’s  pocket to the govt's pocket, or indirect, where the money goes from a person’s  pocket to someone else's pocket and then to the govt's pocket.

Taxes in india are leived by the Central Government and State Governments. Some minor taxes are also leived by the local authorities such as Municipality.

CENTRAL TAXES :

There are two kinds of taxes in India.

i) DIRECT TAX :  A direct tax is generally a tax paid directly to the government by a person on whom it is imposed.

Such as

Income Tax (Income Tax Act, 1961)

Wealth Tax (Wealth Tax Act, 1957)

CBDT ( Central Board of Direct Taxes) is the controller of direct taxes in India.

ii) INDIRECT TAX :

GST (Goods & Service Tax)

STATE TAXES :

SGST (State Goods & Services Tax)

LOCAL BODY TAXES : 
Property Tax

Duty: This is an on-border tax charged on goods (commodities, or things that you can physically touch) either while coming into the country or going out of the country. Generally, a percentage of the value of the good. i.e Custom duty, excise duty, stamp duty etc.

Cess: This is a tax on tax, levied by the govt for a specific purpose. Generally, cess is expected to be levied till the time the govt gets enough money for that purpose. The education cess, that is levied currently, is meant to finance basic education in the country.

Surcharge: This is an additional burden to the tax being already levied. Generally, surcharge is levied for a certain period time. For instance, the 10% surcharge being levied on super rich in India for one financial year.
(Surcharge and Cess may look the same, but the difference is in the way of charging. For instance, say some tax is 30%, so out of Rs 100 earning, Rs 30 is paid as tax. Now if the govt levies a 10% cess, the total tax will become Rs 33. However, if the govt levies a 10% surcharge, the total tax will become Rs 40.

Toll: is a charge payable to use a bridge or road and the collected money is used to repair or maintain such bridge or road.

PRINCIPLES OF TAXATION :-

Basic concepts by which a government is meant to be guided in designing and implementing an equitable taxation regime. These include:

(1) Adequacy: taxes should be just-enough to generate revenue required for provision of essential public services. 
(2) Broad Basing: taxes should be spread over as wide as possible section of the population, or sectors of economy, to minimize the individual tax burden.

(3) Compatibility: taxes should be coordinated to ensure tax neutrality and overall objectives of good governance. 
(4) Convenience: taxes should be enforced in a manner that facilitates voluntary compliance to the maximum extent possible.
(5) Earmarking: tax revenue from a specific source should be dedicated to a specific purpose only when there is a direct cost-and-benefit link between the tax source and the expenditure, such as use of motor fuel tax for road maintenance.

(6) Efficiency: tax collection efforts should not cost an inordinately high percentage of tax revenues.

(7) Equity: taxes should equally burden all individuals or entities in similar economic circumstances.

 (8) Neutrality: taxes should not favor any one group or sector over another, and should not be designed to interfere-with or influence individual decisions-making.

(9) Predictability: collection of taxes should reinforce their inevitability and regularity.

(10) Restricted exemptions: tax exemptions must only be for specific purposes (such as to encourage investment) and for a limited period.

(11) Simplicity: tax assessment and determination should be easy to understand by an average taxpayer.
 

DIFFERENCE BETWEEN DIRECT TAX AND INDIRECT TAX

A more realistic differentiation between the two taxes may be as following. Direct Taxes are the taxes that are levied on the income of individuals or organisations. They include Income tax, corporate tax, wealth tax and inheritance tax. Indirect taxes are those paid by consumers when they buy goods and services.

Basis for Comparison	Direct Tax	Indirect Tax
Meaning	Direct tax is referred to as the tax, levied on person's income and wealth and is paid directly to the government.	Indirect Tax is referred to as the tax, levied on a person who consumes the goods and services and is paid indirectly to the government.
Burden	The person on whom it is levied bears its burden.	The burden of tax can be shifted to another person.
Types	Wealth Tax, Income Tax, Property Tax, Corporate Tax, Import and Export Duties.	Central Sales tax, VAT (Value Added Tax), Service Tax, STT (Security Transaction Tax), Excise Duty, Custom Duty.
Evasion	Tax evasion is possible.	Tax evasion is hardly possible because it is included in the price of the goods and services.
Inflation	Direct tax helps in reducing the inflation.	Indirect taxes promotes the inflation.
Levied on	Persons, i.e. Individual, HUF (Hindu Undivided Family), Company, Firm etc.	Consumers of goods and services.
Nature	Progressive	Regressive

Tax Avoidance and Tax Evasion

In simple words, Tax Avoidance means to reduce Tax liability by taking deductions, rebates or credits in legal way and Tax Evasion means to reduce Tax liability by illegal method. Let's take a look on difference between Tax Avoidance and Tax Evasion.

Basis for Comparison	Tax Avoidance	Tax Evasion
Meaning	Reducing tax liability, by taking such means which do not violate the tax rules, is Tax Avoidance.	Reducing tax liability by using illegal ways is known as Tax Evasion.
Attributes	Immoral in nature, which involves bending the law without breaking it.	Illegal and objectionable, both in script and moral.
Concept	Taking unfair advantage of the shortcomings in the tax laws.	Deliberate manipulations in accounts resulting in fraud.
Happened when	Before the occurrence of tax liability	After tax liability arises.
Type of act	Legal	Illegal
Consequences	Deferment of tax liability	Penalty or imprisonment
Objective	To reduce tax liability by applying law.	To reduce tax liability by exercising unfair means

INCOME TAX (Income Tax Act, 1961)

The major tax enactment in India is the Income Tax Act, 1961 passed by the Parliament, which imposes a tax on the income of persons. This Act imposes a tax on income under the following five heads:

1. Income from house property
2. Income from business and profession
3. Income from salaries
4. Income in the form of capital gains
5. Income from other sources

DEFINATIONS :

Person [sec 2(31)]:In terms of the Income Tax Act, 1961, a person includes

1. Individual
2. Hindu Undivided Family (HUF)
3. Association of Persons (AOP)
4. Body of Individuals (BOI)
5. Company
6. Firm
7. Local authority
8. Artificial Judicial person not falling in any of the preceding categories

The tax rate is prescribed every year by Parliament in the Finance Act, popularly called the Budget.

Assessee [sec 2(7) ] :The assesse is a person by whom any tax or any other some of money (such as interest and penalty) is payable under the Income Tax Act or in respect of whom any proceeding under the act has been taken for the assessment of his income or loss or of the income or loss of any other person in respect of which he is assessable or of the amount of refund due to him or to such other person. It also includes every person deemed to be an assesse under chapter XV of the income tax act,1961.

Assessment Year [sec 2(9)]: In the Income Tax Act, the Income tax year is described as assessment year, that is the year in which the income of the previous year which ended before the commencement of assessment year, is to be assessed. The Assessment year comprises of a period of twelve months corresponding to a financial year.

Residential Status and Tax Incident

Residential Status of an assesse  [sec 6] : The income liable to tax in the hands of the assesse is determined on the basis of residential status. For this purpose, the assesses are divided into the following two categories:

1.         Resident in India and
2.         Non resident in India

Individuals and Hindu undivided families who are resident in India are again classified as-

•     Ordinarily resident, and
•     Not ordinarily resident.

Sec 6 :For the purposes of this Act,—

(1) An individual is said to be resident in India in any previous year, if he—

     (a) is in India in that year for a period or periods amounting in all to one hundred and eighty-two days or more ; or

     (b) [* * *]

     (c) having within the four years preceding that year been in India for a period or periods amounting in all to three hundred and sixtyfive days or more, is in India for a period or periods amounting in all to sixty days or more in that year.

 [Explanation.—In the case of an individual,—

    (a) being a citizen of India, who leaves India in any previous year as a member of the crew of an 46Indian ship as defined in clause (18) of section 3 of the Merchant Shipping Act, 1958 (44 of 1958), or] for the purposes of employment outside India, the provisions of sub-clause (c) shall apply in relation to that year as if for the words “sixty days”, occurring therein, the words “one hundred and eighty-two days” had been substituted ;

  (b) being a citizen of India, or a person of Indian origin within the meaning of Explanation to clause (e) of section 115C, who, being outside India, comes on a visit to India in any previous year, the provisions of sub-clause (c) shall apply in relation to that year as if for the words “sixty days”, occurring therein, the words “one hundred and 47[eighty-two] days” had been substituted.] 

(2) A Hindu undivided family, firm or other association of persons is said to be resident in India in any previous year in every case except where during that year the control and management48 of its affairs48 is

situated wholly48 outside India.

(3) A company is said to be resident in India in any previous year, if—

(i) it is an Indian company ; or

(ii) during that year, the control and management48 of its affairs is situated wholly48 in India.

(4) Every other person is said to be resident in India in any previous year in every case, except where during that year the control and management of his affairs is situated wholly outside India.

(5) If a person is resident in India in a previous year relevant to an assessment year in respect of any source of income, he shall be deemed to be resident in India in the previous year relevant to the assessment year in respect of each of his other sources of income.

 [(6) A person is said to be “not ordinarily resident” in India in any previous

year if such person is—

(a) an individual who has been a non-resident in India in nine out of the ten previous years preceding that year, or has during the seven previous years preceding that year been in India for a period of, or periods amounting in all to, seven hundred and twenty-nine days or less; or

(b) a Hindu undivided family whose manager has been a nonresident in India in nine out of the ten previous years preceding that year, or has during the seven previous years preceding that year been in India for a period of, or periods amounting in all to, seven hundred and twenty-nine days or less.]

Income Exempt from Tax (Sec. 10 of Income Tax Act, 1961)

Deductions from Gross Total Income:

Click here to read a detailed note on Income Tax deductions

RETURN OF INCOME

Filling of Return or voluntary return [u/s 139(1)] : 

last date 30^th September (tax audit)

              31^st July (others)

Loss return [u/s 139(3)]

Belated return [ u/s 139(4)]

Revised return [ u/s 139(5)]

Defective return [ u/s 139(9)]

ASSESSMENTS :

Self Assessment[ u/s 140A]

Regular assessment (acceptance of return without calling Assessee) [ u/s 143(1)]

CAPITAL GAINS :

Capital gains means any profits or gains arising from the transfer of a capital asset effected in the previous year.

Capital asset [sec 2(14)]:The term ‘capital asset’ means (a) property of any kind by an assesse, whether or not connected with his business or profession; and (b) from a.y. 2015-16 and onwards, any securities held by a foreign institutional investor which has invested in such Securities and Exchange Board of India Act, 1992.but doesnot include—

(i) any stock-in-trade, consumable stores or raw materials held forthe purposes of his business or profession ;

(ii) personal effects that is to say, movable property (includingwearing apparel and furniture) held for personal use 43 by theassessee or any member of his family dependent on him, butexcludes—

(a) jewellery;

(b) archaeological collections;

(c) drawings;

(d) paintings;

(e) sculptures; or

(f) any work of art.

Explanation.—For the purposes of this sub-clause, “jewellery” includes—

(a) ornaments made of gold, silver, platinum or any other precious metal or any alloy containing one or more of such

precious metals, whether or not containing any precious or semi-precious stone, and whether or not worked or sewn into

any wearing apparel; (b) precious or semi-precious stones, whether or not set in any furniture, utensil or other article or worked or sewn into any wearing apparel ;

(iii) agricultural landin India, not being land situate—

(a) in any area which is comprised within the jurisdiction of a municipality45 (whether known as a municipality, municipal

corporation, notified area committee, town area committee, town committee, or by any other name) or a cantonment

board and which has a population45 of not less than ten thousand according to the last preceding census of which the

relevant figures have been published before the first day of the previous year ; or

(b) in any area within such distance, not being more than eight kilometres, from the local limits of any municipality or

cantonment board referred to in item (a), as the Central Government may, having regard to the extent of, and scope

for, urbanisation of that area and other relevant considerations, specify in this behalf by notification in the Official

Gazette;]

(iv) 6½ per cent Gold Bonds, 1977,[or 7 per cent Gold Bonds, 1980,] [or National Defence Gold Bonds, 1980,] issued by the Central Government ;]

(v) Special Bearer Bonds, 1991, issued by the Central Government ;]

(vi) Gold Deposit Bonds issued under the Gold Deposit Scheme, 1999 notified 

PAN (Permanent Account Number):

Click here to read a detailed note on PAN 

TAN (Tax Deduction and Collection Account Number) :

In India, a Tax Deduction and Collection Account Number (TAN) is a 10 digit alphanumeric number issued to persons who are required to deduct or collect tax on payments made by them under the Indian Income Tax Act, 1961.

Significance  

The Tax Deducted at Source on payments made by assessees is deposited under the TAN to enable the assessees who have received the payments to claim the tax deducted in their income tax return.

Application

TAN is applied through "Form No. 49B" (prescribed under Indian Income Tax Law). A completed form can be submitted online at the NSDL website or at the "Tax Information Network Facilitation Center" (TIN-FC). These centers are established by NSDL, an appointed intermediary by the Central Government, across India.
TAN is required to be quoted in all TDS/TCS returns, all TDS/TCS payment challans and all TDS/TCS certificates to be issued. TDS/TCS returns will not be accepted if TAN is not quoted and challans for TDS/TCS payments will not be accepted by banks. Failure to apply for TAN or not quoting the same in the specified documents attracts a penalty of Rs. 10,000.
No documents are required to be filed with the application for allotment of TAN. However, where the application is made online, the acknowledgment (a PDF file) which is generated after filling up the form must be forwarded to NSDL. Detailed guidelines for the procedure are available at NSDL website.
A TAN application should accompany a 'proof of identity' and a 'proof of address' (photocopies) of the deductor. In the case of online applications, these documents need to be sent over mail (post/courier) to NSDL - TAN Application division.
When NSDL receives the TAN application along with said documents (either through TIN FC / Online), the details are verified and then sent to the Income Tax Department. Once approved, the Department allocates a unique number, and notifies the applicant through NSDL.

Structure and Validation

• TAN structure is as follows: ANBA99999B: First four characters are letters, next five are numerals, last character is a letter.
• Each tax deductor is uniquely identified by a TAN.
• The first three characters represent the city or state where the TAN was issued.
• And the next 5 characters are numerics

TDS (Tax Deducted at Source)

Tax Deducted at Source (TDS) is a means of collecting income tax in India, under the Indian Income Tax Act of 1961. Any payment covered under these provisions shall be paid after deducting prescribed percentage. It is managed by the Central Board for Direct Taxes (CBDT) and is part of the Department of Revenue managed by Indian Revenue Service (IRS). It has a great importance while conducting tax audits. Assessee is also required to file quarterly return to CBDT. Returns states the TDS deducted & paid to government during the Quarter to which it relates.

TDS on Dividends

Section 194 of Income Tax Act, 1961

• TDS provisions under this section are attracted only in respect of deemed dividend u/s 2(22)(e), If such dividend exceeds 2500 in year.
• Rate of deduction of tax in respect of such dividend is 10%.
• Provisions will not apply to dividend receivable by SADHA, GIC(General Insurance Corporation), its subsidiaries or any other insurer provided shares are owned by it or in which it has full beneficial interest :] [Provided also that no such deduction shall be made in respect of any dividends referred to in section 115-O.]

TDS on immovable property

Section 194I of Income Tax Act by Freakans.

• This provision is applicable in respect of transactions effected on or afterJune 1, 2014
• It seeks deduction of tax at source on transfer of certain immovable property other than agricultural land
• Any person being a transferee who is liable to Pay to a resident by way of consideration for transfer of any immovable property exceeding 50 Lakhs shall at the time of credit of such sum to the account of the transferor or at the time of payment in whatever manner, has to deduct tax at source at 1% only

This TDS on property is required to be deposited in 30 days from the end of the month in which deduction is made for all payments to be made on or after 01st June 2016. Before 01.06.2016 time limit to depoist TDS on property is 7 days from the end of the month in which deduction is made

Section 194C of Income Tax Act
Section 194C of Income Tax Act - Tax need to be deducted 1% (for individual, HUF)/ 2% (for others) of payment where payment is made for carrying out any work (including supply of labour for carrying out any work and advertisements) by a contractor/sub-contractor. Such work must be in pursuance of a contract (including sub contract) between the contractor and payer. TDS is to be made at the time of credit to the account of contractor or at the time of payment in cash or by cheque or draft or by any other mode whichever is earlier.

TDS Certificates

A deductor is required to issue a TDS certificate called form 16 for salaried employees and form 16A for non salaried employees within a specified time.^[6]
He has to issue TDS Certificates within one month of the next financial year

Impact of non-compliance to TDS

Income Tax Act, 1962

• Disallowance u/s. 40(a) (ia) of Income Tax Act, 1962 (Act)
• Raising of demand u/s. 201(1) of the Act
• Charging of Interest u/s (1A) of the Act
• Levying penalty u/s. 271C of the Act

HIERARCHY OF APPEALS IN INCOME TAX

Income tax liability is determined at the level of Assessing Officer first. A tax payer aggrieved by various actions of Assessing Officer can appeal before Commissioner of Income Tax (Appeals). ... On substantial question of law, further appeal can be filed before the High Court and even to the Supreme Court.

DEDUCTIONS ALLOWABLE UNDER SALARY INCOME

This maximum limit of Rs. 1,50,000 is the aggregate of the deduction that may be claimed under sections 80C, 80CCC and 80CCD. 2. The sums paid or deposited need not be out of income chargeable to tax of the previous year.

16(ii)	Entertainment allowance [actual or at the rate of 1/5th of salary, whichever is less] [limited to Rs. 5,000]	Government employees
16(iii)	Employment tax	Salaried assessees

You may also read:
Insurance Law in India - Notes

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