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Contents
Income Tax Structure 2013-14 Important Rules For Filing Of Tax Return How To Make Best Use Of Section 80c Income Tax Allowances Where Exemption Does Not Depend Upon Expenditure Income From Other Sources Capital Gains Capital Gain Not To Be Charged On Investment In Certain Bonds Exemption Of Capital Gain In Case Of Shifting Of Industrial Undertaking From Urban Area (Section 54G) Cost Inflation Index Chart Slump Sale What Is Securities Transaction Tax Profit And Gains Of Business Or Profession Deductions Expressly Admissible: Special Provision For Computing Profits And Gains Of Business On Presumptive Basis. 44 Ad Special Provision For Computing Profits And Gains Of Business Of Plying, Hiring Or Leasing Goods Carriages.44 AE Special Provisions For Computing Profits & Gains Of Retail Business. 44AF What Are Deemed Profits And How They Are Charged To Tax Assessment Of Companies Set-Off And Carry-Forward Of Losses Deductions To Be Made In Computing The Total Income Section 10A,10B And 10BA Fringe Benefits Tax (India) MAT Corporate Dividend Tax Central Sales Tax Act 1956 Basic Concepts Of Sales Tax Inter-State Sales Tax Intra-State Sales Tax Value Added Tax "Deemed Exports

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INCOME TAX STRUCTURE 2013-14

No revision in Income tax slabs Surcharge of 10% on income more than Rs. 1 crore Tax credit of Rs.2000 for annual income of Rs. 5 lakh Home Loan Income tax Exemption limit increased from Rs.1.5 lakhs to Rs.2.5 lakhs for loan up to Rs.25 lakhs Rajiv Gandhi Equity Savings Scheme extended to mutual funds Rajiv Gandhi Equity Savings Scheme to be liberlised. Rajiv Gandhi Equity Savings Scheme limit increased. As it is announced by FM that no revision in Income tax structure for the year 2013-14
Women (Below 60 years of General (nonIncome Range senior citizens) Category age) (This category is abolished from this year and is thus is same as that of General Category Upto Rs. 2,00,000 Rs. 2,00,001 to Rs. 2,50,000 Rs. 2,50,001 to Rs. 5,00,000 Rs. 5,00,001 to Rs. 10,00,000 Above Rs. 10,00,000 Senior Citizens (Men and Women above 60 years of age), but below 80 years Very Senior Citizens (Men and Women above 80 years of age)

Nil 10% 10% 20% 30%

Nil 10% 10% 20% 30%

Nil Nil 10% 20% 30%

Nil Nil Nil 20% 30%

Important Rules for filing of Tax Return 1. Filing of income tax is compulsory for all individuals whose gross annual income exceeds the maximum amount which is not charageble to income tax (e.g. Rs.2,50,000 for Senior citizens, Rs.200000/- for resident individuals

2. The last date for filing of income tax return is usually July 31 for individuals (sometimes the same is extended).
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3. The penalty for non filing of income tax return is Rs.5,000/-

(1) Deductions from Taxable Income (Section 80C) :Sec. under which Tax Benefit available Tax benefits for earnings (i.e. Lock in Period and other Return interest received / Remarks dividend received) 5 years (reduced wef Dec 8.50% for VIII 2011 from 6 years to 5 Series 5 Year years for new NSCs; investments). The yield on Taxable and 8.80% for these NSCs will now be 10 year NSCs revised every year and will for FY 2013-14 be 25 bps above the 5 year government bond yields Varies from year Dividend is tax to year (Market 3 years free linked) Varies from Varies from year Varies from scheme to scheme to to year scheme scheme Varies from Varies from year Varies from scheme to scheme to to year scheme (15 to 20 years) scheme Varies from issue to issue. These were around 8%+ in Dec 2011. These have lost their charm as Taxable 3 to 5 years Additional Tax rebate of Rs 20,000 is NOT given now from FY 2012-13 onwards. Interest earned Till retirement (loans are 8.50% is tax free permitted only after 5 years) Earnings are tax 6 to 7% only free in most of Locked till maturity the cases Earnngs are tax Market linked Partiail withdrawal allowed free 15 years and Decreased to Interest earned extendable. Withdrawals 8.70% for FY is tax free allowed after 7 years. Yield 2013--14 on PPF will vary and will be 3

Saving Scheme

National Saving Certificates - ( NSC scheme )

Section 80C

Equity Linked Savings Section 80C Schemes (ELSS) Life Insurance Policies Section 80C

Unit Linked Insurance Section 80C Plan (ULIP)

Infrastructure Bonds

Section 80C

Contribution to EPF / Section 80C GPF / Voluntary PF Insurance Policies ULIPS Section 80C Section 80C

Public Provident Fund Section 80C (PPF)

NPS

Section 80C Market Linked

fixed at 25 basis point above the 10 year government bonds. Interest earned Withdrawal not permitted is tax free before maturity

Tuition Fees including admission fees or college fees paid for full time Section 80C Not applicable Not applicable Not applicable education of any two children of the assessee. Repayment of Housing Section 80C Not applicable Not applicable Not applicable Loan (Principal) Varies from bank Bank Fixed Deposits - 5 Section 80C to bank (around Nil 5 Years Years 8.00% - 9.00%) As per the guidelines issued in December 2011, there Senior Citizens Savings 9.20% for FY will be spread of 100 basis Scheme 2004 (from Section 80C Taxable 2013-14 points above the 5 year financial year 2007-08) bonds yields for this scheme. Post Office Time Deposit Account (from financial Section 80C 2007-08)

In case of individual (other than II and III below) and HUF Income Level
i.

Income Tax Rate NIL 10% of amount by which the total income exceeds Rs. 2,00,000/-*** Rs. 30,000/- + 20% of the amount by which the total income exceeds Rs.5,00,000/-. Rs. 1,30,000/- + 30% of the amount by which the total income exceeds Rs.10,00,000/-.

Where the total income does not exceed Rs.2,00,000/-. Where the total income exceeds Rs.2,00,000/- but does not exceed Rs.5,00,000/-. Where the total income exceeds Rs.5,00,000/- but does not exceed Rs.10,00,000/-. Where the total income exceeds Rs.10,00,000/-.

ii.

iii.

iv.

*** Tax credit of Rs.2000 for annual income of Rs. 5 lakh

II. In case of individual being a woman resident in India and below the age of 60 years at any time during the previous year:Income Level Where the total income does not exceed Rs.2,00,000/-. Where total income exceeds Rs.2,00,000/but does not exceed Rs.5,00,000/-. Where the total income exceeds Rs.5,00,000/- but does not exceed Rs.10,00,000/-. Income Tax Rate

i.

NIL

ii.

10% of the amount by which the total income exceeds Rs.2,00,000/-.

iii.

Rs. 30,000- + 20% of the amount by which the total income exceeds Rs.5,00,000/-.***

iv.

Where the total income exceeds Rs.10,00,000/-

Rs.1,30,000/- + 30% of the amount by which the total income exceeds Rs.10,00,000/-.

***Tax credit of Rs.2000 for annual income of Rs. 5 lakh

III. In case of an individual resident who is of the age of 60 years or more at any time during the previous year:Income Level i. Where the total income does not exceed Rs.2,50,000/-. Where the total income exceeds Rs.2,50,000/- but does not exceed Rs.5,00,000/Where the total income exceeds Rs.5,00,000/- but does not exceed Rs.10,00,000/Income Tax Rate NIL 10% of the amount by which the total income exceeds Rs.2,50,000/-. Rs.25,000/- + 20% of the amount by which the total income exceeds Rs.5,00,000/-.***

ii.

iii.

Where the total income exceeds Rs.1,25,000/- + 30% of the amount by which Rs.10,00,000/the total income exceeds Rs.10,00,000/-. ***Tax credit of Rs.2000 for annual income of Rs. 5 lakh iv.

IV. In case of an individual resident who is of the age of 80 years or more at any time during the previous year:Income Level i. Where the total income does not exceed Rs.2,50,000/-. Where the total income exceeds Rs.2,50,000/- but does not exceed Rs.5,00,000/Where the total income exceeds Rs.5,00,000/- but does not exceed Rs.10,00,000/Where the total income exceeds Rs.10,00,000/Income Tax Rate NIL

ii.

Nil

iii.

20% of the amount by which the total income exceeds Rs.5,00,000/-.***

iv.

Rs.1,00,000/- + 30% of the amount by which the total income exceeds Rs.10,00,000/-.

***Tax credit of Rs.2000 for annual income of Rs. 5 lakh

Education Cess: 3% of the Income-tax. New Rs 50,000 tax exemption for retail equity investments Sale of residential property exempt from Capital Gains tax if invested in equity or equipment of an SME.

Implementation of Direct Tax Code (DTC) deferred. GST to be operational by August 2012.

Surcharge of 10% on income more than Rs. 1 crore Tax credit of Rs.2000 for annual income of Rs. 5 lakh Home Loan Income tax Exemption limit increased from Rs.1.5 lakhs to Rs.2.5 lakhs for loan up to Rs.25 lakhs

Rajiv Gandhi Equity Savings Scheme extended to mutual fundsRajiv Gandhi Equity Savings Scheme to be liberlised.

Rajiv Gandhi Equity Savings Scheme limit increased.

HOW TO MAKE BEST USE OF SECTION 80C OR BACKGROUND AND KNOW ALL ABOUT SECTION 80C
1A) Section 80CCF : Infrastructure Bonds : (NOT PERMITTED FROM FY 2012-13) Section 80CCF allows you to invest an additional Rs. 20,000 in infrastructure bonds, and such an investment will be reduced from your taxable income in addition to the Rs.100,000 deduction you get from the other instruments listed above. You will get the tax benefit only in the year in which you have invested in these instruments. This means that if you buy bonds before 31st March, 2012, worth Rs. 20,000, an amount of Rs. 20,000 will be deducted from your taxable income while calculating tax this year (2) Deductions Under Section 80CCC(1) : Under this section, the contributions by individuals towards "Pension" schemes of LIC or any othr Insurance company, is allowed as deduction of Rs.10,000/-. However, as provided under section 80CCE, the aggregate deduction u/s 80C, and u/s 80CCC and 80CCD can not exceed Rs.1,00,000/-. Thus effectively, now these are covered under the maximum limit of

Rs.1,00,000/- under section 80C. (3) Deductions Under Section 80 D : Basic Deduction under Section 80D, Mediclaim premium paid for Self, Spouse or dependant

children is allowed upto Rs 15,000. In case any of the persons specified above is a senior citizen (i.e. 65 years or more as of end of the year) and Mediclaim insurance premium is also paid for such senior citizen, deduction amount is enhanced to Rs. 20,000. Additional deduction: Mediclaim premium paid for parents. Maximum deduction Rs 15,000. In case any of the parents covered by the Mediclaim policy is a senior citizen, deduction amount is enhanced to Rs. 20,000.

Thus, in a net shell we can say that health insurance premium that you pay for yourself, your dependents (spouse and children) and your parents, are all considered for tax benefit under Section 80D of the Income Tax Act 1961. Therefore, you can claim a deduction up to Rs.30000 on your taxable income, and if your parents are senior citizens, the deductible amount goes up to Rs.35000. However, there are a few conditions: You can not claim tax benefit on health insurance premium paid for your in-laws; Proof of payment of premium has to be furnished, in order to avail the tax benefit The health insurance premium must be paid from taxable income of that year only if you want to claim a deduction. Thus, if one has paid the premium from ones savings or from gifts of money received, then one is not eligible for tax benefits under this section. However, you have to remember that the premium paid by any mode of other than cash is eligible. Note prior to 1st April 2009, premium payment was required to be paid only by cheque. However, now even the payments through Credit card or other on line mechanism are allowed. Thus, now all payment modes except cash payment are accepted (3A) Deductions Under Section 80 E : Under this section, deduction is available for payment of interest on a loan taken for higher education from any financial institution or an approved charitable institution. The loan should be taken for either pursuing a full-time graduate or post-graduate course in engineering, medicine or management, or a post-graduate course in applied science or pure science. The deduction is available for the first year when the interest is paid and for the subsequent seven years. Up to March 2005, deduction was available for the repayment of principal and interest aggregating to Rs 40,000 a year. (4) Deductions Under Section 24(b) :

Under this section, interest on borrowed capital for the purpose of house purchase or construction is deductible from taxable income upto Rs.1,50,000/- is deductible from income. (certain conditions are to be fulfilled) TAX FREE INCOMES : Some of the incomes are completely exempted from income tax and that too without any upper limit. The following incomes which are tax free :(a) Interest on EPF / GPF / PPF (b) Interest on GOI Tax Free Bonds / Tax Free Bonds issued with specific stipulation to this effect (c) Dividends on Shares and Mutual Funds. Dividend income from companies / Equity Oriented Mutual funds is completely exempt in the hands of investors. Dividend is also tax free in the hands of investors in case of debt-oriented Mutual Fund schemes. (However, the Asset

Management Company is liable to deduct 22.44% distribution tax in case of non individuals / non HUF investors and 14.025% in case of individuals or HUF investors.) (d) Capital receipts from Life Insurance policies i.e. sums received either on death of the insured or on maturity of Life insurance plans. However, in case of life insurance policies issued after March 31, 2004, exemption on maturity payment u/s 10(10D) is available only if premium paid in any year does not exceed 20% of the sum asssured; (e) Interest on Saving Bank account with Post Office (upto Rs3,500 for single account holders and Rs7000 for joint accoun tholders) (f) Long term capial gains on sale of shares and equity mutual funds after 01/10/2004, if security transaction is paid / imposed on such transactions.

INCOME TAX ALLOWANCES

1. 2. City Compensatory Allowance It is always taxable House Rent Allowance Sec 10(13A) and Rule 2A Exemption in respect of HRA is

regulated by Rule 2A. It is based upon the following: a. An amount equal to 50 per cent of Salary, where residential house is situated at Mumbai, Kolkatta, Delhi or Chennai and an amount equal to 40 per cent of Salary where residential house is situated at any other place. b. House Rent Allowance received by the employee in respect of the period during which rental accommodation is occupied by employee during previous year c. Excess of rent paid over 10 per cent of Salary.

Amount exempt from tax The least of the above three is exempt from tax. Note: 1. Salary for this purpose means Basic Salary and Dearness Allowance, if terms of

employment so provide. It also includes Commission based on fixed percentage of turnover achieved by an employee as per terms of contract of employment. 2. Salary shall be determined on due basis Basic Salary, Dearness Allowance and Commission are determined on due basis in respect of the period during which rental accommodation is occupied by employee in the previous year. 3. Exemption is denied where an employee lives in his own house or in a house for which he does not pay rent or pays rent, which does not exceed 10 per cent of Salary. 3. Entertainment Allowance Sec 16(ii) Entertainment allowance is first included in salary income under the head Salaries and thereafter a deduction is given on the basis of: - In case of Government Employees a. b. c. Note: 1. Salary for this purpose excludes any allowance, benefit or other perquisite
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Rs 5,000 or 20 per cent of Basic Salary or Amount of Entertainment allowance granted during the previous year

2. Amount actually expended towards entertainment is not taken into consideration - In case of Non-Government Employees, Entertainment Allowance is not deductible. SPECIAL ALLOWANCES PRESCRIBED AS EXEMPT UNDER SECTION 10(14) When exemption depends upon actual expenditure by the employee In the following cases, the amount of exemption depends upon the 1. 2. Amount of Allowance or Amount utilized for the specific purpose for which allowance is given,

which ever is lower. Name of Allowance 1. Travelling/Transfer allowance Nature of allowance Any allowance granted to meet cost of travel on tour or on Transfer 2. Conveyance allowance Conveyance includes expenditure on conveyance in Performance of duties of office 3. Daily allowance Allowance granted to meet ordinarily daily charges Incurred by employee on a/c of absence from his Normal place of duty 4. Helper allowance 5. Research allowance Allowance to meet the expenditure of helper Allowance granted for encouraging academic Research 6. Uniform allowance Allowance to meet the expenditure of

purchase/maintenance of uniform for wear during performance of duties of office

OTHERS: 1. Allowance to Government employees outside India Sec 10(7) Any allowance allowed

or paid outside India by the Government to an Indian citizen for rendering service outside India is wholly exempt from tax
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2. 3. 4. 5.

Tiffin allowance It is taxable Fixed Medical allowance It is taxable Servant allowance It is taxable Allowance to High court and Supreme court judges Following allowances are not

chargeable to tax: Any allowance paid to High court judges under Sec 22A(2) of High Court Judges

(Conditions of Service) Act 1954, is not chargeable to tax Sumptuary allowance given to High court judges under Sec 22C of High Court Judges

(Condition of Service) Act 1954 and to Supreme Court Judges under Sec 23B of Supreme Court Judges (Conditions of Service) Act 1958, is not chargeable to tax 6. Allowance received from a United Nations Organisation Allowance paid by

UNO to its employees is not taxable.

WHERE EXEMPTION DOES NOT DEPEND UPON EXPENDITURE In the following cases the amount of exemption does not depend upon expenditure, but, exemption limit specified in Rule 2BB. Hence, the amount of exemption is lower of amount of allowance or exemption limit specified. 1. 2. 3. 4. Special Compensatory (Hill Area) Allowance The amount of exemption is lower of amount of allowance or amount exempt from tax varies from Rs 300 per month to Rs 7000 per month Border Area Allowance - The amount of exemption is lower of amount of allowance or amount exempt from tax varies from Rs 200 per month to Rs 1300 per month Tribal Area/Scheduled Area Allowance - The amount of exemption is lower of amount of allowance or Rs 200 per month Allowance for transport employees - The amount of exemption is lower of 70 per cent of amount of allowance or Rs 6000 per month 5. Children Education allowance The amount of exemption is limited to Rs 100

per month per child upto a maximum of two children

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6.

Hostel Expenditure allowance - The amount of exemption is limited to Rs 300 per month Compensatory field area allowance Exemption is limited to Rs 2600 per month in some Compensatory modified area allowance Exemption is limited Rs 1000 per month in Counter Insurgency allowance Exemption is limited to Rs 3900 per month in some Transport allowance It is exempt upto Rs 800 per month (Rs 1600 per month in case of Underground allowance Exemption is limited to Rs 800 per month High altitude allowance Exempt upto Rs 1060 per month (for altitude of 9000 to 15000 Highly active field area allowance It is exempt fro tax upto Rs 4200 per month Island duty allowance It is exempt upto Rs 3250 per month

per child upto a maximum of two children 7. cases 8.

some cases 9. cases 10.

an employee who is blind or orthopaedically handicapped. 11. 12.

feet) or Rs 1600 per month (for altitude above 15000 feet) 13. 14.

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INCOME FROM OTHER SOURCES

This is the last and residuary head of income. Any income which is taxable under the Act but does not find place under any of the remaining four heads of income (i.e., Salaries, House Property, Business and Capital Gains) will be assessable under this residuary head Income from Other Sources. Income chargeable under this head of Income [Sec. 56(2)] The following shall be chargeable to tax under the head Income from Other Sources: 1. 2. Dividends. Income from winning of lotteries, crossword puzzles, races including horse races, card

games and other games. 3. 4. Any fees or commission received by an employee from a person other than his employer. Any Annuity received under a Will. It does not include an Annuity received by an

employee from his employer. 5. All interest other than interest on securities, e.g., interest on bank deposits, interest on

loan, etc. 6. 7. 8. 9. 10. 11. 12. 13. 14. 15. (i) (ii) (iii) (iv) Income of a tenant from sub-letting the whole or a part of the house property. Remuneration received by a teacher or a lawyer for doing examination work. Income from Royalty. Directors fees. Rent of land not appurtenant to any building. Agricultural Income from land situated outside India. Income from markets, ferries and fisheries, etc. Income from leasehold property. Remuneration received for writing a Journal. Income from disclosed Sources: Cash Credits which are unexplained. Unexplained Investments. Unexplained Money. Amount borrowed or repaid on Hundi otherwise than through an account payee cheque

drawn on a bank. 16. Interest received by an employee on his own contribution to URPF.
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17. 18. 19. 20.

Casual Income. Salary for Member of Parliament, Member of Legislative Assembly or Council. Interest received on securities of a co-operative society. Family Pension received by the widow and heirs of deceased employees, a standard

deduction @ 33.33% or Rs. 15,000 WEL is allowed. 21. Amount withdrawn from deposit in NSS, 1987 on which deduction u/s 80CCA has been

allowed including interest there. 22. Insurance Commission

Interest on Securities The income form interest on securities shall be taxable under the head Income from Other Sources, if it is not taxable under the head Profits & Gains of Business or Profession. This interest is taxable under the head Other Sources if securities are held as investments an d it is taxable under the head Business or Profession if securities are held as stock-in-trade. The following amounts due to an assessee in the previous year shall be chargeable to income tax as interest on securities: (i) (ii) (iii) (iv) Interest on any securities of the Central or State Government. Interest on Debenture or Other Securities issued by a local authority. Interest on Debentures issued by a Company (whether Indian or foreign); and Interest on Debenture or Other Securities issued by a Statutory Corporation.

Meaning of Security The term Security means a document acknowledging the debt taken by the government or some authority from the general public. It is held by an investor or creditor as guarantee of his right to receive payment. Kinds of Securities 1. Tax-Free Government Securities: These Securities are those, the interest on which is fully exempt from tax under Section 10(15). Interest on such securities is neither included in total income nor it is taxed. 2. Less-Tax Government Securities:
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Such Securities are issued either by the Central Government or a State Government. These are taxable securities, but no tax is deducted at source on such securities. Hence, the interest on such securities will not be grossed up. The amount received or due, as the case may be, shall be included in the total income. 3. Tax-Free Commercial Securities: These are issued by a local authority or statutory corporation or a company, in the form of Debentures or Bonds. Really speaking their interest is not tax-free, because tax due on this interest is payable by the company, or local authority or corporation concerned. These are called tax-free securities because the assessee need not pay tax on it from his own pocket. The tax paid by the company is deemed to be paid on behalf of the assessee, hence the amount of tax paid on any interest due to assessee is added up in his interest income. The amount of tax paid by the company on this interest is deducted from the total tax payable by the assessee. 4. Less-Tax Securities: These are called as Taxable Securities. In the case of these securities, income tax is deducted at sources on the amount of interest calculated at the percentage stated on the securities and balance of the amount of interest left after deduction of the aforesaid income tax is paid to the securityholder. Bond Washing Transactions: It is a device to avoid tax. When on the eve of due date securities are sold to a friend or relative having taxable income below the minimum limit of taxation and bought back immediately after the due date, so that he does not remain the owner of the securities on the due date and is saved form paying tax on their interest, it is called Bond-Washing Transaction. The Assessing Officer in this case taxes the real owner who has so transferred the security on the eve of the due date. Cum-interest or Ex-interest Transaction: When securities are bought or sold between interest dates, the transaction is either cuminterest or ex-interest. Whatever be the nature of the transaction, the rule is that interest on
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securities is regarded as wholly the income of the person who happens to be the owner at the time when the interest becomes due, irrespective whatever he was the owner throughout the period of which the interest is paid or not, and also whether the transaction has been cum-interest or ex-interest. Rate of TDS: 1. (a) (b) 2. 3. 4. In case of Less-Tax Securities. Listed 10% ( Net 90%) Unlisted 20% (Net 80%) In case of interest on Bank Deposit 10% (Net 90%) In case of Insurance Commission 10% (Net 90%) In case of casual Income 30% (Net 70%)

Note: No Tax should be deducted at source in respect of interest on Bank Deposits provided the gross amount of interest does not exceed more than Rs. 5,000 and in the case of Less Tax Securities not more than Rs. 2,500.

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CAPITAL GAINS
Any profit or gain arising from the sale or transfer of a capital asset is known as capital gain, which is chargeable to tax in the year in which a capital asset is sold or transferred. Meaning of Capital Asset. [Sec 2(14)] Capital assets include all type assets whether movable or immovable, tangible or intangible, fixed or circulating, used for personal or business use. However the following assets are excluded from the definition of capital asset for Capital Gain purpose. 1. Any stock in trade or raw material held for business purposes. 2. Any movable asset held for personal use other than jewellery. 3. Agricultural land provided it is not situated with in the jurisdictions of the local authority or Cantonment Board having a population of not less than 10000. 4. Special bearer bonds. 5. 6.5% & 7% gold bonds. 6. Gold Deposit Bonds issued under the Gold Deposit Scheme, 2000 notified by the Central Government.

Types of capital assets. Capital Assets are divided into Specified Assets & Non Specified Assets. Specified Assets includes the following. 1. Shares of a co. (equity & Prf. Shares) whether quoted or not. 2. Listed Securities (Debentures & Government Loans). 3. Specified Units of UTI. Non Specified Assets includes all the assets other then Specified Assets. Where specified assets are held by the assesse at least for a period of 12 months (from the date of its acquisition to the date of sale) are treated as long term capital asset. If the period of holding is less then 12 months, specified assets are treated as Short Term Capital Assets. Non specified assets are to be treated as
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long term assets provided such assets are held by as assessee at least for a period of 36 months (from the date of its acquisition to the date of sale), If the period of holding is less then 36 months non specified assets are treated as Short Term Assets. Self Generated Assets Self created or invented assets are known as Self-Generated Assets. Self-created assets are being in the nature of intangible assets (having no physical existence) it includes Goodwill, Patent Rights, Tenancy Rights, technical Know how, Route permit etc. Cost of acquisition of selfgenerated assets should be taken as RS 0 provided such assets have duly been self invented or created by the assessee otherwise actual price paid for acquisition of self-generated assets should be taken as its cost of acquisition. Profit on sale of self-generated assets are chargeable to capital gain tax except Technical Know How Invented by the assessee for the purpose of growing seedless oranges. In the case of depreciable assets. Cost of acquisition of a depreciable assets should be computed on the basis of Block Of Assets method. All depreciable assets should be taken as Short Term Capital Assets irrespective of Period of holdings. Meaning of Transfer Transfer in relation to capital asset includes sale, conversion, relinquishment of an asset or extinquishment of rights there in are compulsory acquisition of an asset under the provisions of an act. Transfer of capital asset in not regarded as transfer. In the following cases transfer of capital asset cannot be regarded as transfer for capital gain purpose. Conversion of debentures into Shares. Distribution of capital asset to the members of a company at the time of liquidation. Transfer of shares from holding company to the subsidiary company. Transfer of capital assets under gift or will or irrevocable trust.

Exception to this provision w.e.f AY 01-02, transfer of shares or debentures or warrants by a company to its employees by way of gift or irrevocable trust under Stock Option Scheme shall deemed to be treated as Transfer.
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1. Transfer of capital assets by the company to its members at the time of amalgamation. 2. Transfer of capital assets by the company to its members at the time of absorption. 3. Transfer of capital assets by the company to its members at the time of demurrage. Types of Capital Gains 1. Short term capital gain: Any profit or gain arising from the sale of any short term capital asset (specified or non-specified) is known as Short Term Capital Gain. 2. Long term capital gain: Any profit or gain arising from transfer or sale of any long-term capital asset is known as Long Term Capital Gain. Computation of Cost of Acquisition. In the case of Short Term Capital Assets. Actual cost incurred by an assessee towards acquisition of a short-term capital asset should be taken as its cost of acquisition for capital gain purpose. In the case Long Term Capital Assets. Cost of Acquisition of long term capital assets should be computed on the basis of Cost Inflation index method. Cost inflation index (CIF) or Indexed Cost of Acquisition is 75% of average consumer cost index of urban employees as may be notified by the central govt. in its official gazette or notification. In the case of Bonus Shares. Cost of acquisition of bonus shares should be taken as Rs. 0 provided bonus shares have been allotted on or after 1st April 1981. Where bonus shares have been allotted before 1st April 1981, fair market value of shares as on 1st April 1981 should be taken as cost of acquisition of bonus shares. Indexed Cost of Acquisition It means an amount which bears to the cost of acquisition the same proportion as Cost Inflation Index for the year in which the asset is transferred bears to the Cost Inflation Index for the first year in which the asset was held by the assessee or the year 1981-82, whichever is later.
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Indexed Cost of Improvement It means an amount which bears to the cost of improvement the same proportion as Cost Inflation Index for the year in which the asset is transferred bears to the Cost Inflation Index for the year in which the improvement to the asset took place. Capital Gain arising from the transfer of residential House Property. (Section 54). Capital Gain arising from the transfer of a house property is exempted from tax provided the following conditions are satisfied. 1. 2. Residential house property should be transferred by HUF or Individual. A new house should be purchased or constructed- The assessee has to purchase a

residential house within a period of one year before the transfer or with in two years after the date of transfer or has constructed a residential house within a period of three years after the date of transfer. 3. It should be a long term asset- The house property which may be self-occupied or let

out must be a long term capital asset, i.e., it must be held for a period of more than 36 months before sale or transfer. 4. Amount of Exemption- If the amount of capital gain is less then the cost of a new house

property entire amount of capital gain is exempt from tax. On the other hand if the amount of capital gain is greater than the cost of new house property. The difference between the amount of capital gain and the cost of new house is chargeable to tax as Capital Gain. 5. Consequences if the new house is transferred with in 3 years- If the new house property is

transferred with in a period of 3 years from the date of its purchase or date of completion of construction, the amount of capital gain arising there from together with amount of capital gain exempted earlier will be chargeable to tax in the year of sale of the new house property. (P.T.O) To attain this, it has been provided that if the new house is transferred within 3 years from the date of its acquisition or date of completion of construction, the amount of exemption u/s 54 shall be reduced from the cost of acquisition of the new house while calculating the Short Term Capital Gain on the transfer of new asset.
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6.

Scheme of Deposit in respect of exemption u/s 54- Where the amount of capital gain is

not appropriated or utilised by the assessee for the purchase or construction of the new residential house before the date for furnishing the return of income. It shall be deposited by him on or before the due date of furnishing the return of income in the deposit account in any branch (except rural branch) at a Public Sector Bank in accordance with Capital Gains Account Scheme of 1988. The amount should be utilised with in the stipulated period of 3 years for construction of the house, otherwise on the expiry of 3 years the assessee can withdraw the amount from the account, the amount so withdrawn is taxable as Long Term Capital Gain in the year in which the amount is withdrawn from the Deposit Account. Capital gain arising form the Transfer or Sale of Urban Agricultural Land (Section 54B). The exemption under this section is available to an individual assessee, if the following conditions are fulfilled: 1. 2. The agricultural land may be a Long term or Short term Capital asset. The agricultural land was used by the assessee or his parents for agricultural purposes for

a period of 2 years immediately preceding the date of transfer. 3. The assessee should purchase the agricultural land for agricultural purposes with in 2

years from the date of transfer. NOTE: If Capital Gain arises on account of compulsory acquisition of agricultural land by the Government the time limit of 2 years shall apply from the date of receipt of compensation. 4. 5. The new land purchased may be rural or urban. If the new agricultural land is transferred with in a period of 3 years from the date of its

purchase, the amount of capital gain arising there from together with amount of capital gain exempted earlier will be chargeable to tax in the year of sale of the new agricultural land. But, If the new agricultural land is purchased in rural area for claiming exemption u/s 54B and if such rural land is sold within 3 years, no Capital Gain is Taxable on sale of the such rural land.

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6.

Where the amount of capital gain is not appropriated or utilised by the assessee for the

purchase of the new agricultural land before the date for furnishing the return of income. It shall be deposited by him on or before the due date of furnishing the return of income in the deposit account in any branch (except rural branch) at a Public Sector Bank in accordance with Capital Gains Account Scheme of 1988. The amount should be utilised with in the stipulated period of 3 years for purchase of the land, otherwise on the expiry of 3 years the assessee can withdraw the amount from the account, the amount so withdrawn is taxable as Long Term Capital Gain in the year in which the amount is withdrawn from the Deposit Account. Amount of ExemptionIf the amount of capital gain is less then the cost of a new agricultural land entire amount of capital gain is exempt from tax. On the other hand if the amount of capital gain is greater than the cost of new land. The difference between the amount of capital gain and the cost of new land is chargeable to tax as Capital Gain. Capital Gain on transfer of a Long Term Capital Asset other than a House Property (Section 54F). The provisions of this section are as follows: 1. 2. The assessee is an individual or HUF. The asset transferred is any Long Term Capital Asset other than a residential house for

e.g. Plot of land, commercial building, gold, or any asset but not a residential house property. 3. The assessee has purchased within 1 year before the date of transfer or 2 years after the

date of transfer or constructed within 3 years after the date of transfer, a residential house (referred to as new house). In case of compulsory acquisition the time limit of 1year, 2 years or 3 years shall be determined from the date of receipt of compensation. (Whether initial or additional). 4. The assessee should not own on the date of transfer of original asset more than one

residential house (other than the new house). He should also not purchase within a period of 2

23

years after such date (or complete construction within a period of 3 years after such date) any residential house (other than the new house). Amount of exemption If the cost of the new house is not less than the net consideration in respect of the capital asset transferred, the entire capital gain arising from the transfer will be exempt form tax. If the cost of the new house is less than the net consideration in respect of the asset transferred the exemption from Long Term Capital Gain will be granted proportionately on the basis of investment of net consideration from Long Term Capital Gain either for purchase or construction of the residential house i.e. Cost of new house = ----------------------Net Consideration Net Consideration in respect of the transfer of the capital asset means the full value of the full value of the consideration received or accruing as a result of the transfer of the capital asset after deduction of any expenditure incurred wholly and exclusively in connection with the transfer. Scheme of Deposit When the amount of net consideration is not appropriated or utilised by the assessee for the purchase or construction of the new residential house before the date for furnishing the return of income. It shall be deposited by him on or before the due date of furnishing the return of income in the deposit account in any branch (except rural branch) at a Public Sector Bank in accordance with Capital Gains Account Scheme of 1988. The amount already utilised for purchase or construction of the new house together with the amount so deposited shall be deemed to be the amount utilised for purchase or construction of new house, if the amount so deposited is not utilised fully for purchase or construction within the stipulated period, then the proportionate amount is calculated as under shall be treated as Capital X Capital Gain

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Gain of the previous year in which the period of 3 years from the date of transfer of the original asset expires. The proportionate amount shall be determined as under Unutilized amount in the deposit in the Deposit a/c in respect of which exemption claimed u/s 54F but which is not utilised within the specified time limit of purchasing or constructing a new house ------------------------------------------------------------------------------------------Net Sale Consideration Circumstances when exemption granted u/s 54F may be withdrawn. DEFAULT CONSEQUENCES Capital Amount of original X Capital Gain

1. If the assessee transfers the new house within 3 years of its purchase or construction.

Gain that arises on the transfer of the new house will be taken as Short Term Capital Gain. Besides the Capital Gain which was exempt u/s 54F shall be treated as Long Term Capital Gain of the year in which the new house is transferred 2. If the assessee purchases within a period of 2 years of the transfer of original asset or constructs within a period of 3 years of the transfer of such asset, a residential house other than the new house. Capital Gain which was exempt u/s 54F shall be deemed to be income by

way of Long Term Capital Gain of the year in which another residential house is purchased or constructed.

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Similarities of Section 54 and 54F: 1. HUF. 2. 3. The Capital Asset should only be a Long Term Asset in both the Sections. The assessee should have purchased the new asset within the period of 1 year before the The exemption under these sections can be claimed if the assessee is an individual or a

transfer or within the 2 years after the date of transfer. 4. The asset, which the taxpayer should acquire to get the benefit of exemption under both

the Sections, is a Residential House Property. Exemption of Capital Gain on transfer of asset in case of shifting of industrial undertaking from urban area (Section 54G) Following are the conditions to be satisfied for availing the exemption under this section. 1. The assessee should transfer a long term or short term asset in nature of Plant &

Machinery, Land & Building. 2. Such assets should have been used for the purpose of industrial undertakings situated in

urban areas. 3. 4. The assets should have been shifted to a non-urban area. The amount should be utilised by the assessee within a period of one year before or three

years after the date of transfer for purchase of land and building or shifting or re-establishing the undertaking in such areas. 5. If the new land or machinery is transferred with in a period of 3 years from the date of its

purchase, the amount of capital gain arising there from together with amount of capital gain exempted earlier will be chargeable to tax in the year of sale of the new land or building, Plant or machinery. 6. Where the amount of capital gain is not appropriated or utilised by the assessee for the

purchase of the new land or building before the date for furnishing the return of income. It shall
26

be deposited by him on or before the due date of furnishing the return of income in the deposit account in any branch (except rural branch) at a Public Sector Bank in accordance with Capital Gains Account Scheme of 1988. The amount should be utilised with in the stipulated period of 3 years for purchase of the land or building, otherwise on the expiry of 3 years the assessee can withdraw the amount from the account, the amount so withdrawn is taxable as Long Term Capital Gain in the year in which the amount is withdrawn from the Deposit Account.

Amount of Exemption- If the amount of capital gain is less then the cost of a new land or building, entire amount of capital gain is exempt from tax. On the other hand if the amount of capital gain is greater than the cost of new land or building. The difference between the amount of capital gain and the cost of new land or building is chargeable to tax as Capital Gain. Capital Gain not to be charged on investment in certain Bonds (Section. 54EC) Section 54EC has been inserted from the assessment year 2001-2002. The features of this section are as follows: 1. A long term capital asset is transferred by an assessee during the previous year relevant

for the assessment year 2001-02 (or any subsequent year) 2. Within 6 months from the date of transfer of the asset the assessee should invest the

whole (or any part of) capital gain in long term specified asset. Long term specified assets means any bonds redeemable after 3 years issued: On or after April 1st 2000 by the NABARD (National Bank for Agriculture and Rural Development) or by the National Highway Authorities of India. On or after April 1st 2001 by the Rural Electrification Corporation Ltd. On or after April 1st 2002 by the National Housing Bank or by the Small Industries Development Bank of India.
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3.

The cost of specified assets, which is considered for the purpose of Section 54EC shall

not be eligible for tax rebate u/s 88. 4. If the cost of specified asset is not less than the capital gain, the whole of capital gains

shall be exempt form tax. If however the amount invested in the specified assets is less than the capital gains, then the amount of exemption is equal to the amount invested in specified assets in other words the amount of exemption is capital gain or amount invested in specified assets, whichever is less. 5. If the specified assets are transferred (or converted into money or any loan or advance

taken on the security of specified assets) within 3 years from the date of their acquisition, the amount of capital gain arising form the transfer of original asset which was not charged to tax will be deemed to by the income by way of Long term Capital Gain for the previous year in which the specified assets are transferred. Capital Gain arising from transfer of long term-listed securities or unit invested in Specified Equity Shares. (Section 54ED) The features of this section is given as follows: 1. 2. The exemption under this section is available to all kinds of Assessees. The long term capital asset which is transferred is A Security listed in any recognised Stock Exchange of India. A unit of UTI or a Mutual Fund. Within 6 months from date of transfer of the asset the assessee should invest the whole or any part of the capital gain in specified equity share. The securities for this section are Shares, Stocks, Scripts, Bonds, Debentures or other Securities of a Body Corporate or Company it also includes Government Securities. Specified Equity Shares are those which satisfy following conditions: a) The issue is made by a public company formed and registered in India.
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b) 3.

The shares forming part of the issue are offered for subscription to the to the public. The amount of exemption is amount invested in specified Equity Shares or Capital Gain

which ever is less. 4. The specified equity shares should not be sold within one year from the date of

acquisition, if sold amount of capital gain arising from the transfer of original asset which was not taxed earlier will be deemed to be taxable as Long Term Capital Gain of the previous year in which specified equity shares are transferred.

Cost Inflation Index Chart Sl. No. 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 CII= Cost Inflation Index 100 109 116 125 133 140 150 161 172 182 199 223 244 259 281 305 CII= Cost Inflation Index 331 351 389 406 426 447 463 480 497 519 551 582 632 711
785 852

Financial Year 1981-82 1982-83 1983-84 1984-85 1985-86 1986-87 1987-88 1988-89 1989-90 1990-91 1991-92 1992-93 1993-94 1994-95 1995-96 1996-97

Sl. No. 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31

Financial Year 1997-98 1998-99 1999-00 2000-01 2001-02 2002-03 2003-04 2004-05 2005-06 2006-07 2007-08 2008-09 2009-10 2010-11
2011-12 2012-13

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SLUMP SALE
In simple words, slump sale is nothing but transfer of a whole or part of business concern as a going concern; lock, stock and barrel. As per S. 2(42C), introduced by the Finance Act, 1999, slump sale means the transfer of one or more undertakings as a result of the sale for a lump sum consideration without values being assigned to the individual assets and liabilities in such sales. Slump sale means the transfer of one or more undertakings as a result of the sale for lump sum consideration without values being assigned to the individual assets and liabilities in such sale. If the value of an asset or liability is determined for the sole purpose of payment of stamp duty, registration fees or other similar taxes or fees, that should not be regarded as assignment of values to individual assets and liabilities. The chargeability of Income tax in respect of slump sale Any profits arising from slump sale in the previous year shall be chargeable to tax as capital gains and shall be deemed to be the income of the previous year in which the transfer took place. In relation to a capital assets being an undertaking or division transferred by way of such sale, the net worth of the undertaking or division shall be deemed to be the cost of acquisition and cost of improvement. The indexation benefit shall not be allowed. If an undertaking is owned and held by an assessee for less than 36months it shall be regarded as short term capital asset. Undertaking It includes any part of an undertaking or unit or division of an undertaking or a business activity as a whole, but does not include individual assets or liabilities or any combination thereof not constituting business activity. Net worth in the slump sale It is the aggregate of the value of the total assets of the undertaking or division as reduced by the liabilities of such undertaking or division. Change in the value of asset on account of revaluation shall be ignored. The value of depreciable assets shall be the written down value of the block of assets. The value of capital assets in respect of which the whole of the expenditure is allowed or is allowable as deduction under sec 35AD would be NIL. The value of all other assets shall be the book value.

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The auditor of the company is required to give a certificate in respect of computation of capital gains in case of slump sale. The certificate should be filed along with return of income duly accompanied by the copies of profit/ loss account and balance sheet. What is securities transaction tax Securities Transaction Tax (STT) is a tax in India payable on the value of taxable securities transaction made through a recognized national stock exchange. The tax is not applicable on offmarket transactions. The tax rate is set at 0.125% on a delivery-based buy and sell, 0.025% on non delivery-based transactions, and 0.017% on Futures and Options transactions. It was introduced in 2004. The government in 2013 budget has proposed to lower the tax rates. STT is levied on every purchase or sale of securities that are listed on the Indian stock exchanges. This would include shares, derivatives or equity-oriented mutual funds units.. The securities transaction tax (STT) was introduced in India a few years ago, to stop tax avoidance of capital gains tax. Earlier, many people usually didnt declare their profits on the sale of stocks and avoided paying capital gains tax. The government could tax only those profits, which have been declared by people. Transactions in stock, index options and futures would also be subject to transaction tax. This tax is payable whether you buy or sell a share and gets added to the price of the stock at the time the transaction is made. Since brokers have to automatically add this tax to the transaction price, there is no way to avoid it. The Finance Ministry has supported the introduction of the STT to simplify the tax regime on financial market transactions. According to the ministry, STT is a clean and efficient way of collecting taxes from financial markets. In the words, STT is a neat, efficient and easy-toadminister tax and it has the great advantage of virtually eliminating tax avoidance. STT is levied on every purchase or sale of securities that are listed on the Indian stock exchanges. This would include shares, derivatives or equity-oriented mutual funds units. The rate of tax that is deducted is determined by the central government, and it varies with different types of transactions and securities. STT is deducted at source by the broker or AMC, at the time of the transaction itself, the net result is that it pushes up the cost of the transaction done.
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Scope of STT According to the Securities Contracts (Regulation) Act, 1956, STT would be applicable on following securities. Shares, bonds, debentures, debenture stock or other marketable securities of a like nature in or of any incorporated company or other body corporate Derivatives Units or any other instrument issued by any collective investment scheme to the investors in such schemes Security receipt as defined in section 2(zg) of the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 Government securities of equity nature Rights or interest in securities Equity-oriented mutual funds STT is not applicable for any off-market transaction. STT rate Finance Minister P Chidambaram in the Union Budget 2013-14 has cut the STT (securities transaction tax) on equities and mutual fund units. STT reduction on ETF is expected to enhance returns with lower transaction costs. The STT charge on equity futures is cut from 0.17% to 0.1%. In the previous Budget, STT was slashed by 0.17% from 0.125% on cash delivery transactions. The STT charge on redemption of mutual funds or ETFs (exchange traded funds) at fund counters is reduced from 0.25% to 0.001%, while STT on sale of MFs or ETFs on stock exchanges is cut from 0.1% to 0.001% levied only on the seller.

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PROFIT AND GAINS OF BUSINESS OR PROFESSION Meaning of Business: (Sec. 2(13)) Business means the purchase and sale or manufacture of a commodity with a view to make profit. It includes any trade, commerce or manufacture or any adventure or concern in the nature of trade, commerce or manufacture. It is not necessary that there should be a series of transactions in a business and that it should be carried out permanently. Neither repetition nor continuity of similar transaction is necessary. Meaning of Profession: (Sec. 2(36)) Profession means the activities for earning livelihood which require intellectual skill or manual skill, e.g. the work of a lawyer, doctor, auditor, engineer and so on are in the nature of profession. Profession includes vocation. Vocation means activities which are performed in order to earn livelihood, e.g. brokerage, insurance agency, music, dancing, etc. As the rules for the assessment of Business, Profession, Vocation are the same, there is no importance of making any distinction between them for Income Tax purposes. Profit and Gains of the Business or Profession includes the following: 1. Revenue profits. 2. Amount due to or received as compensation for termination of management or agency or modification of its terms and conditions. 3. Income of an association from specific services performed for its members. 4. Profit on sale of Import Licence. 5. Cash assistance received from the Government for exports. 6. Income form speculative transactions. Important rules regarding assessment of profit and gains of business or profession. 1. The assessee should carry on business or Profession.
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2. Tax is chargeable on the aggregate income from all the businesses or professions carried on by an assessee. 3. Profits and losses of speculation business are kept separate i.e. losses of speculative business cannot be set-off against profits of other businesses. 4. The business or profession is carried on at any time during the relevant previous year. 5. Only legal ownership is necessary. 6. No tax is payable on the anticipatory profits. 7. Expenses of isolated transactions are allowable even if they are incurred in an earlier previous year. 8. Income of illegal or profession is also taxable. 9. Revenue expenses relating to the business or profession for the relevant previous year are allowable as deduction 10. Losses of illegal business cannot be set-off against the profits of legal business. 11. Business losses incidental to business and sustained in the relevant previous year are deductible. 12. Sums deducted in an earlier year as loss and recovered during the current previous year is taxable. 13.If benefit of expenditure extends beyond the relevant previous year, it will not be spread over several years but will be allowed in the same previous year. Computation of Profit The taxable profit is determined by deducting admissible expenses from the gross receipts or gross income of the business or profession. If certain expenses charged in the Profit or loss account are disallowed, they are added back in the net profit as per the profit and loss account.

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Deductions Expressly Admissible:

While computing profits of business or profession the following deductions are expressly allowed by sections 30 37.

1.
2. 3. 4. 5. or

Expenses in respect of business premises. Repairs and insurance of machinery, plant and furniture. Depreciation. Tea Development Account, Coffee Development Account and Rubber Development Account. Deduction will be allowed in respect of prospecting for, or extraction or production of petroleum natural gas or both in India.

6. 7. 8. 9. 10. 11. 12. 13. 14. 15.

Deduction regarding reserves created in the case of a government company or a public company engaged in shipping business. Expenditure on Scientific Research. Expenditure incurred on the acquisition of patent rights or copyrights. Capital Expenditure to obtain Licence to operate Telecommunication services. Admissibility of expenditure on eligible project or scheme. Payment to Rural Development Fund. Amortization of certain preliminary expenses. Expenditure for amalgamation or demerger of an undertaking. Expenditure on voluntary retirement. Expenditure on prospecting, etc for the development of certain minerals.

Other deduction. It includes the following: i)Insurance Premium, ii)Bonus, iii)Commission, iv)Interest on loan, v)Contribution to PF, vi)Loss regarding animals, vii)Bad Debts, viii)Provision for doubtful debts, ix)Contribution to Exchange Risk Administration Fund, x)Expenditure on Family Planning, xi)Special Reserves upto 40% of such profits in the case of financial corporations engaged in providing long term loan for industrial and agricultural development, xii)Revenue receipts based on general principles of commerce, etc.
35

Expenses expressly disallowed 1. Excessive payments:

Any payments of an expenditure to a relative or to an associate shall be disallowed if the Assessing Officer considers it to be excessive or unreasonable having regard to all the circumstances of the case. Only the excessive or unreasonable part is disallowed. 2.Payments in cash: Any expenditure in respect of which payment is made exceeding Rs. 20,000 otherwise than by a crossed cheque drawn on a bank or by a crossed bank draft will be disallowed to the extent of 20%. 3.Provision for gratuity: Mere provision made for the payment of gratuity to the employees will not be allowed as deduction in computing the taxable profits of the business or profession. However, Provisions made for gratuities due during the current previous year will not be disallowed. Provisions made for making contribution towards an approved gratuity fund will also allowed. 4. Contribution to Unapproved Provident Funds: No deduction will be allowed in respect of any sum paid by the assessee as an employer towards the setting up of, or as contribution to any unapproved fund. However sums paid for RPF, SPF, and other approved Superannuation fund or approved Gratuity Fund is allowed as deduction. 5.Other Expenses: In addition to the above, following the expenses, losses and allowances are also not allowed as deduction in computing the profits and gains of business of profession. 1. Drawings of proprietor or partners. 2. Personal expenses of the proprietor or partners. 3. Capital expenditure. 4. Any provision or transfer to reserve except transfer to reserve as provided by the Act. 5. Amounts paid as charity or presents.
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6. Past losses charged to profit & Loss Account. 7. Any expenditure not incurred wholly and exclusively for the purposes of the business or profession. 8. Income Tax, wealth tax and other taxes on income. 9. Expenditure incurred on buy off competition, e.g. a sum paid by a company to a retiring director or a managing agent in consideration of their agreement not to compete with the company. 10. Penalties paid by the owner for infringement of law. 11. Payments made by an assessee in nature of sharing the profits to the sole selling agents under an agreement are not deductible. 12. Litigation expenses for registration of shares. 13. Contribution to a political party where there is no direct relationship between the contribution and the business of the assessee. 14. Insurance premia paid by a firm on life insurance policies of its partners. 15. Expenditure on shifting of registered office. 16. Fees paid for increase of authorised capital. 17. Expenses incurred for issuing shares. 18. Payments made for acquisition of goodwill. 19. Sums paid as compensation to vendor against undertaking not to market milk in Chennai City. The expenditure is of capital nature as the right acquired is of enduring benefit. (Tamilnadu Dairy Development Corporation LTD vs. CIT). 20. Expenditure incurred on violation another statute. (CIT vs. India Cement LTD). 21. Gifts made on occasion of marriages in the families of friends and others with whom assessee has business dealing cannot qualify as business expenditure even on grounds of commercial expediency. (CIT vs. Jeevendas Laljiee & Sons) Deduction allowable on actual payments 1. Tax, cess, duty paid by the assessee. 2. Employers contribution to Employees Provident Fund. 3. Bonus or commission paid to employees. 4. Interest paid by the company for loans taken from financial institutions or Banks. 5. Encashment of earned leave.
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Profit chargeable to tax 1. Recovery of any loss or expenditure allowed as deduction in an earlier year. 2. Profit on sale of asset on which depreciation was allowed on Straight Line Method. 3. Sale Proceeds of assets used for scientific research. 4. Bad Debts recovered which were allowed as deduction in an earlier year. 5. Receipts after the closure of a business. 6. Transfer from Special Reserve u/s 36(1)(viii). Set-off losses against Deemed Profit Any business or profession losses of the year in which it ceased to exist and which could not be set-off against his any other income of that year, shall be set-off against the profits chargeable to tax. Sticky Advances Interest income of public financial institutions or banks on doubtful debts are called Sticky Advances. These shall be chargeable to tax only when either it is actually received or they become sure of realisation and credited to the P/L account. Maintenance of Accounts In case of person carrying on a specified profession, he has to maintain books of accounts in such a manner that the Assessing Officer is able to compute his taxable income correctly. In case of person carrying on non-specified profession or business, he is not required to maintain any books of accounts if during any of the preceding three years his income has exceeded Rs. 1,20,000 or his total sales or gross receipts have exceeded Rs.10,00,000, then he has to maintain such accounts and documents which will enable the assessing officer to compute his taxable income correctly. Valuation of Closing Stock It is done at cost or market price, whichever is lower or at cost only. Basis once adopted cannot be changed except with the prior approval of the Assessing Officer. Depreciation
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It means a decrease in the value of assets by wear & tear, caused by their use in the business over a period of time. Its cost is spread over its anticipated life by charging depreciation every year against the profits of the business. Assets eligible for depreciation a) b) Tangible Assets:i) Building, ii) Machinery or Plant and iii) Furniture. Intangible Assets:i) Know-how, ii) Patents, iii) Copyrights, iv)Trademarks, v)

Licences,vi) Franchises, vii) Any other business or commercial rights of similar nature. Conditions for allowance of Depreciation The two essential conditions to be fulfilled for claiming depreciation allowances are: The assessee should own assets wholly or partly. It should be used for the purpose of the assessees business or profession Methods of allowing Depreciation: Depreciation is allowed on assets used in the previous year in business or profession. For this purpose assets are classified into block of assets. A Block of assets consists of a class of assets in respect of which the same of depreciation is admissible and it can comprise of Tangible and Intangible Assets. Depreciation is calculated on the written down value of a block of assets at the prescribed rate of depreciation. However, in case of an industrial undertaking engaged in generation or generation and distribution of power may be allowed at the prescribed rates on the actual cost thereof (w.e.f. A.Y. 1998-99). Rates of Depreciation on Written-down Value Method
1. 2. 3. 4. 5. 6. Buildings 10% Furniture & Fittings 15% Motor Cars 20% Professional Books 100% Computers including computer software 60% All other assets including Intangible Assets 25%

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SPECIAL PROVISION FOR COMPUTING PROFITS AND GAINS OF BUSINESS ON PRESUMPTIVE BASIS.

44AD
44AD. (1) Notwithstanding anything to the contrary contained in sections 28 to 43C, in the case of an eligible assessee engaged in an eligible business, a sum equal to eight per cent of the total turnover or gross receipts of the assessee in the previous year on account of such business or, as the case may be, a sum higher than the aforesaid sum claimed to have been earned by the eligible assessee, shall be deemed to be the profits and gains of such business chargeable to tax under the head Profits and gains of business or profession. (2) Any deduction allowable under the provisions of sections 30 to 38 shall, for the purposes of sub-section (1), be deemed to have been already given full effect to and no further deduction under those sections shall be allowed : Provided that where the eligible assessee is a firm, the salary and interest paid to its partners shall be deducted from the income computed under sub-section (1) subject to the conditions and limits specified in clause (b) of section 40. (3) The written down value of any asset of an eligible business shall be deemed to have been calculated as if the eligible assessee had claimed and had been actually allowed the deduction in respect of the depreciation for each of the relevant assessment years. (4) The provisions of Chapter XVII-C shall not apply to an eligible assessee in so far as they relate to the eligible business. (5) Notwithstanding anything contained in the foregoing provisions of this section, an eligible assessee who claims that his profits and gains from the eligible business are lower than the profits and gains specified in sub-section (1) and whose total income exceeds the maximum amount which is not chargeable to income-tax, shall be required to keep and maintain such books of account and other documents as required under sub-section (2) of section 44AA and get them audited and furnish a report of such audit as required under section 44AB. Explanation.For the purposes of this section,
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(a) eligible assessee means, (i) an individual, Hindu undivided family or a partnership firm, who is a resident, but not a limited liability partnership firm as defined under clause (n) of sub-section (1) of section 2 of the Limited Liability Partnership Act, 2008 (6 of 2009) 27a ; and (ii) who has not claimed deduction under any of the sections 10A, 10AA, 10B, 10BA or deduction under any provisions of Chapter VIA under the heading C. - Deductions in respect of certain incomes in the relevant assessment year; (b) eligible business means, (i) any business except the business of plying, hiring or leasing goods carriages referred to in section 44AE; and (ii) whose total turnover or gross receipts in the previous year does not exceed an amount of 28 [sixty lakh rupees].] From Assessment year 2011-12, a new section 44Ad has been inserted inthe Income-tax Act to replaceexisting sec.44AD 744AF. The new Section will be aplicable to any business ( whether it is Retail trade,or Civil construction or any other business). The provisions of the new Section will be applicable if the following conditions are satisfied: 1.Assessee eligible for the purpose of this Section has to be an Individual/a HUF/a Partnership Firm( not being a LLP); 2.The assessee has not claimed any deduction u/s.10A,10AA,10B,10BA,80HHto 80RRB in the relevant Assessment Year; 3.The is not engaged in the business ofplying,hiring,or leasing goods carriages referred to u/s. 44AE; and 4. Total Turnover/ Gross Receipt of the Assessee in the previous year should not exceed Rs. 60.00 lakh
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44AE
[Special provision for computing profits and gains of business of plying, hiring or leasing goods carriages. 44AE. (1) Notwithstanding anything to the contrary contained in sections 28 to 43C, in the case of an assessee, who owns not more than ten goods carriages [at any time during the previous year] and who is engaged in the business of plying, hiring or leasing such goods carriages, the income of such business chargeable to tax under the head Profits and gains of business or profession shall be deemed to be the aggregate of the profits and gains, from all the goods carriages owned by him in the previous year, computed in accordance with the provisions of subsection (2). (2) For the purposes of sub-section (1), the profits and gains from each goods carriage, (i) being a heavy goods vehicle, shall be an amount equal to 99[three thousand five hundred] rupees for every month or part of a month during which the heavy goods vehicle is owned by the assessee in the previous year or, as the case may be, an amount higher than the aforesaid amount as declared by him in his return of income; (ii) other than a heavy goods vehicle, shall be an amount equal to 1[three thousand one hundred and fifty] rupees for every month or part of a month during which the goods carriage is owned by the assessee in the previous year or, as the case may be, an amount higher than the aforesaid amount as declared by him in his return of income. The following sub-section (2) shall be substituted for the existing sub-section (2) of section 44AE by the Finance (No. 2) Act, 2009, w.e.f. 1-4-2011 : (2) For the purposes of sub-section (1), the profits and gains from each goods carriage, (i) being a heavy goods vehicle, shall be an amount equal to five thousand rupees for every month or part of a month during which the heavy goods vehicle is owned by the assessee in the previous year or an amount claimed to have been actually earned from such vehicle, whichever is higher;

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(ii) other than a heavy goods vehicle, shall be an amount equal to four thousand five hundred rupees for every month or part of a month during which the goods carriage is owned by the assessee in the previous year or an amount claimed to have been actually earned from such vehicle, whichever is higher. (3) Any deduction allowable under the provisions of sections 30 to 38 shall, for the purposes of sub-section (1), be deemed to have been already given full effect to and no further deduction under those sections shall be allowed : 2[Provided that where the assessee is a firm, the salary and interest paid to its partners shall be deducted from the income computed under sub-section (1) subject to the conditions and limits specified in clause (b) of section 40.] (4) The written down value of any asset used for the purpose of the business referred to in subsection (1) shall be deemed to have been calculated as if the assessee had claimed and had been actually allowed the deduction in respect of the depreciation for each of the relevant assessment years. (5) The provisions of sections 44AA and 44AB shall not apply in so far as they relate to the business referred to in sub-section (1) and in computing the monetary limits under those sections, the gross receipts or, as the case may be, the income from the said business shall be excluded. 3[(6) Nothing contained in the foregoing provisions of this section shall apply, where the assessee claims and produces evidence to prove that the profits and gains from the aforesaid business during the previous year relevant to the assessment year commencing on the 1st day of April, 1997 or any earlier assessment year, are lower than the profits and gains specified in subsections (1) and (2), and thereupon the Assessing Officer shall proceed to make an assessment of the total income or loss of the assessee and determine the sum payable by the assessee on the basis of assessment made under sub-section (3) of section 143.]

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44AF Special provisions for computing profits and gains of retail business.
44AF. (1) Notwithstanding anything to the contrary contained in sections 28 to 43C, in the case of an assessee engaged in retail trade in any goods or merchandise, a sum equal to five per cent of the total turnover in the previous year on account of such business or, as the case may be, a sum higher than the aforesaid sum as declared by the assessee in his return of income shall be deemed to be the profits and gains of such business chargeable to tax under the head Profits and gains of business or profession : Provided that nothing contained in this sub-section shall apply in respect of an assessee whose total turnover exceeds an amount of forty lakh rupees in the previous year. (2) Any deduction allowable under the provisions of sections 30 to 38 shall, for the purposes of sub-section (1), be deemed to have been already given full effect to and no further deduction under those sections shall be allowed : Provided that where the assessee is a firm, the salary and interest paid to its partners shall be deducted from the income computed under sub-section (1) subject to the conditions and limits specified in clause (b) of section 40. (3) The written down value of any asset used for the purpose of the business referred to in subsection (1) shall be deemed to have been calculated as if the assessee had claimed and had been actually allowed the deduction in respect of the depreciation for each of the relevant assessment years. (4) The provisions of sections 44AA and 44AB shall not apply in so far as they relate to the business referred to in sub-section (1) and in computing the monetary limits under those sections, the total turnover or, as the case may be, the income from the said business shall be excluded.] (5) Notwithstanding anything contained in the foregoing provisions of this section, an assessee may claim lower profits and gains than the profits and gains specified in sub-section (1), if he keeps and maintains such books of account and other documents as required under sub-section (2) of section 44AA and gets his accounts audited and furnishes a report of such audit as required under section 44AB.]
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What are Deemed Profits and How they are charged to Tax The following receipts are chargeable to tax as business income : 1. Recovery against any deduction [ Sec. 41(1)] in respect of loss,

In any of the earlier years a deduction was allowed to the taxpayer year,

expenditure or trading liability incurred by the assessee and subsequently during any previous

(a) the Taxpayer has obtained, whether in cash or in any other manner whatsoever, any amount in respect of such loss or expenditure or some benefit in respect of such trading liability shall be deemed to be profits and gains of business or profession and accordingly chargeable to incometax as the income of that previous year, whether the business or profession in respect of which the allowance or deduction has been made is in existence in that year or not. 2. Sale of Assets used for Scientific Research [ Sec. 41(3)]

Where an asset representing expenditure of a capital nature on scientific research is sold, without having been used for other purposes, and the proceeds of the sale together with the total amount of the deductions made, the amount of the deduction exceed the amount of the capital expenditure, the excess or the amount of the deductions so made, whichever is the less, shall be chargeable to income-tax as income of the business or profession of the previous year in which the sale took place. 3. Recovery of Bad Debt . Sec.41(4) :

if the amount subsequently recovered on any such Bad Debt or part allowed earlier is greater than the difference between the debt or part of debt and the amount so allowed, the excess shall be deemed to be profits and gains of business or profession, and accordingly chargeable to income-tax as the income of the previous year in which it is recovered, whether the business or profession in respect of which the deduction has been allowed is in existence in that year or not. 4. Amount withdrawn from Reserve created under 36(1)(viii) . [Sec. 40(4A) :

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Where a deduction has been allowed in respect of any special reserve created and maintained under Section 36(1)(viii), any amount subsequently withdrawn from such special reserve shall be deemed to be the profits and gains of business or profession and accordingly be chargeable to income-tax as the income of the previous year in which such amount is withdrawn 5. Adjustment of Loss [ Sec. 41(5)] :

Generally, Loss of a business cannot be carried forward after 8 years. An exception is, however, provided by Sec. 41(5). This exception is applicable if the following conditions are satisfied :Where the business or profession referred to in this section is no longer in existenc. any loss which arose in that business or profession during the previous year in which it ceased to exist and which could not be set off against any other income of that previous year.Such Business is not a speculation business.After discontinuation of such business or profession, there is a receipt which is deemed as business income.

Assessment of Companies
A company is required to pay tax on every rupee of its total income at a flat rate, without there being any exemption limit. For the purpose of assessment of companies the understanding of the meaning of a company and various types of companies is very essential. Company A Company means: 1) 2) 3) any Indian Company, or any body corporate incorporated under the law of a foreign country, or any institution, association or body which was assessable or was assessed as a company

for any assessment year upto 1970-71, or 4) Any institution, association or body, whether incorporated or not and whether Indian or

non-Indian, which is declared by general or special order of the Central Board of Direct Taxes to be a company.

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Types of Companies Company in which public of substantially interested In the following cases, a company is said to be a company in which the public are substantially interested: a) it is a company owned by the Government or the RBI or in which not less than 40%

shares are held by the Government or the RBI or a corporation owned by the RBI, or b) c) it is a company which is registered u/s 25 of the Companies Act, or it is a company, having no share capital and it is declared by order of the Central Board

of Direct Taxes to be a company in which the public are substantially interested, or d) it is mutual benefit finance company, i.e., a company which carries on, as its principal

business, the business of acceptance of deposits from its members and which is declared by the Central Government to be a Nidhi or Mutual Benefit Society, or e) it is a company wherein shares carrying not less than 50% of the voting rights are held by

one or more co-operative societies throughout the relevant previous year, or f) it is a company which is not a private company under the Companies Act and its equity

shares were, as on the last date day of the relevant previous year, listed in a recognised stock exchange in India, or g) it is company which is not a private company and whose equity shares carrying not less

than 50% (40% in case of an industrial company) of the voting power were beneficially held throughout the previous year by the Government, a statutory corporation or any other company in which the public are substantially interested or a wholly owned subsidiary of a such a company. If the majority of the equity shares of a public company are held by a foreign company in which the public are substantially interested, such a company would be a company in which the public are substantially interested.

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Widely-held Company. substantially interested.

This is the popular name of a company in which the public are

Closely-held Company. This is the popular name of a company in which the public are not substantially interested. Domestic Company Domestic Companies means an Indian Company or any other company, which in respect of its income liable to tax under this Act, has made the prescribed arrangements for the declaration and payments, within India, of the dividends payable out of such income.

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Set-Off and Carry-Forward of Losses

Setting-Off loss from an income chargeable to tax is known as Set-Off of losses. Where the loss is more than income chargeable to tax, the assessee cannot set-off entire losses in the same assessment year and unabsorbed losses can be carried forward in the subsequent assessment years is known as Carry-Forward of losses. Inter Source Set Off: Loss incurred under a particular head of income is being Set-Off against an income which is chargeable to tax under the same head of income is known as Inter Sources Set Off. For e.g. Loss from self-occupied property can be set off against income from let out property. Inter-Head Set Off: Loss incurred under a particular head of income is being Set-Off against an income which is chargeable to tax under any other head of income is known as Inter-Head Set Off. For e.g. Loss from business can be set-off against Income from Salary or Income from House Property etc. Carry-forward and Set-off of Losses The following losses can be carried forward to be set-off in subsequent years if they cannot be set-off in the year in which they occurred: (i) Loss of house property: It can be carried forward for 8 years and it can be set-off only against income from house property. (ii)Losses of non-speculation business or profession: They can be carried forward for 8 years and can be set-off against any business income. They can be set off against speculation profit also. (iii)Losses of Speculation business: They can be carried forward for 8 years and can be set-off against speculation profits only. (iv)Short-term capital losses: They can be carried forward for 8 years and can be set-off against capital gains only, whether short-term or long-term.

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(v)Long-term capital losses: They can be carried forward for 8 years and can be set-off against long-term capital gains only. (vi) Loss from the activity of owning and maintaining race horses: It can be carried forward

for four years and can be set-off only against income from the same sources.

DEDUCTIONS TO BE MADE IN COMPUTING THE TOTAL INCOME

Sec. 80CCC Contribution to certain pension funds. Deduction under this section is allowed to an individual assessee for the amount paid or deposited by the assessee during the relevant previous year to effect or keep in force a contract for annuity plan of LIC of India or any other insurer for receiving pension from the fund referred to in Sec. 10(23AAB). The rate of deduction is actual amount paid under this scheme (excluding any interest or bonus accrued during the year) or Rs. 10,000 p.a whichever if less. If the assessee or his nominee surrenders the annuity plan before its maturity, the surrender value including bonus/interest shall be taxable in the year of receipt in the hands of the assessee or his nominee. The amount on which deduction under this section is claimed shall not qualify for rebate u/s 88. Sec. 80D Medical insurance premium. Premium paid by cheque under a Medical Insurance Scheme of the General Insurance Corporation approved by the Central Government or any other insurer approved by the Insurance Regulatory and Development Authority. The rate of deduction is the actual amount paid or maximum of Rs. 10,000 WEL. Where the insurance is on the health of a senior citizen, Rs. 15,000 shall be the limit for deduction. The deduction is allowed in respect of the following: In case of an individual: Insurance can be made on the health of the assessee, spouse, dependent parents and children.

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In the case of HUF: Insurance on the health of family members. Sec. 80DD Maintenance and medical treatment of a dependent with a disability. This deduction is allowed to an individual or HUF only, if they have incurred any expenditure for the medical treatment (including nursing), training and rehabilitation of a dependent, being a person with disability or paid or deposited any amount under a schedule framed in this behalf by the Life Insurance Corporation or any other insurer or the administrator of UTI or the specified company for the maintenance of a dependent being a person with disability. Amount of Deduction: Deduction of a flat amount of Rs. 50,000 shall be allowed irrespective of the quantum of expenditure incurred or deposit made. Besides, where the dependent is a person with severe disability, the deduction shall be Rs. 75,000. If disabled dependent predeceases the individual or the member of HUF in whose name has been deposited, an amount equal to the amount paid or deposited under the scheme shall be deemed to be the income of the assessee of the previous year in which sum amount is received by the assessee and chargeable to tax in that previous year. For the purpose of this Section Dependent means: 1. In the case of an individual, the spouse, children, parents, brothers and sisters of the

individual or any of them. 2. In the case of HUF, a member of the HUF.

Sec. 80DDB Medical treatment for specified disease or ailment. This deduction is allowed to resident individual or HUF in respect of expenditure actually incurred during the P.Y for the medical treatment of specified disease or aliment as specified in Rule 11DD for himself or a dependent relative or a member of a HUF. Deduction shall be the amount actually paid or Rs. 40,000, WEL in respect of that P.Y in which such amount was actually paid. In the case of senior citizen the deduction shall be the amount actually paid or Rs. 60,000,WEL.
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Deduction shall be allowed only if the assessee furnishes a certificate in form 10-1 from any doctor registered with Indian Medical Association with postgraduate qualifications. For the purpose of Sec. 80DDB, the specified diseases and aliment shall be as under (Rule 11DD): i) ii) iii) iv) v) vi) Neurological diseases. Cancer AIDS Chronic Renal Failure Hemophilia Thalassaemia

Sec. 80E Repayment of loan taken for higher education. In case of an individual takes loan from financial institutions or charitable institutions (so approved) for the purpose of pursuing education he shall be entitled to claim a deduction of Rs. 40,000 p.a or actual amount of loan repaid along with interest on such loan WEL. This deduction will be allowed for initial assessment year i.e. in which repayment of loan starts and seven succeeding assessment years or upto the year in which repayment comes to the end. Higher Education means full time study for any graduate or postgraduate course in engineering, medicine, management or postgraduate course in applied sciences or pure sciences including mathematics and statistics. Sec. 80G Donations to certain funds, charitable institutions, etc. All assessee are entitled to this deduction from their gross total income, if the donation is made in the previous year to the funds or charitable institutions: a) limit. 1. 2. 3. 4. Prime Ministers National Relief Fund. National Defence Fund. Prime Ministers American EarthQuake Relief Fund. The Africa (Public Contribution India) Fund.
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Donations made to following are eligible for 100% deduction without any qualifying

5. 6. 7. 8.

The National Foundation for Communal Harmony. Approved University or Educational Institution of national eminence. The Chief Ministers EarthQuake Relief Fund, Maharashtra. Donations made to Zila Saksharta Samitis constituted under the chairmanship of

collectors of the districts for the purpose of improvement of primary education and for literacy and post-literacy efforts in villages and towns with population not exceeding one lakh according to the latest cencus. 9. The National Blood Transfusion Council or a State Blood Transfusion Council which has

its sole object, the control, supervision, regulation or encouragement in India of the services related to operation and requirement of blood banks. 10. 11. Any fund set up by a State Government to provide medical relief to the poor. The Army Central Welfare Fund or the Indian Navel Benevolent Fund or the Air Force

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. 12. The Andhra Pradesh Chief Ministers Cyclone Relief Fund 1996. 13. The National Illness Assistance Fund. 14. The Chief Ministers Relief Fund/ the Lieutenant Governors Relief Fund.

15. The National Sports Fund to be setup by the Central Government. 16. The National Cultural Fund set up by the Central Government. 17. The Fund for Technology Development and Application set-up by the Central Government. 18. The Fund set-up by the State Government of Gujrat exclusively for providing relief to the victims of earthquake in Gujrat. 19. To a trust, institution or fund between 26.1.2001 and 30.9.2001 for providing relief to the victims of earthquake in Gujrat. 20. The National Trust for Welfare of person with Autism, Cerebral Palsy, Mental Retardation and Multiple Disabilities.

b)

Donations made to the following are eligible for 50% deduction without any

qualifying limit. 1. Jawaharlal Nehru Memorial Fund.

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2. 3. 4. 5. c)

Prime Ministers Drought Relief Fund. National Childrens Fund. Indira Gandhi Memorial Trust. The Rajiv Gandhi Foundation. Donations to the following are eligible for 100% deduction subject to qualifying limit,

(i.e., and 10% of adjusted total income).

1.

Donations to the Government, a local authority or an approved institution or association

to be utilised for the purpose of promoting Family Planning.

2. Sums paid by a company to Indian Olympic Association or other notified association or institution established in India for development of infrastructure for sports and games in India or for sponsorship of sports and games in India.

d) Any other Donations to Funds and charitable institutions are eligible for 50% deduction subject to the qualifying limit. (I.e., 10% of adjusted total income). Notes: 1. Total income for the purpose Sec.80G refers to the amount of income computed after allowing permissible deduction under Chapter VIA from 80CCC to 80U including 80GG but excluding 80G. Sec. 80GG Rent paid. 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 (whose member he is) should not own a house at that place. Rate of Deduction: Statutory limit Rs. 2,000p.m. Rent Paid in excess of 10% of the total income.
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25% of the total income. Total income for this purpose means, gross total income as reduced by deduction under chapter VIA except 80GG

Sec. 80GGA Deduction in respect of Donations for Scientific Research or Rural Development.

The benefit of this deduction is available to all assessees, other than those whose income is chargeable under the head Income from Business or Profession. The following will qualify for deduction from the gross total income of the assessee: a) Sums paid to an approved Scientific Research Association or University or College or other institution to be used for scientific research, research in social science or statistical research. b) Sums paid to a rural development fund set up and notified by the Central Government.

c) Any sum paid to an approved scientific research association, university, college etc to be used by such institution for scientific research. d) Any sum paid to the National Urban Poverty Eradication Fund set up and notified by the Central Government. e) Sums paid to a public sector company, local authority or an approved association or institution for carrying out any eligible project or scheme for promoting social and economic welfare or uplift of the public.

Sec.80L Interest on certain securities, etc. Deduction under this section is available to an individual and HUF in respect of income derived from the following sources: 1. Deposits with public companies providing long term finance for construction or purchase of residential house in India and which is eligible for deduction u/s 36(1)(viii). 2. Deposits under National Deposit Scheme. 3. Government Securities including National Savings Certificate VI, VII & VIII series.

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4. Debenture and bonds issued by a co-operative society or notified institutions and public sector companies. 5. Deposits under the Post Office (Monthly Income Accounts) Rules, 1987 Scheme. 6. Deposits with a bank or a co-operative bank. 7. Deposits with financial corporations providing long term finance for industrial development in India and which is eligible for deduction u/s.36 (1)(viii). 8. Shares and deposits in a co-operative society.

Deposits with any authority constituted in India 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; Deduction: 1. Income from above investment is deductible upto a maximum of Rs. 12,000.

2. Additional deduction of an amount equal to Rs. 3,000 is allowable in respect of income from any securities of the Central Government or State Government if such income remains unallowed after availing Rs. 12,000. Thus the aggregate deduction shall not exceed Rs. 15,000. Sec. 80QQB Deduction in respect of Royalty of Authors (w.e.f A.Y. 2004-2005) An individual, who is a resident of India and an author (including a joint author) of book(s) being a work of literacy, artistic or scientific nature is eligible for deduction under this section. Quantum of Deduction: Whole of such income (royalty maximum @ 15% of the value of such books sold less expenses attributable to such income) or Rs.3, 00,000, WEL. Where the assessee receives lump sum consideration for the assignment or grant of any of his interest in the copyright of a book, the quantum of deduction shall be the whole of the income (after deducting expenses) or Rs.3, 00,000, WEL. Sec. 80U Deduction in case of a person with disability.

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An individual who is a resident and who is certified by a Medical Authority to be a person with disability at any time during the previous year, shall be entitled to deduction of Rs. 50,000. If it is a case of severe disability deduction shall be Rs. 75,000. A copy of the certificate issued by the Medical Authority is required to be furnished in respect of the assessment year for which deduction is claimed along with the return of income. For the purpose of this section a) Disability means blindness, low vision, leprosy-cured, hearing impairment, locomotor

disability, mental retardation, mental illness. b) Person with disability means a person suffering from not less than 40% of any

disability as certified by a medical authority. c) Person with severe disability means a person with 80% or more of one or more

disabilities.

Deduction under section 10A and 10B is available till assessment year 2010-11
EXPLANATORY NOTES TO THE PROVISIONS OF THE FINANCE ACT, 2008 CIRCULAR NO. 1/ 2009, DATED 27th MAR, 2009

9. Extension of time limit for availing deduction under section 10A and 10B 9.1 100% deduction on exports profits is allowed to an undertaking, if(i) the undertaking is set up in a free trade zone, Software Technology Park, Electronic Hardware Technology Park or a special economic zone and is engaged in the manufacture or production of articles or things or computer software; ( section 10A) (ii) the undertaking is declared as a hundred per cent export-oriented undertaking engaged in the manufacture or production of articles or things or computer software. (section 10B). 9.2 The deduction is available for a period of ten consecutive assessment years beginning with the initial assessment year in which the undertaking begins to manufacture or produce the article
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or things or computer software. However, no deduction was allowable, under these sections, to any undertaking beyond the assessment year 2009-10. 9.3 Section 10A and section 10B have now been amended to extend the sun-set date under these sections to assessment year 2010-11. Hence, no deduction will, therefore, be available under these sections beyond assessment year 2010-11. 9.4 Applicability: These amendments have been made applicable with effect from 1st April, 2008 and shall accordingly apply for assessment year 2008-09 and subsequent assessment years.

10A Section
10A. Special provision in respect of newly established undertakings in free trade zone, etc.- (1) Subject to the provisions of this section, a deduction of such profits and gains as are derived by an undertaking from the export of articles or things or computer software for a period of ten consecutive assessment years beginning with the assessment year relevant to the previous year in which the undertaking begins to manufacture96a or produce such articles or things or computer software, as the case may be, shall be allowed from the total income of the assessee : Provided that where in computing the total income of the undertaking for any assessment year, its profits and gains had not been included by application of the provisions of this section as it stood immediately before its substitution by the Finance Act, 2000, the undertaking shall be entitled to deduction referred to in this sub-section only for the unexpired period of the aforesaid ten consecutive assessment years : Provided further that where an undertaking initially located in any free trade zone or export processing zone is subsequently located in a special economic zone by reason of conversion of such free trade zone or export processing zone into a special economic zone, the period of ten consecutive assessment years referred to in this sub-section shall be reckoned from the assessment year relevant to the previous year in which the undertaking began to manufacture or produce such articles or things or computer software in such free trade zone or export processing zone : (1A) Notwithstanding anything contained in sub-section (1), the deduction, in computing the total income of an undertaking, which begins to manufacture or produce articles or things or
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computer software during the previous year relevant to any assessment year commencing on or after the 1st day of April, 2003, in any special economic zone, shall be, (i) hundred per cent of profits and gains derived from the export of such articles or things or computer software for a period of five consecutive assessment years beginning with the assessment year relevant to the previous year in which the undertaking begins to manufacture or produce such articles or things or computer software, as the case may be, and thereafter, fifty per cent of such profits and gains for further two consecutive assessment years, and thereafter; (ii) for the next three consecutive assessment years, so much of the amount not exceeding fifty per cent of the profit as is debited to the profit and loss account of the previous year in respect of which the deduction is to be allowed and credited to a reserve account (to be called the Special Economic Zone Re-investment Allowance Reserve Account) to be created and utilised for the purposes of the business of the assessee in the manner laid down in sub-section (1B) : Provided that no deduction under this section shall be allowed to an assessee who does not furnish a return of his income on or before the due date specified under sub-section (1) of section 139.

Section 10B
10B. 5 [Special provision in respect of newly established hundred per cent export- oriented undertakings' (1) Subject to the provisions of this section, any profits and gains derived by an assessee from a hundred per cent export- oriented undertaking (hereafter in this section referred to as the undertaking) to which this section applies shall not be included in the total income of the assessee. (2) This section applies to any undertaking which fulfils all the following conditions, namely:(i) it manufactures or produces any article or thing;

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(ia) 7[ in relation to an undertaking which begins to manufacture or produce any article or thing on or after the 1st day of April, 1994 , its exports of such articles and things are not less than seventy- five per cent of the total sales thereof during the previous year;] (ii) it is not formed by the splitting up, or the reconstruction, of a business already in existence: Provided that 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 assessee of the business of any such industrial undertaking as is referred to in section 33B, in the circumstances and within the period specified in that section; (iii) it is not formed by the transfer to a new business of machinery or plant previously used for any purpose. Explanation.- The provisions of Explanation 1 and Explanation 2 to sub- section (2) of section 80-I shall apply for the purposes of clause (iii) of this sub- section as they apply for the purposes of clause (ii) of that sub- section. (3) The profits and gains referred to in sub- section (1) shall not be included in the total income of the assessee in respect of any five consecutive assessment years, falling within a period of eight years beginning with the assessment year relevant to the previous year in which the undertaking begins to manufacture or produce articles or things, specified by the assessee at his option: Provided that nothing in this sub- section shall be construed to extend the aforesaid five assessment years to cover any period after the expiry of the said period of eight years. (4) Notwithstanding anything contained in any other provision of this Act, in computing the total income of the assessee of the previous year relevant to the assessment year immediately succeeding the last of the relevant assessment years, or of any previous year relevant to any subsequent assessment year,(i) section 32, section 32A, section 33 and clause (ix) of sub- section (1) of section 36 shall apply as if every allowance or deduction referred to therein and relating to or allowable for any of the relevant assessment years, in relation to any building, machinery, plant or furniture used for the purposes of the business of the undertaking in the previous year relevant to such assessment year or any expenditure incurred for the purposes of such business in such previous year had been given full effect to for that assessment year itself and accordingly sub- section (2) of section 32,
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clause (ii) of sub- section (3) of section 32A, clause (ii) of sub- section (2) of section 33 or the second proviso to clause (ix) of sub- section (1) of section 36, as the case may be, shall not apply in relation to any such allowance or deduction; (ii) no loss referred to in sub- section (1) of section 72 or sub- section (1) or sub- section (3) of section 74, in so far as such loss relates to the business of the undertaking, shall be carried forward or set off where such loss relates to any of the relevant assessment years; (iii) no deduction shall be allowed under section 80HH or section 80HHA or section 80-I 1[ or section 80-IA] in relation to the profits and gains of the undertaking; and

10BA Section
10BA. Special provisions in respect of export of certain articles or things.- (1) Subject to the provisions of this section, a deduction of such profits and gains as are derived by an undertaking from the export out of India of eligible articles or things, shall be allowed from the total income of the assessee : Provided that where in computing the total income of the undertaking for any assessment year, deduction under section 10A or section 10B has been claimed, the undertaking shall not be entitled to the deduction under this section : Provided further that no deduction under this section shall be allowed to any undertaking for the assessment year beginning on the 1st day of April, 2010 and subsequent years. (2) This section applies to any undertaking which fulfils the following conditions, namely : (a) it manufactures or produces the eligible articles or things without the use of imported raw materials; (b) it is not formed by the splitting up, or the reconstruction, of a business already in existence : Provided that 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 assessee 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;
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(c) it is not formed by the transfer to a new business of machinery or plant previously used for any purpose. Explanation.The provisions of Explanation 1 and Explanation 2 to sub-section (2) of section 80-I shall apply for the purposes of this clause as they apply for the purposes of clause (ii) of sub-section (2) of that section; d) ninety per cent or more of its sales during the previous year relevant to the assessment year are by way of exports of the eligible articles or things; (e) it employs twenty or more workers during the previous year in the process of manufacture or production. (3) This section applies to the undertaking, if the sale proceeds of the eligible articles or things exported out of India are received in or brought into, India by the assessee in convertible foreign exchange, within a period of six months from the end of the previous year or, within such further period as the competent authority may allow in this behalf. Explanation.For the purposes of this sub-section, the expression competent authority means the Reserve Bank of India or such other authority as is authorised under any law for the time being in force for regulating payments and dealings in foreign exchange. (4) For the purposes of sub-section (1), the profits derived from export out of India of the eligible articles or things shall be the amount which bears to the profits of the business of the undertaking, the same proportion as the export turnover in respect of such articles or things bears to the total turnover of the business carried on by the undertaking. (5) The deduction under sub-section (1) shall not be admissible, unless the assessee furnishes in the prescribed form, along with the return of income, the report of an accountant, as defined in the Explanation below sub-section (2) of section 288, certifying that the deduction has been correctly claimed in accordance with the provisions of this section. (6) Notwithstanding anything contained in any other provision of this Act, where a deduction is allowed under this section in computing the total income of the assessee, no deduction shall be allowed under any other section in respect of its export profits.
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(7) The provisions of sub-section (8) and sub-section (10) of section 80-IA shall, so far as may be, apply in relation to the undertaking referred to in this section as they apply for the purposes of the undertaking referred to in section 80-IA.

Fringe benefits tax (India)

The fringe benefits tax (FBT) was the tax applied to most, although not all, fringe benefits in India. A new tax was imposed on employers by India's Finance Act 2005 was introduced for the financial year commencing April 1, 2005. The fringe benefit tax was abolished in the 2009 Union budget of India by Finance Minister Pranab Mukherjee. The following items were covered: Employer's expenses on entertainment, travel, employee welfare and accommodation. The definition of fringe benefits that have become taxable has been significantly extended. The law provides an exact list of taxable items. Employer's provision of employee transportation to work or a cash allowances for this purpose. Employer's contributions to an approved retirement plan (called a superannuation fund). Employee stock option plans (ESOPs) have also been brought under fringe benefits tax from the fiscal year 200708.

What is fringe benefit tax?

The taxation of perquisites -- or fringe benefits -- provided by an employer to his employees, in addition to the cash salary or wages paid, is fringe benefit tax. Any benefits -- or perks -- that employees (current or past) get as a result of their employment are to be taxed, but in this case in the hands of the employer. This includes employee compensation other than the wages, tips, health insurance, life insurance and pension plans.

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Fringe benefits as outlined in section 115WB of the Finance Bill, mean any privilege, service, facility or amenity directly or indirectly provided by an employer to his employees (including former employees) by reason of their employment. They also include reimbursements, made by the employer either directly or indirectly to the employees for any purpose, contributions by the employer to an approved superannuation fund as well as any free or concessional tickets provided by the employer for private journeys undertaken by the employees or their family members. What are these fringe benefits that will be taxed? As per the Finance Bill, fringe benefits shall be deemed to have been provided if the employer has incurred any expense or made any payment for the purposes of: (a) Entertainment; (b) Festival celebrations; (c) Gifts; (d) Use of club facilities; (e) Provision of hospitality of every kind to any person whether by way of food and beverage or in any other manner, excluding food or beverages provided to the employees in the office or factory; (f) Maintenance of guest house; (g) Conference; (h) Employee welfare; (i) Use of health club, sports and similar facilities; (j) Sales promotion, including publicity; (k) Conveyance, tour and travel, including foreign travel expenses; (l) Hotel boarding and lodging; (m) Repair, running and maintenance of motor cars; (n) Repair, running and maintenance of aircraft; (o) Consumption of fuel other than industrial fuel; (p) Use of telephone; (q) Scholarship to the children of the employees. In cases where the employer is engaged in the business of carriage of passengers or goods by motor car or by aircraft, a lower percentage of expenses on repair, running and maintenance of motor cars or aircrafts or fuel expenses has been specified. Similarly, for hotels, a lower percentage of the expenses incurred on hospitality has been specified for purposes of calculating the liability under the fringe benefit tax.
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An employer liable to pay fringe benefit tax is required to furnish a return of fringe benefits before the due date as given in section 115WD. Section 115WE outlines the procedure for the assessment of the return of fringe benefits filed by the employer and the determination of tax or interest payable or refund due and in either case the issue of intimation to that effect. Who pays fringe benefit tax? Under the proposed provisions, fringe benefit tax is payable by an employer who is either an individual or a Hindu undivided family engaged in a business or profession; a company; a firm; an association of persons or a body of individuals; a local authority; a sole trader, or an artificial juridical person. The tax is payable in respect of the value of fringe benefits provided or deemed to have been provided by an employer to his employees during the previous year. The value of fringe benefits so calculated, is subject to additional income tax in respect of fringe benefits at the rate of thirty per cent, as provided in section 115WA. The fringe benefit tax is payable by the employer even where he is not liable to pay income-tax on his total income computed in accordance with the other provisions of this Act. The benefit does not have to be provided by the employer directly for him to attract fringe benefit tax. fringe benefit tax may still be applied if the benefit is provided by a third party or an associate of the employer or by under an arrangement with the employer. Why fringe benefit tax? The taxation of perquisites -- or fringe benefits -- provided by an employer to his employees, in addition to the cash salary or wages paid, is subject to varying treatment in different countries. These benefits are either taxed in the hands of the employees themselves or the value of such benefits is subject to a 'fringe benefit tax' in the hands of the employer.

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The rationale for levying a fringe benefit tax on the employer lies in the inherent difficulty in isolating the 'personal element' where there is collective enjoyment of such benefits and attributing the same directly to the employee. This is so especially where the expenditure incurred by the employer is ostensibly for purposes of the business but includes, in partial measure, a benefit of a personal nature. Moreover, in cases where the employer directly reimburses the employee for expenses incurred, it becomes difficult to effectively capture the true extent of the perquisite provided because of the problem of cash flow in the hands of the employer. Therefore, the finance minister has proposed to adopt a two-pronged approach for the taxation of fringe benefits under the Income-tax Act. Perquisites which can be directly attributed to the employees will continue to be taxed in their hands in accordance with the existing provisions of section 17(2) of the Income-tax Act and subject to the method of valuation outlined in rule 3 of the Income-tax Rules. In cases, where attribution of the personal benefit poses problems, or for some reasons, it is not feasible to tax the benefits in the hands of the employee, it is proposed to levy a separate tax known as the fringe benefit tax on the employer on the value of such benefits provided or deemed to have been provided to the employees. For this purpose, a new Chapter XII-H is proposed to be inserted in the Income-tax Act containing sections 115W to 115WL, which provides for the levy of additional income tax on fringe benefits. The chapter is divided into three parts. Part A contains the meaning of certain expressions used, part B enumerates the basis of charge, and part C delineates the procedures for filing of return in respect of fringe benefits, assessment and the payment of tax thereon. How will the fringe benefit tax be calculated? The value of fringe benefits shall be the aggregate cost incurred. That is, the total expense deducted will be considered for purposes of levying fringe benefit tax. From this, a certain percentage will be deducted. The difference therein will be taxed at the rate of 30%.
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However, the fringe benefit tax rate varies from 10 per cent to 50 per cent depending upon the expense incurred: For example, for the use of telephones 10 per cent fringe benefit tax will be charged, while entertainment expenses, festival expenses, gifts, use of club facilities, etc will be taxed at the rate of 50 per cent. Will housing perks be affected too? The department of revenue has notified changes in the income tax rules that double the taxable income of private sector employees on account of housing perquisites. The amendments came hours after Finance Minister P Chidambaram proposed the fringe benefit tax on employers in his Budget. What about fringe benefit tax on use of cars, etc? The tax on perquisites like maintenance of a car, club membership, free meals, credit cards and tours and travel, which were earlier taxed in the hands of the employees, has been withdrawn and the employer will now be liable to pay tax on this. But this may not result in any relief for employees. In the case of the perquisite value of a car, employees are taxed at a rate ranging between Rs 1,200 (for small cars) and Rs 1,600 a month (for bigger vehicles) in addition to Rs 400 or 600 for a driver provided by the company. How badly will it hurt corporate India? Reports suggest that the fringe benefits tax is likely to result in India Inc incurring an additional expenditure of about Rs 25,000 crore. Will advertise agencies be hit by fringe benefit tax? The 30 per cent fringe benefit tax will hurt advertising agencies badly as in this sector about 10% to 12% of an employee's salary comes in the form of perks. In the glamorous world of advertising attending conferences all over the world, wining and dining to network with clients and bag more business, etc is the done thing. Now all these expenses will come under the ambit of fringe benefit tax.
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Also, advertising agencies are people-oriented one and staff welfare and salaries account for almost 50 per cent of their expenses. The fringe benefit tax will thus hurt ad agencies badly.

MAT
Minimum Alternate Tax Taxation on income is a vital source of revenue for our Government. Although Companies have to follow a mind-bogglingly complex procedure, the list of exemptions and deductions is long. As a result, a lot of Companies used these deductions and exemptions and escaped tax liability. While they enjoyed book profits as per their profit and loss accounts (and sometimes even distributed dividend), tax liability as per the Income Tax Act was either nil or negative or insignificant. To counter this problem the government came up with the concept of Minimum Alternate Tax (MAT) in the financial year 1997-1998. What is Minimum Alternate Tax? As per section 115 JA of the Income Tax Act, if a companys taxable income is less than a certain percentage of the booked profits, then by default, that much of the book profits will be considered as taxable income and tax has to be paid on that. The current rate for MAT is 18%, up from 7.5% in 2001-2002. Since this is a very broad provision, sometime companies who genuinely deserve tax relief get stuck with MAT liability. Hence, a system of MAT credit entitlement was brought in. MAT Credit Under this system, if a company pays Minimum Alternate Tax, then the difference between the tax that would have been payable if there was no MAT and the actual tax paid under MAT regime can be carried forward as a credit and can be set off against any tax in the future that is not under the MAT regime.
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For example, if a company has a book profit of 10 lakhs and after applying the provisions of Income tax act, arrives at a taxable income of only Rs.1 lakh, then MAT becomes applicable as 18% of 10 lakhs is 1.8 lakhs. However, the difference between the tax paid on 1.8 lakhs and the tax calculation on 1 lakh is carried forward as MAT credit. Say, the next year, a profit of 11 lakhs is booked but this time due to some cost-cutting initiatives, the company calculates a taxable income of 6 lakhs. Hence, MAT is not applicable as the taxable income is more than 18%. Here the company can choose to set off their tax liability with the tax credit they have from the last time when they paid MAT.

CORPORATE DIVIDEND TAX

The actual meaning of corporate dividend tax is to impost levied by federal, state, or local governments against corporations, their income, or their peculiar attributes, such as charters, capitalization, dividends, and franchises. In easy words you can say Corporation tax is a tax levied on the profits made by companies and associations that are resident for tax purposes. It is a form of tax remitted to the govt. at the time of declaring and issuing dividend to shareholders at present the rate of 14.06% Corporate Dividend tax is a form of income tax paid by corporates on the dividends distributed by company to their shareholders The Finance Act, 1997, has introduced Chapter XIID on Special Provisions Relating to Tax on Distributed Profits of Domestic Companies [hereinafter referred to as CDT (Corporate Dividend Tax)]. The relevant extracts of sections 115O and 115Q of the Income-tax Act, 1961, governing CDT have been reproduced in Annexure I. This Guidance Note is being issued to provide guidance on accounting for CDT. The salient features of CDT are as below: (i) CDT is in addition to the income-tax chargeable in respect of the total income of a domestic company. (ii) CDT is chargeable on any amount declared, distributed or paid by such company by way of dividends (whether interim or otherwise) on or after the 1st day of June 1997. (iii) The dividends chargeable to CDT may be out of the current profits or accumulated profits.
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(iv) The rate of CDT is ten per cent. (v) CDT shall be payable even if no income-tax is payable by the domestic company on its total income. (vi) CDT is payable to the credit of the Central Government within 14 days of (a) Declaration of any dividend, (b) Distribution of any dividend, or (c) payment of any dividend,whichever is the earliest ) CDT paid shall be treated as the final payment of tax on the dividends and no further credit therefor shall be claimed by the company or by any person in respect of the tax so paid. (viii) The expression dividend shall have the same meaning as is given to dividend in clause (22) of Section 2 but shall not include sub-clause (e) thereof. (The relevant extracts of Section 2(22) of the Income-tax Act, 1961, have been reproduced in Annexure II).

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CENTRAL SALES TAX ACT 1956 Central Sales Tax Objects 1. To formulate principles for determining when a sale or purchase of goods takes place i. In the course of Inter-State trade Section 3 or ii. Outside a State Section 4 or 2. In the course of Import into or Export from India Section 5 to provide for i. ii. iii. Levy Section 6, 6A, 8 and 8A Collection Section 9(1), 9(2) and Distribution of taxes on sale of goods in course of Inter State trade

3. To declare certain goods to be of special importance in Inter State Section 14 and 4. Specify restrictions and conditions to which State laws imposing taxes on sale or purchase of goods of special importance Section 15 Notes: 1.Central Sales Tax is applicable in case of sale of goods in Inter State only 2.General Sales Tax or Local Sales Tax is applicable in case of sale of goods in case of within the State trade. 3.CST is also not applicable if sale takes place outside state and in case of import and export. Definitions 1. Appropriate State - means i. State in which business of dealer is situated if dealer has many places of business in one State

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ii. Every such State in which business of dealer is situated if dealer has many places of business in many states. 2.Business means i. Any trade commerce or manufacture or any adventure, with a view to make gain or earn profit irrespective of gain/profit has accrued from such trade, commerce, manufacture or adventure or not. ii. Any transaction in connection with or incidental or ancillary to such trade, commerce, manufacture or adventure. 3.Crossing custom frontiers of India i.It means crossing limits of area of customs station (customs port, custom airport or land customs station) 4. Dealer i.Any person who carries on business of buying, selling, supplying or distributing goods directly or indirectly for cash or on deferred basis or on commission or remuneration or other valuable consideration. ii. Dealer includes Individual, HUF, Local Authority, Company, Firm or Co - operative

Society or other AOPs, including agent and auctioneer. 5. Deemed Dealer i. Government involved in buying, selling, supplying or distributing goods for cash or for deferred payment or for other valuable consideration shall be dealer ii. This rule is not applicable in case of sale, supply or distribution of unserviceable or old stores/materials, waste products or obsolete/discarded machinery or parts by Government. 6. Declared Goods means goods declared under Sec 14 to be of special importance in InterState sale or purchase. Section 14 gives list of declared goods i. Aviation Turbine Fuel (ATF)
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ii. Cereals iii. Coal iv. Cotton v. Cotton Fabric vi. Crude Oil vii. Hides and Skins viii. Iron and Steel ix. Jute x. Oil Seeds xi. Pulses xii. Man made Fabrics xiii. Sugar xiv. Un-manufactured Tobacco or Cigar and Manufactured Tobacco xv. Woven fabric of wool 7. Goods i. Includes all materials, articles or commodities and all kinds of movable property ii. Immovable property is not included. iii. Newspapers are not goods for purpose of CST. If Old newspapers are sold as newspapers, then it CST is not applicable. If Old newspapers are sold as scrap, then, CST is applicable, in case of Inter-State sale. iv. Stocks, Shares and Securities are not liable to CST

Following is list of some items & classification of goods & not goods under CST 1. 2. 3. 4. 5. 6. 7. i. ii. iii. 8. 9. Animals/ Birds/Electricity/Steam/LPG Goods under CST Copyright Goods under CST Immovable Property Not Goods under CST Lottery Tickets Goods under CST Radiologist X-Ray Seller Not Goods under CST Stationery X-Ray Film Seller Goods under CST Place of Business In case of agent carrying on business, place of business of such agent. Godown Warehouse or other place, where dealer stores his goods Place where books of accounts are kept by dealer Registered Dealer A dealer registered under Section 7 of CST Act 1956. Sale
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i. It means any transfer of property in goods by one person to another for cash or deferred payment or any other valuable consideration ii. 10. i. ii. iii. iv. It does not include mortgage, hypothecation, charge or pledge on goods. Deemed Sale transfer of property in goods involved in execution of works contract delivery of goods on hire purchase or any system of payment in instalments transfer of right to use any goods like Patent, Copyright etc Goods by AOP to members

v. Supply of any service of goods being food or drink or any other article for human consumption 11. i. ii. iii. Transactions not regarded as Sale Charge Mortgage Hypothecation

In above cases, there is no transfer of ownership. All are modes of security given under loan. 12. i. ii. iii. iv. v. vi. vii. Sale Price means price on which CST is levied. It includes: CST whether or now shown separately Excise duty - whether or now shown separately Cost of packing material Packing charges Bonus discount or incentive bonus for additional sale Insurance charges, if goods are insured by seller Cost of freight, if shown separately

It does not include: i. Freight/Transportation charges, if charged separately

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ii. iii. iv. v. vi. vii. 13.

Cost of installation, if charged separately Cash discounts Trade discounts Insurance charges insured on behalf of buyer or at request of buyer Goods returned within 6 months of date of sale Goods rejected Turnover aggregate of sale prices received/receivable by a dealer in course of sale of

goods in case of Inter-State sale 14. Year It is year applicable to a dealer under General Sales Tax law of appropriate State,

and where no such year is applicable, then financial year is applicable.

Following transactions are not regarded as Inter State Sale 1. Branch transfer or Stock transfer. However, the onus of proof is on the dealer. Therefore he should obtain Form F. Note Form F will always movie n the opposite direction of goods

2. Transfer to agent ie. Consignment of goods Again Form F is used. 3. If movement commences and terminates in same State but passes through other states, there is no Inter State Sale 4. If a dealer of another State comes to State, purchases goods and transports it to his State on his own, it is not Inter State Sale Following transactions are regarded as Inter State Sale 1. Branch transfer or Stock transfer or on consignment, if Form F is not obtained.
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2. Stock transfer can be Inter State Sale if movement of goods is occasioned on account of contract of Sale ie based on specific orders 3. Sale by Value Paid/Payable Post (VPP)

Sale of goods set to take place outside the State Section 4 1. When a sale is inside a State, then it is deemed to be outside all other States. 2. Sale is set to take place inside State in which goods are situated at time of contract of sale ( in case of specific or ascertained goods) and it is said to take place inside State in which goods are situated at time of appropriation (in case of unascertained or future goods) 3. Even in case of Single contract of sale, goods situated at more places than one, it shall be treated as separate contract for each such place and therefore, sale is said to take place inside state where respective goods are situated. 4. Sale inside a State is always subject to Section 3 ie. It should not be an Inter State Sale. Sale in course of Export or Import Section 5 1. Export Sale Section 5(1) a. Sale occasions such export b. Sale is effected by transfer of documents of title to goods after goods have crossed the custom frontiers of India. 2. Import Sale Section 5(2) a. Sale occasions such import b. Sale is effected by transfer of documents of title to goods before goods have crossed the custom frontiers of India.. 3. Deemed Export or Penultimate Sale Section 5(3)

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a. It refers to sale made to Original Exporter based on export agreement and to comply with the same b. Original Exporter will give Form H to dealer c. In order to attract Section 5(3) there must be a pre-existing agreement of Export.

Note Supply of ATF to Foreign going aircraft at airport, is not in course of export since there is no foreign destination for such goods.

However, according to Finance Act 2005, any carrier notified by Central Government for International flights with ATF is deemed to be in course of export. Liability to pay Tax Section 6 1. Liability arises in all cases of Inter State sale. 2. Exception It is not liable to sales tax in following two cases: One Electrical Energy Two Penultimate Sale Section 5(3) Notes a. CST can be attracted even if General Sales Tax does not levy local tax Section 6(1) b. Subsequent sale by transfer of document of title to goods Section 6(2) - It must be Inter State sale based on Section 3(b) - It must be between registered dealer to another registered dealer (Obtain Form C) - Form E1 is sent by Original dealer whereas subsequent dealers must issue Form E2

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- Between registered dealer and another registered dealer, it must be goods specified in Section 8(3) for the purpose of issuing Form C - Section 8(3) It must be specified in certificate of registration and purchase must be for any of following purposes: a. For resale b. For use in manufacture or mining c. For use in generation of electricity or any form of power d. For packing e. For tele-communication networks Subsequent Sale will not attract CST Levy and Collection of Tax - Section 9 i. CST shall be levied by Central Government but collected and retained by State Government where the movement of goods have commenced. ii. Subsequent Sale In case of subsequent sale, there is no CST. If conditions are not satisfied to construct a sale as subsequent sale, then sales tax shall be levied and collected as follows: Dealer who makes Subsequent Sale 1. Registered dealer State which shall collect tax State where he is registered or where he is supposed to be registered 2. Not being a Registered dealer State where such subsequent sale has been effected Restrictions regarding levy of tax on Declared Goods Section 15 i. Local Sales Tax not to exceed 4% and Multi-point tax has been introduced to launch VAT

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ii. iii. iv. v. vi.

Inter-State sale of Declared Goods entitles re-imbursement of local sales tax Goods must be sold in same form or same identity Tax paid on Paddy to be set-off Rice and Paddy to be treated as Single commodity Conversion of Pulses not taxable.

Provisions regarding payment of Interest i. If tax payable by a dealer is not paid in time, dealer shall be liable to pay interest for delayed payment of such tax ii. Interest collected by State, on behalf of Central Government shall be retained. In case of Union Territory, it shall form part of Consolidated Fund of India. Liability of a Company in liquidation Section 17 and Section 18

Section 17 i. Liquidator of company should inform Sales Tax Authorities within 30 days of his

appointment. ii. iii. Sales Tax Authority shall inform him in 3 months, the amount of tax due from company. Liquidator shall not sell any assets unless the due amount due is set aside as intimated by

Sales Tax Authority. iv. Liquidator shall sell assets under the Court Order or for payment of Secured Creditors or

for payment of liquidation expenses and for purpose of payment of Sales Tax amount due from company v. If liquidator fails to comply with provisions, he shall be personally liable for payment of

tax due from Company. vi. In case of more than one liquidator, they shall be jointly and severally liable.

Section 18
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i.

If a Private Company is in liquidation and any tax assessed cannot be recovered, it

becomes the personal liability of directors, jointly and severally. ii. Directors can avoid this liability, if they prove that non-payment of tax was not bcoz of

neglect, misfeasance or breach of duty on part of Directors. Central Sales Tax Appellate Authority Section 19 to 26 i. Central Government shall constitute an Authority to settle Inter-State disputes concerning

sale of goods effected in Inter-State Sale. ii. Authority shall adjudicate an appeal filed by a dealer within 45 days from date on which

order is served on him. iii. iv. Application shall be mad in quadruplicate and fee of Rs 5,000. Authority may grant stay of operation of order of assessing authority against which

appeal is filed before it or order the pre-deposit of tax before entertaining the appeal. v. On receipt of appeal, Authority shall forward a copy to assessing authority and each State

Government involved to call for records vi. Authority shall examine appeal and records and after examination, by order, shall allow

or reject appeal. vii. viii. Authority should give order in writing in 6 months of receipt of appeal. Order passed by Authority is binding on assessing authorities

Basic Concepts of Sales Tax

Basic aspects of CST, Inter state sales, stock transfer Tax on sales by Union and State Governments Sale tax on Inter State sale is levied by Union Government under Entry 92A of List I (Union List), while sales tax on intra-State sale (sale within State) (now termed as Vat) is levied by State Government under Entry 54 of List II (State List) of Seventh Schedule to constitution of India.

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Categories of sales

Sales can be broadly classified in three categories. (a) Inter-State Sale (b) Sale during import/export (c) Intra-State (i.e. within the State) sale. State Government can impose sales tax only on sale within the State. State cannot discriminate between goods manufactured/produced within the State and goods brought from outside the State i.e. tax on local goods and goods from other States must be same

State cannot discriminate between local goods and goods from outside State Rate of CST

CST is payable on inter-State sales @ 2%, if C form is obtained. No CST if form H or I is obtained from purchaser. Otherwise, CST rate is same as applicable for sale within the State. Even if CST is levied by Union Government, the revenue goes to State Government. State from which movement of goods commences gets revenue. CST Act is administered by State Government.

Revenue of CST goes to State Government

Inter state sale, intra-state sale and stock transfer

Types of Inter-state sale

Inter State can be either direct u/s 3(a) or by transfer of documents u/s 3(b) of CST Act. In case of inter state sale u/s 3(a), sale is inter state if it occasions movement of goods from one State to other. There should be express or implied stipulation for movement of goods outside the State. Sale is inter state even if goods move from one State to another under agreement to sale. The agreement may be express or even implied. Movement of goods should be inter-linked with sale or agreement to sale. In inter-state sale, property in goods can pass to buyer
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Sale should occasion movement of goods u/s 3(a)

Movement of goods can be under agreement to sale u/s3(a)

Property in goods can pass in

either State u/s 3(a)

in either State. Sale can be inter-state even if buyer takes delivery of goods within the State, if he is required to take the goods outside the State. Sale can be inter state even if both buyer and seller are in same State if goods are moving out of State on account of sale. Inter Stale sale can be by transfer of documents of title during movement of goods from one State to another u/s 3(b) of CST Act. Sale can be inter-state even if buyer and seller are in same State. The movement of goods commences as soon as goods are handed over to transporter. The movement is deemed to be continuing till delivery of goods is taken at other end. E-I/E-II transactions are required to establish sale during movement. If done, all subsequent sales are exempt from sales tax/Vat. In stock/branch transfer, goods move from one State to another, but there is no sale. Goods are sent to branch or depot or consignment agent in other State. Stock transfer/branch transfer is not subject to tax since there is no sale. Stock transfer can be only of standard goods. Stock transfer of tailor made goods for a specific customer is a bogus stock transfer. It can be held as inter-state sale and sales tax may be payable. If buyer is identifiable before goods are dispatched, it is Inter State sale and not a stock transfer.

Buyer and seller can be in same State u/s 3(a)

Sale by transfer of documents u/s 3(b)

Meaning of during movement of goods for purpose of section 3(b)

Exemption to subsequent sale during movement of goods u/s 3(b)

Stock transfer/Branch transfer of goods

Stock transfer can be only of standard goods where buyer is not known

Form F for stock transfer/branch transfer of goods

Form F is required to be submitted to establish stock transfer. Sales Tax Officer can make enquiry regarding

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truth of contents in form F. Double taxation of stock transfer/branch transfer held as inter state sale If dealer claims dispatches as stock transfer but Sales Tax Authorities treat it as sale, there is double taxation. In such case, CST Appellate Authority can grant relief. After stock transfer, sale in that other State is first sale and State sales tax (Vat) will be payable. If a sale is inside one State, it is outside all other States. In case of specific or ascertained goods, sale within State takes place at the time of contract. In case of unascertained or future goods, sale takes place when goods are appropriated to contract in the State. If sale is inter-state as defined in section 3 of CST Act, it can never be intra state sale. Thus, inter-state sale is a residuary sale. Sale when there is no specific foreign destination is local sale. It is not export sale. Sale to ship which is within territorial waters is local sale. Sale within territorial waters of India i.e. within 12 nautical miles from the base line on the coast of India the is local sale. It is not inter-state sale.

Sale subsequent to stock transfer/branch transfer Sale inside the State Sale in case of ascertained/unascertained goods

Sale inside the State is a residuary sale

Sale not export if no specific destination

Sale within territorial waters of India is local sale

INTER-STATE SALES TAX Liability to tax on inter-State sales. 6. (1) Subject to the other provisions contained in this Act, every dealer shall, with effect from such date as the Central Government may, by notification in the Official Gazette, appoint, not being earlier than thirty days from the date of such
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notification, be liable to pay tax under this Act on all sales of goods other than electrical energy effected by him in the course of inter-State trade or commerce during any year on and from the date so notified:[Provided that a dealer shall not be liable to pay tax under this Act on any sale of goods which, in accordance with the provisions of sub-section (3) of section 5, is a sale in the course of export of those goods out of the territory of India.]

(1A) A dealer shall be liable to pay tax under this Act on a sale of any goods effected by him in the course of inter-State trade or commerce notwithstanding that no tax would have been leviable (whether on the seller or the purchaser) under the sales tax law of the appropriate State if that sale had taken place inside that State.

(2) Notwithstanding anything contained in sub-section (1) or sub-section (IA), where a sale of any goods in the course of inter-State trade or commerce has either occasioned the movement of such goods from one State to another or has been effected by a transfer of documents of title to such goods during their movement from one State to another, any subsequent sale during such movement effected by a transfer of documents of title to such goods,(a) to the Government, or (b) to a registered dealer other than the Government, if the goods are of the description referred to in sub-section (3) of section 8, shall be exempt from tax under this Act: Provided that no such subsequent sale shall be exempt from tax under this subsection unless the dealer effecting the sale furnishes to the prescribed authority in
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the prescribed manner and within the prescribed time or within such further time as that authority may, for sufficient cause, permit,(a) a, certificate duly filled and signed by the registered dealer from whom the goods were purchased containing the prescribed particulars in a prescribed form obtained from the prescribed authority; and (b) if the subsequent sale is made-

(i) to a registered dealer, a declaration referred to in clause (a) of sub- section (4) of section 8, or (ii) to the Government, not being a registered dealer, a certificate referred to in clause (b) of sub-section (4) of section 8 Provided further that it shall not be necessary to furnish the declaration or the certificate referred to in clause (b) of the preceding proviso in respect of a subsequent sale of goods if,(a) the sale or purchase of such goods is, under the sales tax law of the appropriate State exempt from tax generally or is subject to tax generally at a rate which is lower than 4[four] per cent (whether called a tax or fee or by any other name); and (b) the dealer effecting such subsequent sales proves to the satisfaction of the authority referred to in the preceding proviso that such sale is of the nature referred to in clause (a) or clause (b) of this sub-section. Burden of proof, etc., in case of transfer of goods claimed otherwise than by way of sale.

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VALUE ADDED TAX

A value added tax (VAT) is a form of consumption tax. From the perspective of the buyer, it is a tax on the purchase price. From that of the seller, it is a tax only on the value added to a product, material, or service, from an accounting point of view, by this stage of its manufacture or distribution. The manufacturer remits to the government the difference between these two amounts, and retains the rest for themselves to offset the taxes they had previously paid on the inputs. The value added to a product by or with a business is the sale price charged to its customer, minus the cost of materials and other taxable inputs. A VAT is like a sales tax in that ultimately only the end consumer is taxed. It differs from the sales tax in that, with the latter, the tax is collected and remitted to the government only once, at the point of purchase by the end consumer. With the VAT, collections, remittances to the government, and credits for taxes already paid occur each time a business in the supply chain purchases products. Maurice Laur, Joint Director of the France Tax Authority, the Direction gnrale des impts, was first to introduce VAT on 10 April 1954, although German industrialist Dr. Wilhelm von Siemens proposed the concept in 1918. Initially directed at large businesses, it was extended over time to include all business sectors. In France, it is the most important source of state finance, accounting for nearly 50% of state revenues.[1] Personal end-consumers of products and services cannot recover VAT on purchases, but businesses are able to recover VAT (input tax) on the products and services that they buy in order to produce further goods or services that will be sold to yet another business in the supply chain or directly to a final consumer. In this way, the total tax levied at each stage in the economic chain of supply is a constant fraction of the value added by a business to its products, and most of the cost of collecting the tax is borne by business, rather than by the state. Value added taxes were introduced in part because they create stronger incentives to collect than a sales tax does. Both types of consumption tax create an incentive by end consumers to avoid or evade the tax, but the sales tax offers the buyer a mechanism to avoid or evade the tax persuade the seller that the buyer is not really an end consumer, and therefore the seller is not legally required to collect it. Therefore, the burden of determining whether the buyer's motivation is to
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consume or re-sell is on the seller, and the seller has no direct economic incentive to collect it. The VAT approach gives sellers a direct financial stake in collecting the tax and eliminates a decision needing to be made by the seller about whether the buyer is or is not an end consumer. Comparison with sales tax Value added tax avoids the cascade effect of sales tax by taxing only the value added at each stage of production. For this reason, throughout the world, VAT has been gaining favor over traditional sales taxes. In principle, VAT applies to all provisions of goods and services. VAT is assessed and collected on the value of goods or services that have been provided every time there is a transaction (sale/purchase). The seller charges VAT to the buyer, and the seller pays this VAT to the government. If, however, the purchaser is not an end user, but the goods or services purchased are costs to its business, the tax it has paid for such purchases can be deducted from the tax it charges to its customers. The government only receives the difference; in other words, it is paid tax on the gross margin of each transaction, by each participant in the sales chain. In many developing countries such as India, sales tax/VAT are key revenue sources as high unemployment and low per capita income render other income sources inadequate. However, there is strong opposition to this by many sub-national governments as it leads to an overall reduction in the revenue they collect as well as of some autonomy. In theory sales tax is normally charged on end users (consumers). The VAT mechanism means that the end-user tax is the same as it would be with a sales tax. The main difference is the extra accounting required by those in the middle of the supply chain; this disadvantage of VAT is balanced by application of the same tax to each member of the production chain regardless of its position in it and the position of its customers, reducing the effort required to check and certify their status. When the VAT system has few, if any, exemptions such as with GST in New Zealand, payment of VAT is even simpler. A general economic idea is that if sales taxes are high enough, people start engaging in widespread tax evading activity (like buying over the Internet, pretending to be a business, buying at wholesale, buying products through an employer etc.). On the other hand, total VAT rates can rise above 10% without widespread evasion because of the novel collection mechanism.[citation needed] However, because of its particular mechanism of collection, VAT
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becomes quite easily the target of specific frauds like carousel fraud, which can be very expensive in terms of loss of tax incomes for states Implementation The standard way to implement a value added tax involves assuming a business owes some fraction on the price of the product minus all taxes previously paid on the good. By the method of collection, VAT can be accounts-based or invoice-based.[2] Under the invoice method of collection, each seller charges VAT rate on his output and passes the buyer a special invoice that indicates the amount of tax charged. Buyers who are subject to VAT on their own sales (output tax), consider the tax on the purchase invoices as input tax and can deduct the sum from their own VAT liability. The difference between output tax and input tax is paid to the government (or a refund is claimed, in the case of negative liability). Under the accounts based method, no such specific invoices are used. Instead, the tax is calculated on the value added, measured as a difference between revenues and allowable purchases. Most countries today use the invoice method, the only exception being Japan, which uses the accounts method. By the timing of collection,[3] VAT (as well as accounting in general) can be either accrual or cash based. Cash basis accounting is a very simple form of accounting. When a payment is received for the sale of goods or services, a deposit is made, and the revenue is recorded as of the date of the receipt of fundsno matter when the sale had been made. Cheques are written when funds are available to pay bills, and the expense is recorded as of the cheque dateregardless of when the expense had been incurred. The primary focus is on the amount of cash in the bank, and the secondary focus is on making sure all bills are paid. Little effort is made to match revenues to the time period in which they are earned, or to match expenses to the time period in which they are incurred. Accrual basis accounting matches revenues to the time period in which they are earned and matches expenses to the time period in which they are incurred. While it is more complex than cash basis accounting, it provides much more information about your business. The accrual basis allows you to track receivables (amounts due from customers on credit sales) and payables (amounts due to vendors on credit purchases). The accrual basis allows you to match revenues to the expenses incurred in earning them, giving you more meaningful financial reports.
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Further information: Comparison of cash method and accrual method of accounting Registered VAT registered means registered for VAT purposes, that is entered into an official VAT payers register of a country. Both natural persons and legal entities can be VAT registered. Countries that use VAT have established different thresholds for remuneration derived by natural persons/legal entities during a calendar year (or a different period), by exceeding which the VAT registration is compulsory. Natural persons/legal entities that are VAT registered are obliged to calculate VAT on certain goods/services that they supply and pay VAT into a particular state budget. VAT registered persons/entities are entitled to a VAT deduction under legislative regulations of a particular country. The introduction of a VAT can reduce the cash economy because businesses that wish to buy and sell with other VAT registered businesses must themselves be VAT registered. Examples Consider the manufacture and sale of any item, which in this case we will call a widget. In what follows, the term "gross margin" is used rather than "profit". Profit is only what is left after paying other costs, such as rent and personnel. Without any tax A widget manufacturer spends $1.00 on raw materials and uses them to make a widget. The widget is sold wholesale to a widget retailer for $1.20, making a gross margin of $0.20 The widget retailer then sells the widget to a widget consumer for $1.50, making a gross margin of $0.30 With a sales tax With a "12.5%" & 4% The manufacturer spends $1.00 for the raw materials, certifying it is not a final consumer. The manufacturer charges the retailer $1.20, checking that the retailer is not a consumer, leaving the same gross margin of $0.20.

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The retailer charges the consumer $1.50 + ($1.50 x 10%) = $1.65 and pays the government $0.15, leaving the gross margin of $0.30. So the consumer has paid 10% ($0.15) extra, compared to the no taxation scheme, and the government has collected this amount in taxation. The retailers have not paid any tax directly (it is the consumer who has paid the tax), but the retailer has to do the paperwork in order to correctly pass on to the government the sales tax it has collected. Suppliers and manufacturers only have the administrative burden of supplying correct certifications, and checking that their customers (retailers) aren't consumers.

A large exception to this state of affairs is online sales. Typically if the online retail firm has no "presence" in the state where the merchandise will be delivered, no obligation is imposed upon the retailer to collect sales taxes from "out-of-state" purchasers. Generally, state law requires that the purchaser report such purchases to the state taxing authority and pay the sales tax. It is fair to say that many citizens are unaware of this obligation and that states make little effort to raise that awareness or provide a reasonably easy way of complying with the obligation. With a value added tax With a 10% VAT: The manufacturer spends $1.10 ($1 + ($1 10%)) for the raw materials, and the seller of the raw materials pays the government $0.10. The manufacturer charges the retailer $1.32 ($1.20 + ($1.20 10%)) and pays the government $0.02 ($0.12 minus $0.10), leaving the same gross margin of $0.20. ($1.32 $0.02 $1.10 = $0.20) The retailer charges the consumer $1.65 ($1.50 + ($1.50 10%)) and pays the government $0.03 ($0.15 minus $0.12), leaving the same gross margin of $0.30 ($1.65 $0.03 $1.32 = $0.30). The manufacturer and retailer realize less gross margin from a percentage perspective. Note that the taxes paid by both the manufacturer and the retailer to the government are 10% of the values added by their respective business practices (e.g. the value added by the manufacturer

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is $1.20 minus $1.00, thus the tax payable by the manufacturer is ($1.20 $1.00) 10% = $0.02). With VAT, the consumer has paid, and the government received, the same dollar amount as with a sales tax. The businesses have not incurred any tax themselves. Their obligation is limited to assuming the necessary paperwork in order to pass on to the government the difference between what they collect in VAT (output tax, an 11th of their sales) and what they spend in VAT (input VAT, an 11th of their expenditure on goods and services subject to VAT). However they are freed from any obligation to request certifications from purchasers who are not end users, and of providing such certifications to their suppliers. On the other hand, they incur increased accounting costs for collecting the tax, which are not reimbursed by the taxing authority. For example, wholesale companies now have to hire staff and accountants to handle the VAT paperwork, which would not be required if they were collecting sales tax instead. If you calculate the added overhead required to collect VAT, businesses collecting VAT have less profits overall than businesses collecting sales tax. The advantage of the VAT system over the sales tax system is that under sales tax, the seller has no incentive to disbelieve a purchaser who says it is not a final user. That is to say the payer of the tax has no incentive to collect the tax. Under VAT, all sellers collect tax and pay it to the government. A purchaser has an incentive to deduct input VAT, but must prove it has the right to do so, which is usually achieved by holding an invoice quoting the VAT paid on the purchase, and indicating the VAT registration number of the supplier. Limitations of VAT A Supply-Demand Analysis of a Taxed Market A VAT, like most taxes, distorts what would have happened without it. Because the price for someone rises, the quantity of goods traded decreases. Correspondingly, some people are worse off by more than the government is made better off by tax income. That is, more is lost due to supply and demand shifts than is gained in tax. This is known as a deadweight loss. If the income lost by the economy is greater than the government's income; the tax is inefficient. It must be noted that a VAT and a Non-VAT has the same implications on the microeconomic model.
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The entire amount of the government's income (the tax revenue) may not be a deadweight drag, if the tax revenue is used for productive spending or has positive externalities in other words, governments may do more than simply consume the tax income. While distortions occur, consumption taxes like VAT are often considered superior because they distort incentives to invest, save and work less than most other types of taxation in other words, a VAT discourages consumption rather than production. In the diagram on the right: Deadweight loss: the area of the triangle formed by the tax income box, the original supply curve, and the demand curve Governments tax income: the grey rectangle that says "tax revenue" Total consumer surplus after the shift: the green area Total producer surplus after the shift: the yellow area Imports and exports Being a consumption tax, VAT is usually used as a replacement for sales tax. Ultimately, it taxes the same people and businesses the same amounts of money, despite its internal mechanism being different. There is a significant difference between VAT and Sales Tax for goods that are imported and exported: VAT is charged for a commodity that is exported while sales tax is not Sales Tax is paid for the full price of the imported commodity, while VAT is expected to be charged only for value added to this commodity by the importer and the reseller This means that, without special measures, goods that are imported from one country that does have VAT to another country that does not have VAT will be taxed twice. The exporting country will charge VAT and the importing country will charge sales tax. Vice versa, goods that are imported from a country that does not have VAT to another country that does have VAT will result in no sales tax for those goods, and only a fraction of the usual VAT. There are also significant differences in taxation for goods that are being imported / exported between countries
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with different VATs. sales tax does not have all those problems it is charged in the same way for both imported and domestic goods, and it is never charged twice. To fix this problem of VAT, nearly all countries that use VAT use special rules for imported and exported goods: All imported goods are charged VAT tax for their full price when they are sold for the first time All exported goods are exempted from any VAT payments

"Deemed Exports "Deemed Exports" refers to those transactions in which the goods supplied do not leave the country and the payment for such supplies is received either in Indian rupees or in free foreign exchange. Categories of Supply 8.2 The following categories of supply of goods by the main/ sub-contractors shall be regarded as "Deemed Exports" under this Policy, provided the goods are manufactured in India: (a) Supply of goods against Advance Licence/Advance Licence for annual requirement/DFRC under the Duty Exemption /Remission Scheme; (b) Supply of goods to Export Oriented Units (EOUs) or Software Technology Parks (STPs) or Electronic Hardware Technology Parks (EHTPs) or Bio Technology Parks (BTP); (c) Supply of capital goods to holders of licences under the Export Promotion Capital Goods (EPCG) scheme;

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(d) Supply of goods to projects financed by multilateral or bilateral agencies/funds as notified by the Department of Economic Affairs, Ministry of Finance under International Competitive Bidding in accordance with the procedures of those agencies/ funds, where the legal agreements provide for tender evaluation without including the customs duty; (e) Supply of capital goods, including in unassembled/ disassembled condition as well as plants, machinery, accessories, tools, dies and such goods which are used for installation purposes till the stage of commercial production and spares to the extent of 10% of the FOR value to fertiliser plants. (f) Supply of goods to any project or purpose in respect of which the Ministry of Finance, by a notification, permits the import of such goods at zero customs duty . (g) Supply of goods to the power projects and refineries not covered in (f) above. (h) Supply of marine freight containers by 100% EOU (Domestic freight containersmanufacturers) provided the said containers are exported out of India within 6 months or such further period as permitted by the Customs; and (i) Supply to projects funded by UN agencies. (j) Supply of goods to nuclear power projects through competitive bidding as opposed to International Competitive Bidding. The benefits of deemed exports shall be available under paragraph (d), (e), (f) and (g) only if the supply is made under the procedure of International Competitive Bidding (ICB). http://dgftcom.nic.in/exim/2000/not/not02/not0302.htm Benefits for Deemed Exports

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8.3 Deemed exports shall be eligible for any/all of the following benefits in respect of manufacture and supply of goods qualifying as deemed exports subject to the terms and conditions as given in Handbook (Vol.1):(a) Advance Licence for intermediate supply/ deemed export/DFRC/ DFRC for intermediate supplies. (b) Deemed Export Drawback. (c) Exemption from terminal excise duty where supplies are made against International Competitive Bidding . In other cases , refund of terminal excise duty will be given. *****

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