RESEARCH PROJECT ON

Taxation in India
SUBMITTED TO

In Fulfillment of the Requirements for Internal Component in

ECONOMICS-II

By

Mohamed Farvace .J

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 Declaration

I do hereby declare that the project entitled Taxation in

India submitted to National law school in partial
fulfillment of requirement of award of degree in
undergraduate in law is a record of original work done by
me under the supervision and guidance of faculty in
charge of department of Economics of National law school
and has not formed basis for award of any degree or
diploma or fellowship or any other title to any candidate
of any university.

Date: 22/07/2016

MOHAMED FARVACE.J
SECTION-A

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 Certificate

This is to certify that the project entitled Taxation in India

submitted to Tamil Nadu National law school in partial fulfillment of
requirement of award of degree of under graduate in Law done by
Mohamed Farvace.J under the supervision and guidance of faculty in
charge of department of Economics of National Law School.

Place: Trichy
Date: 22/07/2016

Acknowledgement
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 This project could not have been done without the help, guidance,
and support of few people who stood by my side from the very
beginning of this project.

Im very glad and grateful to the faculty in charge of department of

Economics who was the initiative and inspired me to take up this
project. His contribution to this project is an immense one.

Im also grateful to my parents and friends who all stood as a pillar of

support for me during this entire research work. Their contribution to
this project is an indispensable one.

TAXATION IN INDIA

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Taxation in India:-

The Indian Tax Structure is quite elaborate, with clear distinction in authority between Central,
State and local governments. The taxes levied by the Central government are on income (other
than tax on agriculture income which would be levied by the state government), customs duties,
central excise and service tax.

The State government levies Value Added Tax (VAT), sales tax in states where VAT is not
applied, stamp duty, state excise, land
revenue and tax on professions.

Local bodies levy tax on property, and for utilities like water supply, drainage etc.

In the last 10 to 15 years, tax system in India has been subjected to significant reforms. The tax
rates have been revised and tax laws have been modified. Since April 1, 2005 many State
Governments in India have replaced the sales tax with VAT.

Indian Tax Structure After Independence:-

The period after Independence was quite challenging for the tax planners. A huge black economy
set in both due to Second World War and the increase in economic activity after independence.
Savings and investment were encouraged through the various taxation laws by the way of
incentives. There was a need for generating huge amount of revenues to fund the economic
growth of the country. The tax department took great care to plan the tax structure not only with
the aspect to widen the income tax base, but also to look for alternate taxes and to eradicate tax
avoidance .The department was severely tested due to the high volumes of work.

Some of the prominent taxes that came into existence were:-

Business Profits Tax (1947)

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 Capital Gains (1946-48 to 1956)

Estate Duty (1953)

Wealth Tax (1957)

Expenditure Tax (1957)

Gift Tax (1958)

To check the growth of black money, high denomination notes were demonetized in 1946.

The Income tax Act was re modified in 1961, replacing the outdated law of 1922.

Income Tax Structure Post Liberalization:-

The wave of tax reforms which started across the world in the second half of 1980's found its
way into India. As part of its policy of liberalization, India introduced tax reforms in the
1990's.The reforms introduced in the Indian tax structure are different in comparison to other
countries. The tax reforms in India took place independent of interference from any external
multilateral agency unlike some other countries. But the tax reforms took place in such a way as
to ensure its adherence to the prevailing International trends.

During the initial stages of reforms, the restructuring of the tax structure took place with a view
to increase savings and use the increased savings towards investment, to bring in equitable
distribution of income and to rectify the disparities due to oligopolistic market that existed due to
co existence of both private and public sector. The tax structure reform in India can be used as an
example for many developing countries that are in the same path of development, due to the
large size of the country and the disproportion in the socio economic condition across the
country.

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Direct Tax:-

Direct tax is the tax which is charged directly on the tax payer. For e.g, property tax and
income tax. In other words direct tax is that tax that is deducted from one's salary.

Direct Taxation in India :-

Direct taxation in India is taken care by the Central Board of Direct Taxes (CBDT); it is a
division of Department of revenue under Ministry of Finance. CBDT is governed by the revenue
act 1963.CBDT is given the authority to create and control direct taxes in India. The most
important function of CBDT is to manage direct tax law followed by Income Tax department.

In India the tax structure is divided amongst the central government and state government. The
central government levies taxes on income, custom duties, central excise and service tax. While
the state government levies tax like state excise, stamp duty, VAT (Value Added Tax), land
revenue and professional tax.

Corporate Tax:-

A company has been defined as a juristic person having an independent and separate
legal entity from its shareholders. Income of the company is computed and assessed
separately in the hands of the company. However the income of the company which is
distributed to its shareholders as dividend is assessed in their individual hands. Such distribution
of income is not treated as expenditure in the hands of company, the income so distributed is an
appropriation of the profits of the company.

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Taxable Corporate Income:-
The tax levied on a companys income is based on its legal residence. Companies of Indian
origin are levied tax in India, while International companies are levied tax on earnings from their
Indian operations. For International companies royalty, interest, gains from sale of capital assets
within India, dividends from Indian companies and fees for technical services are all treated as
income arising in India.

Income Tax in India:-

Income tax in India is levied by the Central government and is monitored and
controlled by Central Board OF Direct Taxes under Ministry of Finance in allay with the
provisions of the Income Tax Act. Income earned in a given financial year is subject to tax as
per the rates prescribed for that year. A financial calendar is from April 1 to March 31 of the
following year. India has adopted the residential form of tax system. It means tax payers will be
divided into residents or non residents. A tax payer can also be classified as ordinary residents.

Residential Status:-

An individual is resident in India if he is in India in the tax year for:

182 days or more; or

60 days or more (the period of 60 days stands changed to 182 days or more for Indian
citizens or persons of Indian origins on a visit to India; and also for citizens of India who
leave India for employment abroad as member of a crew of an Indian ship) during the tax
year, and an aggregate of 365 days or more during the four years preceding the tax year.

An individual who does not satisfy the above conditions is a non-resident.

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A resident is "not ordinarily resident" in India in any tax year if he:-

Has been "non-resident" in India in nine out of the 10 previous years preceding that year:
or

Has during the previous seven years, preceding that year, been in India for a total period
of 729 days or less.

Taxability based on status

Taxability Based On Status:-

Residential Status Indian Sourced Income Foreign Sourced Income

Resident Taxable In India Taxable In India
Resident but not ordinarily resident Taxable In India Not Taxable In India
Non resident Taxable In India Not Taxable In India

Wealth Taxation In India:-

The wealth taxation in India is known as the wealth tax act, 1957. It applies to all the
citizens of the country. It is one of the most important direct taxes. It is paid on the property
ownership benefits. Till a person retains the ownership of a property, he or she has
to pay wealth tax based on the prevailing market rate. Even if the property is not yielding any
income, Wealth tax would have to be paid.

Payment Procedures Of The Wealth Tax In India:-

An Assessee is one who pays the wealth tax. An assessee can belong to any of the following
categories:

A Company.

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 A Hindu undivided family.

An Association of Persons or a Body of Individuals.

Non corporative taxpayers.

A dead persons legal representative, the executor or administrator.

A non residents agent.

For a Hindu Undivided Family the tax is considered on the income derived from joint family
collections. But for a non-corporative taxpayers, whose account is audited they have to pay the
wealth tax according to the existing tax rate.

Chargeability To Wealth Tax In India:-

One of the main factors for a person to pay the wealth tax in India is the persons domicile status.
According to the act, the domicile status of the assessee and the domicile status of the same
needed for payment of the Income Tax must remain similar.

Another factor based on which wealth tax is computed is the status of the assessee, whether he is
a citizen or a non citizen. For citizens the wealth of the person within India is taxed, while for
non citizens the wealth of the person within India is taxed, while the wealth located outside India
is not taxed.

Assets On Which Wealth Tax Is Charged:-

The assets on which wealth tax is chargeable in India are:

Residence like guesthouse, residential house, urban farmhouse and commercial property.

Automobile for personal use.

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 Precious items like jewelry, bullion, furniture, utensils.

Yachts, boats and aircrafts used for non commercial purposes.

Urban land under the authority of municipality or cantonment board having a population
of, 10,000 and more.

If the cash in hand is more than Rs 50000 for individuals and Hindu Undivided
Families.

Indirect tax:-

Charge levied by the State on consumption, expenditure, privilege, or right but not
on income or property. Customs duties levied on imports, excise duties on production,
sales tax or value added tax (VAT) at some stage in production-distribution process, are
examples of indirect taxes because they are not levied directly on the income of the consumer or
earner. Since they are less obvious than income tax (because they don't show up on the wage
slip) politicians are tempted to increase them to generate more state revenue. Also called
consumption taxes, they are regressive measures because they are not based on the ability to pay
principle.

Indirect Tax System India

Indirect Taxes Pre Reforms:-

The indirect tax structure was extremely irrational between the reforms. The Constitution gives
the permission to levy a multitude of indirect taxes. But the most important ones are customs and
excise duties charged by the Central government and sales tax excepting inter state sales tax to

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be charged by the state government. The indirect taxes levied by the centre like customs, excise
and central sales tax and the major indirect taxes levied by the states and civic bodies like
passenger and goods tax, electricity duty and octroi when taken together did not present a
rational system.

Indirect Taxes Post Reforms:-

Even post reforms, the indirect tax regime in India is still in the early stages of growth.
Both the Central and State governments charge a multitude of indirect taxes. The central
government charges tax on goods at the point of import (Customs duty), manufacture
(Excise duty), inter state sales (Central sales tax or CST) and on provision of services
(Service tax).

The state governments charge tax on goods sold within the state (Sales tax/Value Added
Tax or VAT), and on the goods that enter the state (Entry tax).

In the present scenario corporate would have to analyze the tax cost involved in a
transaction, have enough backup documentation to support their tax positions and keep
looking for ways for tax maximization.

India Budget 2008:-

Indirect Taxes:-

As per the Ministry Of Finance there has been significant development in planning for
introducing the goods and services tax (GST) from April 1 2010.As a first step the rate of central
sales tax (CST) is under proposal to be decreased to 2 per cent from April1 2008.The general rate
of central value added tax (CENVAT) has been decreased from 16 per cent to 14 per cent across
all goods.

Sales Tax In India:-

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Sales Tax in India is a form of tax that is imposed by the government on the sale or purchase of a
particular commodity within the country. Sales Tax is imposed under both, Central Government
(Central Sales Tax) and State Government (Sales Tax) Legislation. Generally, each state follows
its own sales tax act and levies tax at various rates. Apart from sales tax, certain states also
imposes additional charges like works contracts tax, turnover tax and purchaser tax. Thus, sales
tax acts as a major revenue-generator for the various State Governments.

Sales tax is an indirect form of tax, wherein it is the responsibility of the seller of the commodity
to collect and recover the tax from the purchaser. Generally, sale of imported items and sales by
way of export are not included in the range of commodities which requires payment of sales tax.
Moreover, luxury items (like cosmetics) are levied heavier sales tax rates. Central Sales Tax
(CST) Act that falls under the direction of the Central Government takes into account all the
interstate sales of commodities.

Thus, sales tax is to be paid by every dealer on the sale of any commodity, made by him during
inter-state trade or commerce, irrespective of the fact that no liability to pay tax on the sale of
goods arises under the tax laws of the appropriate state. He is to pay sales tax to the sales tax
authority of the state from which the movement of the commodities commences. However, from
April 01, 2005, most of the states in India have supplemented sales tax with a new Value Added
Tax (VAT).

The practice of VAT executed by State Governments is applied on each stage of sale, with a
particular apparatus of credit for the input VAT paid. VAT in India can be classified under the
following tax slabs:

0% for essential commodities

1% on gold ingots and expensive stones

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 4% on industrial inputs, capital merchandise and commodities of mass consumption

12.5% on other items

Variable rates (state-dependent) are applicable for petroleum products, tobacco, liquor
etc.

Tax Deduction and Collection Account Number (TAN):-

TAN is the abbreviated form of Tax Deduction and Collection Account Number. It is actually a
unique ten digit alpha-numeric (comprising both alphabets and numerals) number, allotted by the
Income Tax Department of India. A TAN is mandatory for every individual who is entrusted with
the responsibility of deducting or collecting
tax at source, on behalf of the Income Tax
Department of India. Moreover, according
to the provisions of Section 203 A of the Income Tax Act, it is obligatory to quote the TAN in all
TDS (Tax Deducted at Source) and TCS (Tax Collected at Source) return (including e TDS/
TCS return).

TAN should also be mentioned on the TDS/ TCS payment challan and all the TDS/ TCS
certificates to be issued. In case, TAN is not quoted in TDS/TCS returns, they wont be
approved. Moreover, failure to quote the TAN on challans for TDS/TCS payments makes them
unacceptable in banks. In order to apply for a TAN card or to make any alterations in an existing
TAN record, one must submit the requisite application form (Form 49B), which is available at
any of the Tax Information Network Facilitation Centers (TIN-FCs) that are managed by the
National
Securities
Depository
Ltd (NSDL).

There are also provisions for online application of form. The applicants have to pay only Rs. 50

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and an additional service tax (as applicable) as processing fee at the TIN-FCs, when submitting
Form 49B. Care should be taken that the form does not remain incomplete form, as they will be
considered invalid and rejected. In case of failure to apply for TAN (individuals who require
TAN) or not quoting the same in the specified documents and accounts, the individual will be
required to pay a penalty of Rs. 10,000.

Permanent Account Number (PAN):-

Permanent Account Number or PAN is issued by the Income Tax Office of India, to all those
who are required to pay income tax in the country. Thus, taxpayers whose income is taxable are
issued a Permanent Account Number, which is similar to the Social Security Number issued in
United States to citizens and other legal residents. So, PAN in India is nothing, but a national
identification number. The main purpose of allotting PAN card is to outline the monetary
transactions of individuals and to avert any sort of tax evasion by tax payers.

Apart from keeping a track on the various financial dealings of a person, a PAN is also required
for many other important activities. As every individual is assigned a unique, national and
permanent number as his/her PAN, the number is required while opening an account, applying
for a phone line, receiving salary or other professional fees. Thus, it becomes an authentic
document, proving the identity of the individual. The PAN of a person remains the same even if
there is residential change of address from one state to another.

Each individual entitled to a Permanent Account Number receives a PAN card, wherein the
number is mentioned. The PAN follows the following structure XXXXX1111X. The first five
characters are letters; the next 4 are numerals, and the last character is again a letter. A Permanent
Account Number that doesnt follow this pattern is deemed as invalid. Moreover, the fourth
character of the PAN is one of the following, depending on the type of assessee who is allotted
the number.

C - Company

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 P - Person

H - Hindu Undivided Family (HUF)

F - Firm

A - Association of Persons (AOP)

T - AOP (Trust)

B - Body of Individuals (BOI)

L - Local Authority

J - Artificial Juridical Person

G - Government

In addition, the fifth character of the PAN is the first character in the surname of the assessee.
Though PAN is generally issued to individuals to keep track of the tax payment, it can however
also be issued to non-taxpayers in India.

Value Added Tax:-

VAT is the indirect tax on the consumption of the goods, paid by its original producers upon the
change in goods or upon the transfer of the goods to its ultimate consumers. It is based on the
value of the goods, added by the transferor.
It is the tax in relation to the difference of
the value added by the transferor and not
just a profit.

Across the globe, VAT is payable on the goods and services, which are part of the national GDP.

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It means that tax is applicable at every stage of the value added of the goods.

VAT In India:-

Post liberalization, it can be said that Value Added Tax in India is one of the most important
constituent of tax reforms.VAT can also be referred to as a multi point destination based system
of taxation, such that tax is charged at every step of transaction in the supply chain.VAT is
actually a state subject in India, acquired from Entry 54 of the state list, for which states are
sovereign in making decisions. With the help of tax departments in their respective states, state
governments ensure the levy of VAT. The Central government is instrumental in guiding the state
government with respect to execution of VAT.

The department of revenue under the Ministry of Finance is given the power to have control with
respect to direct and indirect taxes, through two statutory boards, i.e. Central Board OF Direct
Taxes (CBDT) and the Central Board Of Customs and Central Excise (CBEC).The sales tax
division of department of revenue is responsible for levying VAT. India had a problem of double
taxation. Goods were taxed before manufacture once and then again after manufacturing. To
avoid such double taxation, which had a negative impact on the economy, VAT was introduced.

Method Of Collecting VAT:-

VAT can be collected in two different methods. In method one, tax is charged both on the basis of
the tax which is paid on purchase and the tax that is payable on the sale(shown separately in the
invoice).Finally the difference between the tax paid on purchase and the tax paid on sale
according to the invoice is VAT.

In the other method tax is collected and charged on the cumulative value of the tax paid on sale
and purchase, by applying the rate of tax applicable to the goods. Which means the difference
between the sale price and purchase price is VAT.

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Benefit Of VAT:-
The chief benefit for execution of VAT is:-

Reduces tax evasion.

Multiple taxes such as turnover tax, surcharge on sales tax, additional surcharge etc have
been put an end to.

Advocated an internal system of self assessment for VAT liability.

Tax structure becomes easier and more visible.

Enhances tax compliance and results in higher revenue growth.

Encourages competitiveness of exports.

Excise Duty:-

Central excise duty is an indirect tax which is charged on such goods that are manufactured in
India and are meant for domestic consumption. The taxable fact is "manufacture" and the
liability of central excise duty arises as soon as the goods are manufactured. The tax is on
manufacturing, it is paid by a manufacturer, which is then passed on to the customer.

The term "excisable goods" means the goods which are specified in the First Schedule and the
Second Schedule to the Central Excise Tariff Act 1985.

The term "manufacture" refers to any process

Related or supplementary to the combination of a manufactured product.

Which is specified in relation to any goods in the Section or Chapter Notes of the First
Schedule to the Central Excise Tariff Act 1985 as amounting to manufacture or

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 Which in relation to the goods specified in the Third Schedule involves packing or
repacking of such goods in a unit container or labeling or re-labeling of containers
including the declaration or alteration of retail sale price on it or adoption of any other
treatment on the goods to render the product marketable to the consumer.

Three different types of Central Excise Duties exist in India. They are listed below: -
Basic Excise Duty In India:-
Excise Duty, imposed under section 3 of the Central Excises and Salt Act of1944 on all
excisable goods other than salt produced or manufactured in India, at the rates set forth in the
schedule to the Central Excise tariff Act, 1985, falls under the category of Basic Excise Duty In
India.

Additional Duty of Excise:-

Section 3 of the Additional Duties of Excise Act of 1957 permits the charge and collection of
excise duty in respect of the goods as listed in the Schedule of this Act. This tax is shared
between the Central and State Governments and charged instead of Sales Tax.

Special Excise Duty :-

According to Section 37 of the Finance Act, 1978, Special Excise Duty is levied on all excisable
goods that come under taxation, in line with the Basic Excise Duty under the Central Excises and
Salt Act of 1944. Therefore, each year the Finance Act spells out that whether the Special Excise
Duty shall or shall not be charged, and eventually collected during the relevant financial year.

India Budget 2008:-

Excise Duty:-

The general rate of CENVAT has been brought down from 16 per cent to 14 per cent.

The CENVAT on many goods like cars, writing paper, printing paper and packing paper,
drugs and pharmaceuticals, water filtration and purification devices, pan masala not
containing tobacco etc have been decreased.

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 For goods like anti AIDS drugs and bulk drugs, packaged tender coconut water, tea and
coffee mixes, specified refrigeration equipment, etc have been exempt from excise duty.

For packaged software the duty has been increased from 8 per cent to 12 per cent.

The duty of 1 per cent on National Calamity and Contingent Duty has been imposed on
mobile phones.

Tax Deducted at Source:-

Assessee pays tax in the assessment year on income earned in previous year. Due to this rule
the tax collection is delayed till the completion of the previous year. Even sometimes
people conceal their income and the tax is not paid at all. In order to overcome these problems,
government started to deduct some amount of tax from the amount which is receivable by the
assessee. The amount of tax so deducted is called as "Tax Deducted At Source" or TDS in India.

Advance Tax:-
In some cases, the assessee is required to make a payment of advance tax. Such taxes paid in
advance are called prepaid taxes.

Tax deduction is mainly done to reduce ones taxable income. In a way tax deductions can reduce
the taxable income and thus provide tax relief.

Tax deducted in this manner needs to be deposited in the Government treasury and assigned to
the Central Government, within a stipulated time period. Indian Government is adhering to the
policy of TDS to broaden its tax bracket in the country. Income gained through several sources
falls under the tax deduction at source or TDS scheme. Some of such income that is subjected to
Tax Deduction at Source is as follows:

Salary.

Interest.

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 Rental fee.

Interest on Securities.

Insurance commission.

Dividends from shares and UTI/Mutual Funds.

Commission and brokerage.

Prize money won from lotteries, horse races, etc.

Payments to non-resident sportsmen or sports associations.

Commission on sale of lottery tickets.

Fees for professional and technical services and the like.

Compensation for compulsory acquisition.

Income from units of an offshore fund.

Income from foreign currency bonds or shares of Indian Companies (unless specified as
tax-free).

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REFERENCES:

Datt&Sundaram-Indian Economy
Schaums Series-Macroeconomics
TNHSC Economics Year I
NCERT Macroeconomics
Gregory Mankiw Macroeconomics

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