Tax CLASS NOTES

Unit-2
Classification tax
A. On the basis of Form of Tax
a. Direct Tax
b. Indirect Tax
B. On the basis of source of Tax
a. Income Tax
b. Property Tax
c. Production Tax
d. Consumption Tax
e. Sales Tax
C. On basis of Frequency tax
a. Single Tax
b. Multiple Tax
D.On basis of Specificity of Tax
a. Ad-Valorem Tax
b. Specific Tax
E. On basis of Method of tax
a. Proportional Tax
b. Progressive Tax
c. Regressive Tax
d. Depressive Tax
Direct Tax
A Direct tax is a kind of charge, which is imposed directly
on the taxpayer and paid directly to the government by
the persons (artificial or natural) on whom it is imposed. A
direct tax is one that cannot be shifted by the taxpayer to
someone else. The some important direct taxes imposed
in India are as under:
Income Tax: Income Tax Act, 1961 imposes tax on the
income of the individuals or Hindu undivided families or
firms or co-operative societies (other than companies)
and trusts (identified as bodies of individuals associations
of persons) or every artificial juridical person.
Corporation Tax: The companies and business
organizations in India are taxed on the income from their
worldwide transactions under the provision of Income Tax
Act, 1961.
Indirect Tax
An indirect tax is a tax collected by an intermediary (such
as a retail store) from the person who bears the ultimate
economic burden of the tax (such as the customer). An
indirect tax is one that can be shifted by the taxpayer to
someone else. An indirect tax may increase the price of a
good so that consumers are actually paying the tax by
paying more for the products. The some important
indirect taxes imposed in India are as under:
Customs Duty: The Customs Act was formulated in 1962

to prevent illegal imports and exports of goods.
Central Excise Duty: The Central Government levies
excise duty under the Central Excise Act, 1944 and the
Central Excise Tariff Act, 1985. Central excise duty is tax
which is charged on such excisable goods that are
manufactured in India and are meant for domestic
consumption.
Service Tax: The service providers in India except those in
the state of Jammu and Kashmir are required to pay a
Service Tax under the provisions of the Finance Act of
1994. The provisions related to Service Tax came into
effect on 1st July, 1994. Under Section 67 of this Act, the
Service Tax is levied on the gross or aggregate amount
charged by the service provider on the receiver.
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 classified under the tax slabs are 0% for essential
commodities, 1% on gold ingots and expensive stones,
4% on industrial inputs, capital merchandise and
commodities of mass consumption, and 12.5% on other
items.
Merits of Direct Tax:

1. Justifiable tax- according to paying capacity of tax
payers
2. Creates Civic consciousness- tax payer realize their
right to question the government about development
of state
3. Helps in reduction of inequality (of income and
wealth)
4. Certainty of tax (date, rate, amount of tax)
5. Elasticity- Rates can be revised on yearly basis
6. Educative Value- Tax payer tries to understand tax
calculation and subsequent tax liability
7. Easier to understand
8. Suitable for developed countries
Demerits of Direct Tax:
1. Inconvenience in tax calculation and deposition
2. Unpopular tax
3. Possibility of tax evasion (hiding the taxable income)
4. Narrow in scope- applicable on high income earners
5. Creates barrier in capital formation
6. Influenced from political decisions
7. Not suitable for under-developed country
Merits of Indirect Tax:

1. Convenient for tax payer- as generally they dont
come to know about tax payment
2. Elastic in nature: changeable as per requirement
3. Rare possibility of evasion
4. Equal tax liability on purchaser of goods; irrespective
of social or financial status
5. Social Welfare- applicable high rates on luxury
articles
6. Progressive in nature
7. Wider in coverage than direct tax
8. Suitable for developing countries
9. Easy to collect
Demerits of Indirect Tax
1. Regressive in nature (High burden on low income
persons)
2. Uncertainty- changeable in nature
3. No Civic consciousness
4. Discourage Savings
5. Inflationary in nature
6. Inequitable- as no role of economic condition of tax

sufferer
7. No direct link with government authorities
Distinction between Direct and Indirect Tax:

Basis
Direct tax
Indirect Tax
Meaning
Burden on same
person who
makes tax
payment
Tax burden
suffered by others
Shifting of Tax
Cant Shift
Can be shifted
Impact &
Incidence
On same person
Falls on two
different parties
Civic
Consciousness
Inculcates civic
consciousness
No civic
consciousness
Income &
expenditure
Basically
applicable on
Income
Majorly applicable
on Expenditure
Nature of Tax
Compulsory
Not compulsory;
depends upon
expenditure
Example
Income Tax,
Wealth Tax
Custom Duty, VAT
Whichever is better: Direct Tax or Indirect Tax?

This purely Depends upon economic status of the
country:
o In case of underdeveloped country-Indirect tax is
preferable
o In case of developed country-Direct tax is
suitable
o In case of developing country-Proper blend (mix)
of both the taxes
Income Tax
Income: Meaning of income as generally understoodIncome is periodical monetary return with some sort of
regularity. It may be recurring in nature.
It may be broadly defined as the true increase in the
amount of wealth which comes to a person during a fixed
period of time. Therefore following are included in
income:
Income from Regular and definite source
Different forms of income (including cash and kinds)
Receipt or accrual
Illegal income
Disputed title income
Diversion of income by overriding title
Temporary and permanent income
Income includes losses
Extended meaning of income-
This section includes the following incomes:

Profits or gains of Business or Profession
Dividend
Perquisites in hands of employees
Any special allowances/ dearness allowance
City compensatory allowance
Any salary, commission, bonus etc received by
partner of firm
Deemed profits
Capital gains
Income from gift
Winning from lottery/ speculation income
Employees contribution towards provident fund in
the hands of employees
Tax applicable on above mentioned incomes is termed as

income tax. In case of Individual, below mentioned format
can be used for such calculation:
Computation of Income Tax of Indiviidual

(For the Assessment Year 2012-2013)
Income from Salary
Income from House Property
Profits or Gains of Business or Profession
Capital Gains
Income from other sources

Total Income
Set-off & carry forward of losses and unabsorbed

depreciation
Gross Total Income (GTI)
Less: Deduction from section 80C to 80U
Taxable Income/ Net Income
Tax (as per tax slab)
Add: Education Cess (2% -Education Cess, 1% Higher

Edu. Cess)
Tax Payable
Corporation Tax
Corporate Taxation in India
Corporate Taxes are annual taxes payable on the income
of a body corporate operating in India. The provisions
relating to corporate income tax are contained in the
Income-tax Act, 1961.
For the purpose of taxation companies in India are
broadly classified into domestic companies and foreign
companies or in other words resident or non-resident.
Depending on their residence they are subjected to
different tax treatment. Companies that are registered in
India according to the Companies Act of 1956 are
deemed to be domestic companies and a company whose
chief control and management are wholly located within
India is also known as domestic company. A domestic

company may be a public company or a private company.
A company which is not registered in India and if its
management control is exercised from a foreign country
then it is treated as a foreign company.
Key Provisions
A domestic/ resident company is taxed on-
1. Any income which is received or is deemed to be

received in India in the relevant Previous Year by or on
behalf of such company
2. Any income which accrues or arises or is deemed to
accrue or arise in India during the relevant Previous Year
3. Any income which accrues or arises outside India
during the relevant Previous Year.
A Foreign/non-resident company is taxed on-
1. Any income which is received or is deemed to be

received in India during the relevant Previous Year by or
on behalf of such company
2. Any income which accrues or arises or is deemed to

accrue or arise to it in India during the relevant previous
year.
Companies with more than INR 10 million (1Crore)

total incomes are subjected to a surcharge on their taxes.
Domestic companies pay a surcharge of 5% as against
foreign companies that pay a surcharge of only 2.5%.
Corporate Tax Rates:

Company with total income exceeding INR 10 Company with total income less
million
than INR 10 million
Domestic
Company
32.445% (30% basic rate plus surcharge of 5%

plus education cess of 3%)
30.9% (30% direct tax plus education

cess of 3%)
Foreign
Company
42.23% (40% plus surcharge of 2.5% and

education cess of 3%)
41.2% (40% plus and education cess

of 3%)
Computation of Corporation Tax

(For the Assessment Year 2012-2013)
Income from House Property
Profits or Gains of Business or Profession
Capital Gains
Income from other sources
Total Income
Set-off & carry forward of losses
Gross Total Income (GTI)
Less: Deduction from GTI
Taxable Income/ Net Income
Tax (as per tax slab of company)
Add: Surcharge (5%/2.5% of tax, if Total income exceeds

Rs 1cr)
Total
Tax
Add: Education Cess (3% of total tax, as Education cess)
Tax Payable
Value Added Tax(VAT)
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.
Or
VAT is a multi-point levy where the tax paid on local
purchases from the registered dealer can be set off
against the tax payable on the sale of goods.
Or
As its name implies, VAT is a tax on value added to a
commodity. Its special characteristics is that it falls on
the value added at each stage from the stage of
production to retail stage. VAT is a multipoint system of
taxation, with tax being applied on value addition at each
stage of transaction in the production/ distribution chain.
The term addition implies the increased value of goods at
each stage of production or transfer of goods. This is a
multistage tax with the provision to allow input tax credit.
Input tax credit means setting of the amount of input tax
paid by a registered dealer against the output tax as VAT.
Basically VAT belongs to sales tax family.
History of VAT:
VAT is comparatively of recent origin which was

suggested by industrial executives of Germany in year
1918. For the first time, it was adopted on restricted basis
in France in 1954, since then it has become favorite
category of tax authorities. European Economic
Community (EEC) adopted this tax system in 1967.
In India, Haryana became the first state in the
country which introduced VAT in year 2004. Due to the
federal nature of the Indian constitution, the states do
have the power to set their own VAT rate. Over the years
the experience of implementing VAT has been
encouraging, with the empowered committee constantly
reviewing the progress of implementation.
Rates and turnover for VAT:
The standard rate of VAT is 12.5%. There are reduced
rates of 4% and 1%
Ten items have been kept in exempted schedule of
zero rate
Floor rate of 20% for articles like cigarettes and
lottery tickets
The minimum annual turnover for V.A.T. registration
is INR 500,000
V.A.T. returns are filed on a monthly or quarterly
basis
Main Benefits/ Features of VAT:

A. Minimizes tax evasion
B. Set-off is given for input tax credit
C. Abolishes multiplicity of taxes (like turnover tax,
sales tax etc)
D.Replaces a system of inspection by a system of
built-in-self assessment
E. Simpler and more transparent tax system
F. Improves tax compliance
G.Generates higher tax revenue growth
H.Promotes competitiveness of exports

Tax CLASS NOTES

Uploaded by

Copyright:

Available Formats

Tax CLASS NOTES

Uploaded by

Document Information

Original Description:

Copyright

Available Formats

Share this document

Share or Embed Document

Sharing Options

Did you find this document useful?

Is this content inappropriate?

Copyright:

Available Formats

Tax CLASS NOTES

Uploaded by

Copyright:

Available Formats

Unit-2

Customs Duty: The Customs Act was formulated in 1962

Merits of Direct Tax:

Merits of Indirect Tax:

6. Inequitable- as no role of economic condition of tax

Distinction between Direct and Indirect Tax:

Custom Duty, VAT

Whichever is better: Direct Tax or Indirect Tax?

This section includes the following incomes:

Tax applicable on above mentioned incomes is termed as

Computation of Income Tax of Indiviidual

Income from Salary

Income from House Property

Profits or Gains of Business or Profession

Income from other sources

Set-off & carry forward of losses and unabsorbed

Less: Deduction from section 80C to 80U

Taxable Income/ Net Income

Tax (as per tax slab)

Add: Education Cess (2% -Education Cess, 1% Higher

India is also known as domestic company. A domestic

A domestic/ resident company is taxed on-

1. Any income which is received or is deemed to be

A Foreign/non-resident company is taxed on-

1. Any income which is received or is deemed to be

2. Any income which accrues or arises or is deemed to

Companies with more than INR 10 million (1Crore)

Corporate Tax Rates:

32.445% (30% basic rate plus surcharge of 5%

30.9% (30% direct tax plus education

42.23% (40% plus surcharge of 2.5% and

41.2% (40% plus and education cess

Computation of Corporation Tax

Income from House Property

Profits or Gains of Business or Profession

Income from other sources

Set-off & carry forward of losses

Gross Total Income (GTI)

Less: Deduction from GTI

Taxable Income/ Net Income

Tax (as per tax slab of company)

Add: Surcharge (5%/2.5% of tax, if Total income exceeds

Add: Education Cess (3% of total tax, as Education cess)

Value Added Tax(VAT)

VAT is the indirect tax on the consumption of the

VAT is comparatively of recent origin which was

Main Benefits/ Features of VAT:

You might also like