Business taxation – Juilee Bhingarde-

Lecture 1 notes
Direct and indirect tax

Direct Tax Indirect tax

Income and profits
Levied
of individuals and Goods and services.
on
businesses.
Consumers through intermediaries
Taxpayer directly
Paid by (businesses) who collect and pass it
to the government.
on to the government.
Can be shifted to consumers
through higher prices, making it
Cannot be shifted
Burden regressive - low-income people pay
to another person.
a higher proportion of their income
in tax.
Progressive - tax
rate increases with Regressive - tax burden falls
Impact income, leading to disproportionately on those with
a fairer distribution lower incomes.
of tax burden.
Income
tax, corporate Value-added tax (VAT), sales
Examples
tax, capital gains tax, excise duty, customs duty.
tax.

Income tax act 1961

Here are some of the key features of the Income Tax Act, 1961:

 Progressive tax system: The Act imposes a progressive tax system, which means
that the rate of tax increases as income increases. This is designed to ensure that
those who earn more income pay a larger share of their income in tax.
 Exemptions and deductions: The Act provides for a number of exemptions and
deductions that can be claimed from total income. This helps to reduce the amount
of tax that people have to pay.
 Advance tax: The Act requires taxpayers to pay advance tax on their estimated
income for the year. This helps to ensure that the government receives income tax
revenue throughout the year.
 Self-assessment system: The Act is based on a self-assessment system, which
means that taxpayers are responsible for calculating their own tax liability and filing
their own income tax returns.
 Tax administration: The Act is administered by the Central Board of Direct Taxes
(CBDT), which is a part of the Ministry of Finance. The CBDT is responsible for the
collection and administration of income tax in India.

The Income Tax Act, 1961, is an important piece of legislation that plays a vital role
in the Indian economy. The Act helps to raise revenue for the government, which is
used to fund public services such as education, healthcare, and infrastructure. It also
helps to promote investment and economic growth.

Amendments in Income tax act

The Income Tax Act, 1961 has been amended numerous times since its inception.
Some significant amendments in recent years include:

Finance Act, 2023:

 New tax regime as the default option: The newly introduced Section 115BAC
proposes the new tax regime (lower tax rates with fewer deductions) as the default
option for taxpayers.
 Revision of basic exemption limit and tax slabs: The basic exemption limit for
individuals under the new tax regime is proposed to be increased to INR
3,00,000. The number of tax slabs is also proposed to be reduced.
 Increased threshold for rebate under Section 87A: The threshold limit for total
income eligible for rebate under Section 87A is proposed to be increased from INR
5,00,000 to INR 7,00,000.
 Reduced surcharge for highest income bracket: The highest surcharge rate of
37% for income above INR 5,00,00,000 is proposed to be reduced to 25%.
 Tax on online gaming winnings: Winnings from online gaming are proposed to be
taxed at a rate of 30% (plus surcharge and cess).
 Tax benefits for manufacturing co-operative societies: A new section 115BAE
proposes a reduced tax rate of 15% for manufacturing co-operative societies
established on or after April 1st, 2023, subject to certain conditions.

Finance Act, 2022:

 Pre-filled income tax returns: The government started pre-filling income tax returns
with certain information to simplify the filing process.
 Tax deduction on health insurance premiums increased: The maximum
deduction allowed for health insurance premiums under Section 80D was increased
to INR 75,000 for senior citizens and INR 50,000 for others.
 Tax benefits for startups extended: The tax holiday for startups was extended by
one year.

Finance Act, 2021:

 Tax on dividends reduced: The tax on dividends received by individuals was

reduced from 10% to 7%.
 Faceless assessment and appeals: A faceless assessment and appeal system
was introduced to reduce taxpayer interaction with tax officials and improve
transparency.
 Tax exemption for foreign remittances received by non-residents: Tax
exemption was introduced for foreign remittances received by non-residents for
certain purposes.

Earlier amendments:

The Income Tax Act has undergone various amendments over the years to address
changing economic conditions, social needs, and evolving tax practices. Some
notable earlier amendments include:

 Finance Act, 2020: Introduced the Vivad se Vishwas scheme to settle tax disputes.
 Finance Act, 2019: Increased the standard deduction for salaried individuals.
 Finance Act, 2018: Introduced the long-term capital gains tax on equity shares.
 Finance Act, 2017: Introduced the Goods and Services Tax (GST) and eliminated
the cascading effect of taxes.

Budget of Indian Government

The Indian government budget presents a comprehensive financial roadmap for the
year, impacting various aspects of the nation's economy and society. Here are some
key features of the Indian government budget:

1. Fiscal Consolidation:

 Aiming to reduce the fiscal deficit, which is the gap between the government's
income and expenses. This implies controlling expenditure while maximizing
revenue collection.
 Reducing the fiscal deficit is crucial for maintaining economic stability and promoting
long-term growth.
 2. Capital Expenditure:

 Emphasizing capital expenditure on infrastructure development, including

roads, railways, airports, and renewable energy projects.
 Increased capital expenditure aims to create jobs, boost economic activity, and
enhance the overall infrastructure landscape.

3. Sector-Specific Allocations:

 The budget allocates funds to various sectors, including

education, healthcare, agriculture, rural development, defense, social welfare, and
others.
 The allocation reflects the government's priorities and its commitment to improving
different aspects of citizens' lives.

4. Tax Reforms:

 The budget often introduces tax reforms aimed at simplifying the tax
system, increasing tax revenue, and promoting economic growth.
 Tax reforms can include changes in tax rates, exemptions, deductions, and slabs to
achieve the desired outcomes.

5. Social Welfare Programs:

 The budget typically allocates funds for various social welfare programs like
pensions, scholarships, subsidies, and poverty alleviation schemes.
 These programs aim to support vulnerable populations and promote social inclusion
and equity.

6. Budget Transparency and Accountability:

 The government strives to improve budget transparency and accountability by

making budget documents and information easily accessible to the public.
 This allows for greater scrutiny and public participation in the budget process.

7. Focus on Sustainability:

 The budget increasingly focuses on promoting sustainable development through

initiatives like renewable energy, clean technology, and environmental conservation.
 This reflects the government's commitment to mitigating climate change and
ensuring a sustainable future.
 8. Digital Initiatives:

 The budget encourages digitalization in various sectors, including tax

administration, education, and healthcare.
 Digitalization aims to improve efficiency, transparency, and accessibility of
government services for citizens.

9. Economic Growth and Development:

 The budget aims to promote economic growth and development by creating a

conducive environment for businesses, encouraging investments, and fostering
innovation.
 This contributes to job creation, poverty reduction, and improved living standards for
citizens.

10. Long-Term Vision:

 The budget is often aligned with the government's long-term vision and development
goals for the country.
 This ensures consistency in the government's approach and facilitates the
achievement of long-term objectives.

Difference between financial year and current year

Financial Year Current year

Starts on April 1st and ends on Starts on January 1st and ends on
March 31st of the following year. December 31st.

Used by
Used for general purposes and
businesses, governments, and
everyday life, such as personal
non-profit organizations for
finances, social events, and news
accounting and financial reporting
reporting.
purposes.
 Allows for better comparison of May not be suitable for comparing
financial performance across financial performance due to different
different periods. start and end dates.

Aligned with the government's

Not aligned with the government's
budgetary cycle and tax filing
budgetary cycle or tax filing deadlines.
deadlines.

Often used when referring to Commonly used in informal contexts

official government documents and when referring to general
and financial statements. timeframes.

CBDT:

The Central Board of Direct Taxes (CBDT) plays a crucial role in Indian taxation but
doesn't directly levy taxes itself. Here's a breakdown of its function and its impact on
taxation in India:

CBDT Function:

 Policy formulation: CBDT recommends and implements tax policy decisions as per
the Finance Act and other relevant legislation.
 Tax administration: CBDT oversees the administration of direct taxes through the
Income Tax Department, including assessment, collection, and recovery of taxes.
 Tax legislation: CBDT is responsible for drafting and enacting tax laws and
amendments.
 Dispute resolution: CBDT handles appeals and disputes related to income tax
assessments.
 Tax research and analysis: CBDT conducts research and analysis to inform tax
policy decisions and improve tax administration.

Impact on Taxation:

 Policy changes: CBDT's recommendations and policy decisions directly impact tax
rates, exemptions, deductions, and other aspects of the tax system.
 Tax administration efficiency: CBDT's efforts aim to improve the efficiency and
effectiveness of tax administration, ensuring fair and timely collection of taxes.
 Tax compliance: CBDT's initiatives promote tax compliance by taxpayers and
address tax evasion.
 Dispute resolution process: CBDT's role in dispute resolution ensures a fair and
transparent process for taxpayers and helps resolve tax-related issues.
 Data analysis and insights: CBDT's research and analysis provide valuable
insights into taxpayer behavior and trends, informing policy decisions and improving
tax administration.

Taxation Processes:

 CBDT does not directly levy taxes. Instead, it sets the framework and policies for
taxation.
 The Income Tax Department, under the CBDT's supervision, assesses and collects
taxes from taxpayers based on applicable laws and regulations.
 Taxpayers are responsible for filing income tax returns and paying their taxes on
time.
 Disputes related to income tax assessments can be appealed through the CBDT's
dispute resolution process.

Importance of CBDT in Taxation:

 Ensures fair and efficient tax administration.

 Promotes economic growth through robust tax collection.
 Provides a framework for a stable and predictable tax system.
 Protects taxpayers' rights through efficient dispute resolution.

Difference between assessment year and previous year

Assessment Year Previous year

The year in which income
The financial year immediately
earned during the previous year
preceding the assessment year.
is assessed and taxed.
The AY starts on April 1st and
It is the year in which the income
ends on March 31st of the
was actually earned.
following year.
It is used to identify the The PY is used to determine the
relevant tax laws and regulations amount of income that is subject to tax
applicable to the income earned. in the AY.
 For example, income earned
during the period April 1, 2022, to For example, for the AY 2023-
March 31, 2023, is assessed and 2024, the PY is 2022-2023.
taxed in the AY 2023-2024.

Person in Taxation:

1. Individual:

 In general, "person" often refers to an individual taxpayer, meaning a natural person

who earns income and is subject to income tax.
 This includes salaried employees, business owners, professionals, and any other
individual who receives income from any source.

2. Hindu Undivided Family (HUF):

 In India, "person" also includes Hindu Undivided Families (HUFs).

 HUFs are a specific type of family unit with a unique tax status.
 The income of an HUF is assessed and taxed as a single entity, separate from the
individual members.

3. Company – Large corporations like reliance.

4. Firm – Partnerships – LLP

5. Association of persons (AOP): An association of persons formed for a common

purpose, whether incorporated or not. It also includes companies and firms.

 6. Body of Individuals (BOI): A group of individuals coming together for a specific

purpose, typically for a short duration.
 7. Local authority: Government bodies like BMC.
 8. Artificial Judicial Person: Trusts, Associations, Government agencies.
 Characteristics of Income

 Cash or kind
 Legal or Illegal
 Temporary or permanent
 Receipt or accrual
 Income/ Expenses
 Gifts
 Lumpsum or instalments

Heads of income

Here are the five heads of income under the Income Tax Act, 1961:

1. Income from Salaries:

 Includes income received from employment, such as

salaries, wages, commissions, and allowances.
 Also includes perquisites received in lieu of cash, such as housing, travel, and
education allowances.
 Certain deductions are allowed from salary income, such as standard
deduction, professional tax, and contributions to retirement accounts.

2. Income from House Property:

 Includes income earned from renting out property, such as

houses, apartments, commercial spaces, and land.
 The net annual value of the property is determined by deducting expenses incurred
for repairs, maintenance, and municipal taxes from the gross rent received.
 This net annual value is then taxed at applicable rates.
 3. Profits and Gains of Business or Profession:

 Includes income earned from carrying on a business or profession, such as profits

from trading, manufacturing, or service-based businesses.
 This head also covers income from professional activities like doctors, lawyers, and
consultants.
 Various deductions and allowances are available for business income, such as
expenses incurred for running the business, depreciation of assets, and interest on
loans.

4. Capital Gains:

 Includes income derived from the sale or transfer of capital assets, such as
shares, property, bonds, and other investments.
 Capital gains are categorized as short-term or long-term, depending on the holding
period of the asset.
 Different tax rates apply to short-term and long-term capital gains.

5. Income from Other Sources:

 Includes any income not covered under the other four heads, such as:
o Interest income from bank deposits and fixed deposits.
o Dividends received from shares.
o Winnings from lotteries and gambling.
o Royalties for creative works.
o Pension income.
 Rent on plant and machinery.

Understanding the different heads of income is important for taxpayers to:

 Identify the correct head under which their income falls.

 Calculate their taxable income accurately.
 Claim the applicable deductions and allowances.
 Comply with tax laws and regulations.
Tax rates in India

Total tax
Income slab Tax rate(%) Surcharge(%)
rate

Up to 3,00,000 0 Nil 0

3,00,001 - 6,00,000 5 Nil 5

6,00,001 - 9,00,000 10 Nil 10

9,00,001 - 12,00,000 15 Nil 15

12,00,001 -
20 10 22
15,00,000

Above 15,00,000 30 15 34.5

Basic conditions to determine residential status:

An individual is said to be a resident in India in any previous year if he satisfies and

of the following three basic conditions
1. He is in India during the previous year for 182 days or more.
2. He is in India for 365 days or more during 4 years immediately preceeding the
previous year.
3. He is in India during previous year for the period of 60 days or more.(180 days
for captain of a ship)
Problems solved in the class

Q1. Mr. A an Indian citizen comes to India for first time on 1 st Ooctober 2021 and left
31st March 2022. Is he resident in 2022?
Ans: Yes. Satisfies first condition.

Q2. Mr Sanjay, an Indian citizen went to USA for first timefor purpose of employment
on 10th May 2021. He came back to India on 19th November 2021. Find out his
residential assessment status for 2022-23.
Ans: PY - 2021-22
AY – 2022-23
Stayed in India for 173 days
Does not satisfy the conditions. Hence not a resident.
Q3. Mr. C who is an Indian citizen went for employment to Dubai on 1st April 2016
and he came on visit to India on 1st July 2021 and left for Dubai on 15th December
2021. Determine the residential assessment status for 2022-23.
Ans: In India for 168 days
Does not satisfy the first condition.

Exemptions in Income tax

1. Leave travel concession: Leave Travel Concession (LTC) is a benefit offered

by employers to their employees in India to cover travel expenses during their
leave period.

2. Gratuity: Lumpsum payment after completion of minimum 5 years of service.

It can be funded or unfunded.
3. Pension
4. Encashment of leave salary
5. Provident fund
6. Deductions listed in section 10
7. Agricultural income
Deductions:
1. Savings account interest (80TTA)
2. LIC Premium
3. Bank FD interest (80TTB)
4. Retirement benefits
5. Contribution to pension fund- 1.5 lacs (80CC)
6. Mediclaim – 80D
7. Maintainance of Handicap dependant ( 75,000- 1,25,000) (80U)
8. Interest on Loan for higher education

Problems solved during the lecture:

Q1. Mr B is a professor of law in MK College. His income for year 2022 is as follows:
 Salary – 32,000 p/m
 Royalty for books – 25,000
 Expenditure on typing – 2000
 Honorarium from institute – 3000
 Expenditure incurred to visit – 200
 Examinership fees from MU – 1000
 Family pension – 42000 on death of spouse
 Dronacharya award – 10,000 from state govt.

Compute gross total income:

Ans:

Particular Rr. Ps.

Salary Income 32,000
Income from other sources:
Royalty from book 25,000 23,000
2,000
Fees from management institute 3,000 2,800
Expense 200
Examinership fees 1,000
Pension 42,000 28,000
Exemption on pension 14,000
Gross total income 86,800
Q2. Mr. H receives the following in 2021-22 from R:
 Cash gift – 51,000
 Wrist watch – 55,000
 A plot of a land in Bengaluru – 3,00,000

Find the taxed amount.

Ans: Cash gift – Taxed ( above 50,000)

Wrist watch – Not taxed ( tax already collected from R during the purchase)
Plot of land ( Not determined as blood relation condition is not mentioned)

What is tax planning?

Analysis which helps you pay lower taxes.

 Personal level
 Corporate level