Introduction of Tax - Unit 1

Course Code: 1070427240
Course Name: Corporate Tax and

Financial Planning
Unit No:1
SEMESTER: 3
PREPARED BY: Dr. Divya Harwani
WHAT IS TAX?
• A TAX IS A COMPULSORY PAYMENT LEVIED ON THE PERSONS OR COMPANIES TO MEET

THE EXPENDITURE INCURRED ON CONFERRING COMMON BENEFITS UPON THE PEOPLE
OF A COUNTRY.
• THE TAXATION SYSTEM IN INDIA IS SUCH THAT THE TAXES ARE LEVIED BY THE CENTRAL
GOVERNMENT AND THE STATE GOVERNMENTS. SOME MINOR TAXES ARE ALSO LEVIED
BY THE LOCAL AUTHORITIES SUCH AS THE MUNICIPALITY AND THE LOCAL
GOVERNMENTS.
• TO RUN THE GOVERNMENT AND MANAGE THE AFFAIRS OF A STATE, MONEY IS
REQUIRED. SO THE GOVERNMENT IMPOSES TAXES IN MANY FORMS ON THE INCOMES OF
INDIVIDUALS AND COMPANIES.
FEATURES OF TAX
(1) A TAX IS A COMPULSORY PAYMENT TO BE PAID BY THE CITIZENS WHO ARE

LIABLE TO PAY IT. HENCE, REFUSAL TO PAY A TAX IS A PUNISHABLE
OFFENCE.
(2) THERE IS NO DIRECT QUID-PRO-QUO BETWEEN THE TAX PAYERS AND THE
PUBLIC AUTHORITY.
(3) A TAX IS LEVIED TO MEET PUBLIC EXPENDITURE INCURRED BY THE
GOVERNMENT IN THE GENERAL INTEREST OF THE NATION.
(4) A TAX IS PAYABLE REGULARLY AND PERIODICALLY AS DETERMINED BY THE
TAXING AUTHORITY.
(5) A TAX IS A LEGAL CORRECTION.
SIGNIFICANCE OF TAX
1. RAISING REVENUE
2. EQUAL DISTRIBUTION OF INCOME
3. REGULATION
4. HIGHER GROWTH
5. PUSHING UP RATES OF SAVINGS AND INVESTMENTS
OBJECTIVES OF TAX
1. ECONOMIC DEVELOPMENT
2. FULL EMPLOYMENT
3. PRICE STABILITY
4. CONTROL OF CYCLICAL FLUCTUATIONS
5. REDUCTION OF BOP DIFFICULTIES
6. NON-REVENUE OBJECTIVES
DIRECT TAX
• A DIRECT TAX CAN BE DEFINED AS A TAX THAT IS PAID DIRECTLY BY AN INDIVIDUAL OR

ORGANIZATION TO THE IMPOSING ENTITY (GENERALLY GOVERNMENT). A DIRECT TAX CANNOT
BE SHIFTED TO ANOTHER INDIVIDUAL OR ENTITY. THE INDIVIDUAL OR ORGANIZATION UPON
WHICH THE TAX IS LEVIED IS RESPONSIBLE FOR THE FULFILMENT OF THE TAX PAYMENT.
• THE CENTRAL BOARD OF DIRECT TAXES DEALS WITH MATTERS RELATED TO LEVYING AND
COLLECTING DIRECT TAXES AND FORMULATION OF VARIOUS POLICIES RELATED TO DIRECT
TAXES.
• A TAXPAYER PAYS A DIRECT TAX TO A GOVERNMENT FOR DIFFERENT PURPOSES, INCLUDING
REAL PROPERTY TAX, PERSONAL PROPERTY TAX, INCOME TAX OR TAXES ON ASSETS, FBT, GIFT
TAX, CAPITAL GAINS TAX, ETC.
INDIRECT TAX
• THE TERM INDIRECT TAX HAS MORE THAN ONE MEANING. IN THE COLLOQUIAL
SENSE, AN INDIRECT TAX SUCH AS SALES TAX, A SPECIFIC TAX, A VALUE ADDED
TAX (VAT), OR GOODS AND SERVICES TAX (GST) 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 CONSUMER).
• THE INTERMEDIARY LATER FILES A TAX RETURN AND FORWARDS THE TAX
PROCEEDS TO THE GOVERNMENT WITH THE RETURN. IN THIS SENSE, THE TERM
INDIRECT TAX IS CONTRASTED WITH A DIRECT TAX WHICH IS COLLECTED DIRECTLY
BY THE GOVERNMENT FROM THE PERSONS (LEGAL OR NATURAL) ON WHICH IT IS
IMPOSED.
DIFFERENCE BETWEEN:
DIRECT TAX INDIRECT TAX
ADMINISTRATION OF TAX:
LAWS THE ADMINISTRATIVE HIERARCHY OF TAX LAW IS AS FOLLOWS
1. MINISTRY OF FINANCE
2. DEPARTMENT OF REVENUE
3. CENTRAL BOARD OF DIRECT TAX (CBDT)
4. CENTRAL BOARD OF INDIRECT TAXES & CUSTOMS (CBIC)
SOME OF THE IMPORTANT DIRECT TAXES:-
FRINGE BENEFIT TAX
• TO REDUCE THE PROFIT ON BOOKED ENTRY, MANY COMPANIES STARTED PROVIDING VARIOUS BENEFITS TO THEIR
EMPLOYEES AND MAINTAINING THEM UNDER THEIR INPUT COST. THUS REDUCING THE PROFIT WHICH IN TURN
LEADS TO LESS TAXATION BY THE GOVERNMENT.
• THEREFORE GOVERNMENT-IMPOSED FRINGE BENEFITS TAX (FBT) WHICH IS FUNDAMENTALLY A TAX THAT AN
EMPLOYER HAS TO PAY INSTEAD OF THE BENEFITS THAT ARE GIVEN TO HIS/HER EMPLOYEES. IT WAS AN ATTEMPT
TO COMPREHENSIVELY LEVY A TAX ON THOSE BENEFITS, WHICH EVADED THE TAX.
• THE LIST OF BENEFITS ENCOMPASSED A WIDE RANGE OF PRIVILEGES, SERVICES, FACILITIES, OR AMENITIES WHICH
WERE DIRECTLY OR INDIRECTLY GIVEN BY AN EMPLOYER TO CURRENT OR FORMER EMPLOYEES, BE IT SOMETHING
SIMPLE LIKE TELEPHONE REIMBURSEMENTS, FREE OR CONCESSIONAL TICKETS, OR EVEN CONTRIBUTIONS BY THE
EMPLOYER TO A SUPERANNUATION FUND.
• FBT WAS INTRODUCED AS A PART OF THE FINANCE BILL OF 2005 AND WAS SET AT 30% OF THE COST OF THE
BENEFITS GIVEN BY THE COMPANY. THIS TAX NEEDED TO BE PAID BY THE EMPLOYER IN ADDITION TO THE INCOME
TAX, IRRESPECTIVE OF WHETHER THE COMPANY HAD AN INCOME-TAX LIABILITY OR NOT.
• THE FRINGE BENEFITS TAX WAS ABOLISHED IN THE 2009 UNION BUDGET OF INDIA.
MINIMUM ALTERNATE TAX
• THE CONCEPT OF MINIMUM ALTERNATE TAX (MAT) WAS INTRODUCED IN THE DIRECT TAX SYSTEM TO MAKE
SURE THAT COMPANIES HAVING LARGE PROFITS AND DECLARING SUBSTANTIAL DIVIDENDS TO
SHAREHOLDERS BUT WHO WERE NOT CONTRIBUTING TO THE GOVERNMENT BY WAY OF CORPORATE TAX,
BY TAKING ADVANTAGE OF THE VARIOUS INCENTIVES AND EXEMPTIONS PROVIDED IN THE INCOME-TAX
ACT, PAY A FIXED PERCENTAGE OF BOOK PROFIT AS MINIMUM ALTERNATE TAX.
• AS PER THE INCOME TAX ACT, IF A COMPANY’S 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.
• IT IS CALLED MAT AND IS A DIRECT TAX. IT WAS INTRODUCED TO DETER SOME COMPANIES WHO MANAGED
THEIR ACCOUNT IN SUCH A WAY THAT THEY END UP PAYING ZERO OR NO TAX TO THE GOVERNMENT.
• THE CURRENT RATE OF MAT IS 18.5%.
ALTERNATE MINIMUM TAX
• UNDER THE EXISTING PROVISIONS OF THE INCOME-TAX ACT, MINIMUM ALTERNATE TAX (MAT) AND ALTERNATE
MINIMUM TAX (AMT) ARE LEVIED ON COMPANIES AND LIMITED LIABILITY PARTNERSHIPS (LLPS) RESPECTIVELY.
• THAT MEANS WHAT IS MAT TO THE COMPANIES, AMT IS TO THE LLPS. HOWEVER, NO SUCH TAX IS LEVIED ON
THE OTHER FORM OF BUSINESS ORGANIZATIONS SUCH AS PARTNERSHIP FIRMS, SOLE PROPRIETORSHIPS, AN
ASSOCIATION OF PERSONS, ETC.
• TO WIDEN THE TAX BASE VIS-À-VIS PROFIT LINKED DEDUCTIONS, IT IS PROPOSED TO AMEND PROVISIONS
REGARDING AMT CONTAINED IN THE INCOME-TAX ACT TO PROVIDE THAT A PERSON OTHER THAN A COMPANY,
WHO HAS CLAIMED DEDUCTION UNDER ANY SECTION (OTHER THAN SECTION 80P), SHALL BE LIABLE TO PAY
AMT.
• UNDER THE PROPOSED AMENDMENTS, WHERE THE REGULAR INCOME-TAX PAYABLE FOR A PREVIOUS YEAR BY
A PERSON (OTHER THAN A COMPANY) IS LESS THAN THE ALTERNATE MINIMUM TAX PAYABLE FOR SUCH
PREVIOUS YEAR, THE ADJUSTED TOTAL INCOME SHALL BE DEEMED TO BE THE TOTAL INCOME OF SUCH
PERSON AND HE SHALL BE LIABLE TO PAY INCOME-TAX ON SUCH TOTAL INCOME AT THE RATE OF EIGHTEEN
AND ONE-HALF PERCENT.
FAQS:
Q 1. WHAT ARE THE MAJOR STATE TAXES IN INDIA?

• ANS. THERE ARE TWO MAJOR STATE TAXES IN INDIA. THESE INCLUDE STATE
GOODS & SERVICES TAX (SGST) AND STAMP DUTY AND REGISTRATION.
Q 2. WHAT IS THE GOODS AND SERVICES TAX?
• ANS. GST IS A COMPREHENSIVE INDIRECT TAX LEVIED ON THE
MANUFACTURE, SALE AND CONSUMPTION OF GOODS AS WELL AS SERVICES
AT THE NATIONAL LEVEL. IT HAS REPLACED ALL INDIRECT TAXES LEVIED ON
GOODS AND SERVICES BY THE CENTRAL AND STATE GOVERNMENTS.
Q 3. WHICH ARE THE MAJOR CENTRAL TAXES IN INDIA?
• ANS. THERE ARE FOUR MAJOR CENTRAL TAXES IN INDIA:
• INCOME TAX
• CENTRAL GOODS & SERVICES TAX (CGST)
• CUSTOMS DUTY
• INTEGRATED GOODS & SERVICES TAX (IGST):
Q 4. WHAT IS THE DIFFERENCE BETWEEN DIRECT AND INDIRECT TAX?
• ANS. A DIRECT TAX CAN BE DEFINED AS A TAX THAT IS PAID DIRECTLY BY AN
INDIVIDUAL OR ORGANIZATION TO THE IMPOSING ENTITY (GENERALLY
GOVERNMENT). WHEREAS, INDIRECT TAXES ARE BASICALLY TAXES THAT CAN
BE PASSED ON TO ANOTHER ENTITY OR INDIVIDUAL.

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Course Code: 1070427240

Course Name: Corporate Tax and

• A TAX IS A COMPULSORY PAYMENT LEVIED ON THE PERSONS OR COMPANIES TO MEET

(1) A TAX IS A COMPULSORY PAYMENT TO BE PAID BY THE CITIZENS WHO ARE

• A DIRECT TAX CAN BE DEFINED AS A TAX THAT IS PAID DIRECTLY BY AN INDIVIDUAL OR

Q 1. WHAT ARE THE MAJOR STATE TAXES IN INDIA?

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