8/2/2019 Fundamentals of Direct Taxes - 11[1].10
1/32
FUNDAMENTALS OFDIRECT TAXESDecember 23, 2011
Kanu H Doshi
Dean, Finance
Welingkar Institute of Management
8/2/2019 Fundamentals of Direct Taxes - 11[1].10
2/32
Direct Tax collected individually and
seperately
Indirect Tax collected or levied on the
commodity or product/goods/or services.
Direct Tax hits us directly
Indirect Tax hits us indirectly through theprice of the product and services.
8/2/2019 Fundamentals of Direct Taxes - 11[1].10
3/32
Indirect Tax is harshest on the poor
because irrespective of income /
status of the user / consumerincidence is same.
Direct Tax is on inflow or income.
Indirect Tax is on outflow .
8/2/2019 Fundamentals of Direct Taxes - 11[1].10
4/32
Two basic Characteristics of our
Direct Tax system :
Progressive
and
Integrated
8/2/2019 Fundamentals of Direct Taxes - 11[1].10
5/32
Progressive system of direct
taxation is a system in which
proportion of tax increases morethan proportionately of the amount
which attracts the tax.
8/2/2019 Fundamentals of Direct Taxes - 11[1].10
6/32
Thus at present the tax (inclusive of 2%
Education Cess and Secondary and Higher
Education Cess @ 1%) on Income of Rs.1,60,000 is NIL.On Rs.1,60,000 Rs. NIL
On Rs.2,00,000 Rs. 4,120
On Rs.2,50,000 Rs. 9,270
On Rs.3,00,000 Rs. 14,420
On Rs.4,00,000 Rs. 24,720
On Rs.5,00,000 Rs. 35,020
On Rs.6,00,000 Rs. 55,620
On Rs. 10,00,000 Rs. 1,58,620
In Statistics, we have Progression .Hence
the World Progressive.
8/2/2019 Fundamentals of Direct Taxes - 11[1].10
7/32
Income A/c year
2009-10Tax
Effect
iveRate
A/c years
2010-112011-12
Tax
Effec
tiveRate
A/c year
2011-12DTC No
Ed. Cess
Effecti
ve Taxrate in
%
5,00,000 55,620 11 % 35,020 7 % 30,000 6 %
8,00,000 1,48,320 19 % 96,820 12 % 90,000 11 %
10,00,000 2,10,120 21 % 1,58,620 16 % 1,30,000 13 %
20,00,000 5,19,120 26 % 4,67,620 23 % 4,30,000 21 %
25,00,000 6,73,620 27 % 6,22,120 25 % 5,80,000 23 %
Tax Payable:
Ongoing Voluntary Scheme! Declare more and more!!
8/2/2019 Fundamentals of Direct Taxes - 11[1].10
8/32
This is based on the simple principle ofability to pay or what the traffic can
bear. It is observed that with every
increase in our income, after meeting
the basic necessities, our capacity
(ability) to pay tax increases more than
proportionately and hence the quantum
of tax also increases under the system.
8/2/2019 Fundamentals of Direct Taxes - 11[1].10
9/32
We have the following slabs at present :
(i) GENERAL:
TAXFirst Income of Rs.1,60,000 NIL
On Income of Rs.1,60,001 to 5,00,000 10%
On Income of Rs.5,00,000 to 8,00,000 20%
On Income over Rs.8,00,000 30%
(ii) WOMEN TAXPAYERS
Income upto Rs.1,90,000 NIL
(iii) SENIOR CITIZENS (Over 60 years)(earlier 65 yrs)Income upto Rs.2,50,000 NIL
(iv) Very senior citizen (80 yrs) NIL
Income upto 5,00,000
8/2/2019 Fundamentals of Direct Taxes - 11[1].10
10/32
Sur Charge :
It is always a per cent of Tax while tax is per cent ofIncome /Wealth. Only for special purpose, hencetemporary. It does not disturb the basic rates of say10,20 & 30%. Payable by only companies on first rupee
of Income at 5% if income exceeds Rs. 1 crore.
It is imposed largely for raising funds for special purposesay Bangladesh War, Kargil War, Super Cyclone ofOrissa, Gujarat Earthquake of 26 Jan 2000 and Tsunamiof 26 Dec 2004. Surcharge collections are not sharedwith the States but remain only with the Central Govt.
8/2/2019 Fundamentals of Direct Taxes - 11[1].10
11/32
Integrated System of Taxation. We have had the following
Direct Taxes from time to time :
(i) The Income Tax Act, 1961 (1922 Act)(ii) The Expenditure Tax Act, 1957
(iii) The Gift Tax Act, 1958
(iv) TheWealth Tax Act, 1957
(v) The Estate Duty Act, 1953
Highest marginal Income Tax rate in the year1973-74 was 97.75% + 3% Wealth tax which
taxes together exceeded 100% of a taxpayers income. Not thru error but by design.Socialistic Patter of society
8/2/2019 Fundamentals of Direct Taxes - 11[1].10
12/32
Professor Nicolas Kaldor, an eminent English
Economist from UK at the invitation of Pandit
Nehru, our first Prime Minister, came to India in1956 and studied our Indian Tax system and
submitted his Report titled Indias Tax Reform.
He noticed that we in India in our wisdom had
imposed income tax on income by virtue ofIndian Income Tax Act, 1922. We had also
imposed Estate Duty by the Act of 1953,
modeled on English Death Duty Act on property
passing on death.
In order to plug a loophole in the Estate Duty Act
through GIFTS prior to the death of the person, he
suggested levy of Gift Tax on Gifts during the life
time of the tax payer.
8/2/2019 Fundamentals of Direct Taxes - 11[1].10
13/32
Similary, to plug loophole in our Income Tax
Act, he suggested levy ofWealth Tax on our
Wealth. Wealth is Income saved after
payment of tax and spending it on our
needs.
Wealth put to productive use generates
income e.g. FD with a Bank Rs.2,00,000 @10% = Rs.20,000 income per year. There is
a direct relationship between Income and
Wealth and hence a check through a tax on
Wealth serves automatically as a check overthe Income.
8/2/2019 Fundamentals of Direct Taxes - 11[1].10
14/32
On the same principle, a persons
expenditure is a good guide of a persons
income. Hence, the expenditure tax onexpenditure incurred.
Rationale was that if a person filed his
Return of Income, Return of Wealth,
Return of Gifts and Return of Expenditure,
Income Tax Officer would be in a better
position to make a meaningful assessmentof his Income and collect proper and full
income tax on his true income.
8/2/2019 Fundamentals of Direct Taxes - 11[1].10
15/32
These taxes could be summarized
as :(i) If we earn income, we pay Income Tax;
(ii) If we spend that income, we pay
Expenditure Tax;(iii) If we gifted that income, we pay Gift Tax;
(iv) If we retained that income, we pay
Wealth tax; &
(v) If we died leaving behind that wealth,
there was Estate Duty to be paid on it.
8/2/2019 Fundamentals of Direct Taxes - 11[1].10
16/32
(i) Expenditure tax was abolished 01.04.1960
(ii) Estate Duty w.e.f. 15.03.1985
(iii) Gift Tax w.e.f. 01.10.1998(iv) Wealth Tax diluted w.e.f. 01.04.1992
Expenditure tax was removed because cost of collectionof tax exceeded the tax itself. Same for Estate Duty.
However, real reason for deleting Estate Duty was that itprevented NRIs to keep deposits in India and invest inIndia because estate duty was payable on such fundseven if NRI died outside India. (Indian in Dubai movedby Mrs.Indira Gandhis appeal).
As of today in Oct 2011 we have now the Income TaxAct, 1961 and Wealth Tax Act, 1957
8/2/2019 Fundamentals of Direct Taxes - 11[1].10
17/32
Wealth Tax is levied on market
value of the following assets;(i) Vacant land (Not being agricultural)
(ii) Jewellery (Gold, Diamonds, Silver, Precious Stones)(Sarabhais)
(iii) House Property (ONE is Exempt)
(iv) Motor Car (Infosys) aircraft, boat, (not being for hire)
(v) Cash over Rs.50,000
Wealth Tax is @1% of the market value ofWealth
exceeding Rs.30 Lacs every year.
8/2/2019 Fundamentals of Direct Taxes - 11[1].10
18/32
Gift Tax came back through backdoor w.e.f. 1.9.2004 as Income Tax
on gift of sum of money over
Rs.25,000 per year from non closerelatives.
8/2/2019 Fundamentals of Direct Taxes - 11[1].10
19/32
FEW
TAX PLANNING
IDEAS
8/2/2019 Fundamentals of Direct Taxes - 11[1].10
20/32
Capital Asset defined : section 2(14)
Capital asset means property of any kind held by an assessee,whether or not connected with his business or profession, but
does not include -
(i) any stock in trade ,consumable stores or raw
materials held for the purpose of his business orprofession;
(ii) personal effects, that is to say ,movable
property (including wearing apparel andfurniture) held for personal use by the assessee or
any member of his family dependent on him, but
excludes -
8/2/2019 Fundamentals of Direct Taxes - 11[1].10
21/32
a) jewellery;
b) archeological collections;
c) drawings;d) painting;
e) sculptures; or
f) any work of art.
8/2/2019 Fundamentals of Direct Taxes - 11[1].10
22/32
Explanation For the purpose of this sub
clause, jewellery includes-
a) ornaments made of gold,silver,platinum or
any other precious metal or alloy containing
one or more of such precious metals ,whether
or not worked or sewn in to any wearing
apparel;
b) precious or semi-precious stones, whether or
not set in any furniture , utensil or otherarticle or worked or sewn into any wearing
apparel;
8/2/2019 Fundamentals of Direct Taxes - 11[1].10
23/32
Wealth Tax Act 1957:
Section 2(ea) (iii)
Jewellery, bullion, furniture, utensils or any
other article made wholly or partly of gold,
siliver, platinum or any other precious metal or
nay alloy containing one or more of such
precious metals:
Provided that where any of the said assets is
used by the assessee as stock-in-trade, suchasst shall be deemed as excluded from the
assets specified in this sub-clause.
8/2/2019 Fundamentals of Direct Taxes - 11[1].10
24/32
Section 54EC
Capital gain not to be charged on investment in
certain bonds. Where the capital gain arises from the transfer
of a long-term capital asset (the capital asset to
transferred being hereafter in this section
referred to as the original asset) and the
assessee has, at any time within a period of six
months after the date of such transfer, invested
the whole or any part of capital gains in thelong-term specified asset, the capital gain shall
be dealt with in accordance with the following
provisions of the section, that is to say, -
8/2/2019 Fundamentals of Direct Taxes - 11[1].10
25/32
Provided that the investment made on or after
the 1st day of April,2007 in the long-term
specified asset by an assessee during anyfinancial year does not exceed fifty
lakh rupees.
8/2/2019 Fundamentals of Direct Taxes - 11[1].10
26/32
Gifts as Income
Income from other sources.
Section 56
1) Income of every kind which is not to be excludedfrom the total income under this Act shall bechargeable to income tax under the head Income
from other sources, if it is not chargeable to income-tax under any of the heads specified in section 14,
items A to E.
.....
v) where any sum of money exceeding twenty- fivethousand rupees is received without considerationby an individual or a Hindu undivided family fromany person on or after the 1st day of September, 2004but before the 1st day of April, 2006, the whole of
such sum:
8/2/2019 Fundamentals of Direct Taxes - 11[1].10
27/32
vi)
where any sum of money, the aggregate
value of which exceeds fifty thousandrupees, is received without consideration, byan individual or a Hindu undivided family, in
any previous year from any person or persons
on or after the 1st day of April, 2006 but
before the 1st day of October, 2009, the
whole of the aggregate value of such sum:
8/2/2019 Fundamentals of Direct Taxes - 11[1].10
28/32
vii) where an individual or a Hindu undivided
family receives, in any previous year, from
any person or persons on or after the 1st day
of October, 2009,-
a)any sum of money,
without consideration,
the aggregate value of which exceeds fifty
thousand rupees, the whole of the aggregate
value of such sum;
8/2/2019 Fundamentals of Direct Taxes - 11[1].10
29/32
b) any immovable property , without consideration ,
the stamp duty value of which exceeds fifty
thousand rupees, the stamp duty value of such
property;
c) any property, other than immovable property,-
i) without consideration, the aggregate fair marketvalue of which exceeds fifty thousand rupees, the
whole of the aggregate fair market value of such
property;
8/2/2019 Fundamentals of Direct Taxes - 11[1].10
30/32
Provided that this clause shall not
apply to any sum of money
received
(a) from any relative; or
(b) on the occasion of the marriage of
the individual; or
(c) under a will or by way of inheritance; or
(d) in contemplation of death of the payer; or
8/2/2019 Fundamentals of Direct Taxes - 11[1].10
31/32
Explanation For the purpose of this clause,
relative means-
i. Spouse of the individual;ii. Brother or sister of the individual;
iii. Brother or sister of the spouse of the individual;
iv. Brother or sister of either of the parents of the
individual;
v. Any lineal ascendant or descendant of the
individual;
vi. Any lineal ascendant or descendant of the spouse ofthe individual;
vii. Spouse of the person referred to in clauses (ii) to
(vi);
8/2/2019 Fundamentals of Direct Taxes - 11[1].10
32/32