Important Answers Taxation PDF

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Explain the term tax and state different types of taxes. To run a nation judiciously, the government needs to collect tax from the eligible citizens; paying taxes to the local government is an integral part of everyone’s life, no matter where we live in the world. Now, taxes can be collected in any ...

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1) Explain the term tax and state different types of taxes. To run a nation judiciously, the government needs to collect tax from the eligible citizens; paying taxes to the local government is an integral part of everyone’s life, no matter where we live in the world. Now, taxes can be collected in any form such as state taxes, central government taxes, direct taxes, indirect taxes, and much more. For your ease, let’s divided the types of taxation in India into two categories, viz. direct taxes and indirect taxes. This segregation is based on how the tax is being paid to the government. What are tax and its types? A tax is a mandatory fee or financial charge levied by any government on an individual or an organization to collect revenue for public works providing the best facilities and infrastructure. The collected fund is then used to fund different public expenditure programs. If one fails to pay the taxes or refuse to contribute towards it will invite serious implications under the pre-defined law. Types of Taxes Be it an individual or any business/organization, all have to pay the respective taxes in various forms. These taxes are further subcategorized into direct and indirect taxes depending on the manner in which they are paid to the taxation authorities. Let us delve deeper into both types of tax in detail: Direct Tax 

The definition of direct tax is hidden in its name which implies that this tax is paid directly to the government by the taxpayer

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The general examples of this type of tax in India are Income Tax and Wealth Tax.

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From the government’s perspective, estimating tax earnings from direct taxes is relatively easy as it bears a direct correlation to the income or wealth of the registered taxpayers.

Indirect Tax 

Indirect taxes are slightly different from direct taxes and the collection method is also a bit different. These taxes are consumption-based that are applied to goods or services when they are bought and sold.

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The indirect tax payment is received by the government from the seller of goods/services.

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The seller, in turn, passes the tax on to the end-user i.e. buyer of the good/service.

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Thus the name indirect tax as the end-user of the good/service does not pay the tax directly to the government.

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Some general examples of indirect tax include sales tax, Goods and Services Tax (GST), Value Added Tax (VAT), etc

2) Define Agricultural income. Explain its characteristics from income tax point of view. The following are some of the examples of agricultural income: 

Income derived from sale of replanted trees.

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Income from sale of seeds.

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Rent received for agricultural land.

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Income from growing flowers and creepers.

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Profits received from a partner from a firm engaged in agricultural produce or activities.

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Interest on capital that a partner from a firm, engaged in agricultural operations, receives.

As per Section 10(1) of the Income Tax Act, 1961, agricultural income is exempted from taxation. The central government cannot levy tax on the agricultural income received. However, agricultural income is considered for rate purposes while assessing the income tax liability if the following two conditions are met: 

Net agricultural income is greater than Rs. 5,000/- for previous year.

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Total income, excluding net agricultural income, surpasses the basic exemption limit (Rs. 2,50,000 for individuals below 60 years of age and Rs. 3,00,000 for individuals above 60 years of age).

If these two conditions are met, tax liability shall be computed in the following manner: Step 1: Let us regard agricultural income as X and other income as Y Tax computed on X+Y is B1 Step 2: Let us regard basic exemption slab for income tax payment as A Tax computed on A+X is B2

Step 3: The actual income tax liability shall be B1-B2 Note: If the individual’s aggregate agricultural income is up to Rs. 5,000, the individual will have to disclose the agricultural income in the income tax return (ITR). In case the agricultural income crosses Rs. 5,000, the individual will have to disclose the agricultural income in ITR 2.

Section 54B of the Income Tax Act, 1961 Section 54B of the Income Tax Act, 1961, provides relief to taxpayers who sell their agricultural land and use the sale proceeds to acquire another agricultural land. To claim tax benefit under Section 54B of the Income Tax Act, the following conditions will have to be satisfied: 

This benefit can only be claimed by an individual or a HUF

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The agricultural land should be used by the individual or his or her parents for agricultural purpose for at least two years immediately preceding the date on which the exchange of land occurred. In case of HUF, the land should be used by any member of HUF.

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The taxpayer should purchase another agricultural land within two years from the date of selling the old land. In case it is an incident of compulsory acquisition, the period of acquiring new agricultural land will be assessed from the date of receipt of compensation. It must be noted that under Section 10(37), capital gain shall not be chargeable to tax if agricultural land is compulsorily acquired under any law, and the consideration of which is approved by the central government or banking regulator and received on or after 0104-2004.

3) What is tax avoidance and tax evasion? Explain its effects and method of prevention. Tax Evasion: Tax Evasion is an illegal way to minimize tax liability through fraudulent techniques like deliberate under-statement of taxable income or inflating expenses. It is an unlawful attempt to reduce one’s tax burden. Tax Evasion is done with a motive of showing fewer profits in order to avoid tax burden. It involves illegal practices such as making false statements, hiding relevant documents, not maintaining complete records of the transactions, concealment of income, overstatement of tax credit or presenting personal expenses as business expenses. Tax evasion is a crime for which the assesse could be punished under the law. Tax Avoidance: Tax avoidance is an act of using legal methods to minimize tax liability. In other words, it is an act of using tax regime in a single territory for one’s personal benefits to decrease one’s tax burden. Although Tax avoidance is a legal method, it is not advisable as it could be used for one’s own advantage to reduce the amount of tax that is payable. Tax avoidance is an activity of taking unfair advantage of the shortcomings in the tax rules by finding new ways to avoid the payment of taxes that are within the limits of the law. Tax avoidance can be done by adjusting the accounts in such a manner that there will be no violation of tax rules. Tax avoidance is lawful but in some cases it could come in the category of crime. Consequences: Tax avoidance leads to the deferment of tax liability. Tax evasion leads to penalty or imprisonment.

Effects of Tax Evasion or Avoidance: As we have already seen the methods through which tax evasion takes place these method effect very harsh on the nation. These are harmful for the sustainable growth and improvements of society and the whole nation as well. Tax evasion gives dominance to the causation or formation of illegal gains which people try to hide and dodge tax by doing this but due to this rich section became more wealthier and poor section is affected badly as government don’t have enough funds to do something for weaker sections as it don’t get the correct tax paid to it. As the administration fails to remove these kinds of wrongdoing apparently more harm is done to the feeble segment of the nation. Tax evasion gives rise to administration to stop the development programmes which it started to do some good to persons individually and societies as it goes out of wealth and enough funds due to avoidance of tax by people. Evasion barge into the policies made by government for society and twist the plan of administration by forming the main resources unavailable for project. Evasion of tax by many people somewhere put an excessive load on tax payers who honestly pay taxes every time, due to this they are encouraged to dodge taxes after this kind of biasness. Evasion and avoidance of tax is also harmful for the security of nation in some way because due to it whole lead is provided to those people who try to dodge tax and dishonestly make illegal money and also lead the enemies in downsizing growth of nation. There are so many social evils which takes place on small accounts but at end give rise to evasion only. E.g. taking bribe, forging documents etc.[iv]

Best Ways To Avoid Tax Evasion: Reducing tax rates. Make more simplified laws and simplified system. Design a wellorganized tax administration structure. Strengthen anti-corruption policies.

4) What is meant by business and profession? what incomes are chargable to income tax under the head profits and gains of business or profession? Business : “Business” simply means any economic activity carried on for earning profits. Sec. 2(3) has defined the term as “ any trade, commerce, manufacturing activity or any adventure or concern in the nature of trade, commerce and manufacture”. In this connection it is not necessary that there should be a series of transactions in a business and also it should be carried on permanently. Neither repetition nor continuity of similar transactions is necessary. Profession : “Profession” may be defined as a vacation, or a job requiring some thought, skill and special knowledge like that of C.A., Lawyer, Doctor, Engineer, Architect etc. So profession refers to those activities where the livelihood is earned by the persons through their intellectual or manual skill. Under section 28, the following income is chargeable to tax under the head “Profits and gains of business or profession”:

i. ii. iii. iv. v. vi. vii. viii. ix. x. xi. xii.

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profits and gains of any business or profession; any compensation or other payments due to or received by any person specified in section 28(ii); income derived by a trade, professional or similar association from specific services performed for its members; the value of any benefit or perquisite, whether convertible into money or not, arising from business or the exercise of a profession; any profit on transfer of the Duty Entitlement Pass Book Scheme; any profit on the transfer of the duty free replenishment certificate; export incentive available to exporters; any interest, salary, bonus, commission or remuneration received by a partner from firm ; any sum received for not carrying out any activity in relation to any business or profession or not to share any know-how, patent, copyright, trademark, etc.; fair market value of inventory as on the date on which it is converted into, or treated as, a capital asset determined in the prescribed manner; any sum received under a Keyman insurance policy including bonus; any sum received (or receivable) in cash or kind, on account of any capital asset (other than land or goodwill or financial instrument) being demolished, destroyed, discarded or transferred, if the whole of the expenditure on such capital asset has been allowed as a deduction under section 35AD; and income from speculative transaction.

5) Define the term salary. state the items under head of salary.

Salary in common parlance means any amount paid by an employer to his employees in lieu of services rendered by them. However income tax act 1961 defines the term “ salary” u/s 17(1) to include the following monetary as well as non monetary payments :a) Wages b) Annuity or pension c) Any Gratuity d) Any fees, commission, perquisite or profits in lieu of or in addition to any salary or wages e) Any Advance of Salary f) Leave Encashment g) Employers contribution to provident fund in excess of 12% of Salary h) The contribution by the central government or any other employer in the Previous year to the account of an employee under a pension scheme u/s 80CCD

The provisions pertaining to Income under the head “Salaries” are contained in sections 15, 16 and 17. Basis of charge (Section 15) 

Section 15 deals with the basis of charge. Salary is chargeable to tax either on ‘due’ basis or on ‘receipt’ basis, whichever is earlier.

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However, where any salary, paid in advance, is assessed in the year of payment, it cannot be subsequently brought to tax in the year in which it becomes due.

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If the salary paid in arrears has already been assessed on due basis, the same cannot be taxed again when it is paid.

(1) Advance salary Advance salary is taxable when it is received by the employee irrespective of the fact whether it is due or not. It may so happen that when advance salary is included and charged in a particular previous year, the rate of tax at which the employee is assessed may be higher than the normal rate of tax to which he would have been assessed. (2) Arrears of salary Normally speaking, salary arrears must be charged on due basis. Points to consider: a) Salary income is chargeable to tax on “due basis” or “receipt basis” whichever is earlier. b) Existence of relationship of employer and employee is must between the payer and payee to tax the income under this head. c) Income from salary taxable during the year shall consists of following: i. Salary due from employer (including former employer) to taxpayer during the previous year, whether paid or not; ii. Salary paid by employer (including former employer) to taxpayer during the previous year before it became due; iii. Arrear of salary paid by the employer (including former employer) to taxpayer during the previous year, if not charged to tax in any earlier year; Exceptions - Remuneration, bonus or commission received by a partner from the firm is not taxable under the head Salaries rather it would be taxable under the head business or profession. If professional tax is reimbursed or directly paid by the employer on behalf of the employee, the amount so paid is first included as salary income and then allowed as a deduction u/s 16 Salary, perquisite and profits in lieu of salary (Section 17)

Meaning The meaning of the term ‘salary’ for purposes of income tax is much wider than what is normally understood. The term ‘salary’ for the purposes of Income-tax Act, 1961 will include both monetary payments (e.g. basic salary, bonus, commission, allowances etc.) as well as non-monetary facilities (e.g. housing accommodation, medical facility, interest free loans etc.). Section 17(1) defined the term “Salary”. It is an inclusive definition and includes monetary as well as non-monetary items.

‘Salary’ under section 17(1), includes the following: 1. wages, 2. any annuity or pension, 3. any gratuity, 4. any fees, commission, perquisite or profits in lieu of or in addition to any salary or wages, 5. any advance of salary, 6. any payment received in respect of any period of leave not availed by him i.e. leave salary or leave encashment, 7. Provident Fund: - the portion of the annual accretion in any previous year to the balance at the credit of an employee participating in a recognized provident fund to the extent it is taxable and - transferred balance in recognized provident fund to the extent it is taxable, 8. The contribution made by the Central Government or any other employer in the previous year to the account of an employee under a pension scheme referred to in section 80CCD

6) What is previous year? Explain the exceptions to the rule of previous year. As per the Income Tax law the income earned in current year is taxable in the next year. The year in which income is earned is known as the previous year. In layman language the current financial year is known as the previous year. The financial year starts from 1st April and end on 31st March of the next year. For Instance, for the salary income earned from 1 April 2017 - 31st March 2018 .The previous year would be 2017-18. All the assessee’s are required to follow the financial year( April 1 to March 31) as previous year for all types of incomes. Incase, of a newly set-up business/profession or first job then your first previous year will be less than 12 months. Though from subsequent years your previous year will always be your financial year.

Exceptions: 1. Section 172 : Shipping business income of non-resident ship-owners:

In case a non-resident shipping company, which has no representative in India, earns income by carrying passengers, livestock, mail or goods loaded from any Indian port, such ship will not be allowed to leave the port till the tax on such income has been paid or alternative arrangements to pay tax are made. As such income is assessed to tax at current year’s rates.

2. Section 174: In cases of persons leaving India – When it appears to the Assessing Officer that any individual may leave India during the current assessment year or shortly after its expiry and that he has no present intention of returning to India, the total income of such individual for the period from the expiry of the previous year for that assessment year up to the probable date of his departure from India shall be chargeable to tax in that assessment year.

3. Section 174A: Assessment of any association of persons, body of individuals or Artificial Juridical person formed or established only for a limited period: In case an Assessing Officer finds that any association of persons (AOP), Body of individuals (BOIs) or Artificial Juridical person (AJP) has been formed or established only for a limited period or for a particular event and it is likely to be dissolved or discontinued in the same year after the accomplishment of such event or purpose, the assessment of such person can be made in same year.

4. 175: In case of persons who are likely to transfer their assets to avoid tax If it appears to the A.O. that any person is likely to sell, transfer, dispose of or to part with any of his assets with the intention to avoid payment of any tax liability, he may commence proceeding to assess the income for the period between the expiry of last previous year and the date of commencement of such proceedings.

5. Section 176: In case of discontinued business In case any business or profession is discontinued during an assessment year, the income of the period from the expiry of last previous year till the date of discontinuation may be assessed to tax in the current assessment year at the discretion of the assessing officer.

7) What is baggage? Explain provisions under customs act for baggage. The term baggage means luggage of the passengers and it refers to all dutiable goods. imported by a passenger or a member of a crew in his baggage As per section 2 (3) of Customs. Act 1962, Baggage includes unaccompanied baggage but does not include motor vehicle. Statutory provisions:  The owner of the baggage shall make a declaration of its contents to the proper officer of customs.  The rate of duty on baggage is 35% ad valorem plus 10% social welfare charge ( w.e.f 2 February 2018), so effective rate including social welfare charge comes to 38.5 %.  The integrated Tax under section 3(7) of tariff Act is nil.  The rate of 35% duty is not applicable to 1) Fire arms 2) Cartridges of fire arms exceeding 50.

3) Cigarettes, cigars or tobacco in excess of the quantity prescribed for importation free of duty under the relevant baggage rules and 4) Goods imported through the courier service.  The Central Government has exempted one laptop computer (note book computer) when imported into India by a passenger of the age of 18 years or above ( other than member of crew) from whole of BCD.  The law envisa...