It covers Anna university syllabus Unit 4: income and sales tax act on (Legal aspects of business)

1. Prepared and presented by,
N. Ganesha Pandian,
Assistant professor,
Madurai school of management,
Madurai.

3.  Income tax is a very important source of income of the central
government
 IncomeTax department under the control of CBDT (Central board of direct
taxes) which is under the finance ministry of GOI
 Income tax is a tax on income levied on the previous year’s total taxable
income of an assessee at the rates applicable during the current year.
 It means every person, whose taxable income for the previous year
exceeds the minimum taxable limit is liable to pay the tax to the central
government

4.  Income tax is levied on the income of a person
 Income tax is a direct tax
 Income tax is payable by every person
 Income tax is levied on previous year’s income
 Income tax is levied on total taxable income
 Income tax is levied at the rates applicable during
the current year
 Income tax is levied as per slab-system

5.  Income means any receipt from an outside
source. Income arising to a person from
various sources may be placed in any of the
five heads of such income as:
1. Income from salary
2. Income from house property
3. Profits and gains of businesses or profession
4. Capital gains
5. Income from other sources

6. 1. Important source of revenue
2. Reducing disparities
3. Capital formation

7.  Income tax act extends to whole of India. It came into
force on the 1st day of April,1962.
 This act with 298 sections, various sub-sections and 14
schedules
 Present law of income tax is contained in Income tax act
1961, Income tax rules 1962, Finance act 2008 and 2009.
 This act had been amended several times:
1963,1965,1972,1973,1976,1981,1986,1989,1996,1997and
1998

8.  Income tax act 1961 has become the most complicated act
of the country due to the amendments at several times.
 Central government appointed a Direct taxes enquiry
committee in 1970 under the chairmanship of
Dr.K.N.Wanchoo, to suggest measures to curb the evil
effects of black money on the national economy
 Choski committee was appointed under the chairmanship
of Sir C.S.Choski to suggest measures to rationalize and
simplify the tax structure

9.  Definitions of some of the key terms used in the Income tax act 1961 have been given under as.
1. Assessee (section 2(7))
2. Assessment (section 2(8))
3. Person (section 2(31))
4. Previous year (section 3)
5. Assessment year (section 2(9))
6. Income (section 2(24))
7. Heads of income (section 14)
8. Gross total income (section 80 B(5))
9. Exempted income (section 10 and section 86)
10. Deductions from income (section 80 C to 80 U)
11. Total income (section 2(25))
12. Agricultural income (section 10(1))

10.  Assessee means a person by whom any tax or any other sum of
money (interest or penalty) is payable under this Act
 Types of assessee:
1. Deemed assessee
a, Legal heir
b, Representative
2. Assessee in default: If a person doesn’t fulfill the legal obligations
as per this act due to which is loss of revenue is caused to
income tax department, such a person entitled to compensate
for such loss

11.  The process of determination of income or loss or refund or
tax liability on an assessee is known as assessment.
 Generally an assessment officer makes an assessment of the
income or loss of an assessee for a particular year, known as
the assessment year.
 The two stages of an assessment under the income tax act
1961 are as under:
1. Computation of total income
2. Determination of income tax payable or refundable

12.  The definition of a person under the
Income tax act is very comprehensive and includes a natural as well as an artificial or a
judicial person
 The incidence of tax rests on a person can be an assessee.
1. Individual [section 2(31)(i)]
2. Hindu undivided family [section 2(31) (ii)]
3. Company [section 2(31)(iii)] and [section 2(36)]
4. Firm [section 2(31)]
5. Association of persons [section 2(31)(v)]
6. Body of individuals [section 2(31)(v)]
7. Local Authority [section 2(31)(vi)]
8. Other artificial judicial person [section 2(31)(vii)]

13.  According to section 3, previous year means the Financial
year immediately preceding the assessment year. Previous
year for this assessment year 2015-2016 is 2014-2015
Provisions regarding previous years
1. Preceding financial year
2. Previous year for newly set-up business or profession
3. Previous year for a new source of income
4. Previous year for old business or profession

14. 5. Previous year for share in firm’s profit
6. Previous year for Life insurance business
7. Previous year for unexplained money
8. Previous year for undisclosed income or property
9. Previous year for unexplained expenditure
10. Previous year for amounts borrowed or repaid on
hundis

15. In certain case, to protect the interests of revenue, the income is taxed
in the year of earning itself.Thus assessment year and previous year
are the same
1. Shipping business of non-resident (section 172)
2. Persons leaving India (section 174)
3. Associations of persons or body of individual or artificial judicial
person formed for a particular purpose (section 174A)
4. Person likely to transfer property to avoid tax (section 175)
5. Discontinued business (section 176)

16.  Assessment year means the period of 12 months
commencing on the first day of April every year. It is
therefore, the period from 1st of April to 31st of march.
 For example: the assessment year 2012-2013 will
commence on 01.04.2012 and end on 31.03.2013.The tax
levied, in each assessment year, with respect to or on the
total earned by the assessee in the previous year

17.  The concept of income is very important as it is the
income that is taxed under the Income tax Act.The
definition of the income under this act is wide and
includes
1. Profits and gains
2. Dividend
3. Voluntary contributions received by aTrust
4. Perquisite
5. Special allowance or benefit

18.  Any benefit or perquisite to director
 Compensation: Compensation received for past losses,
obligations or expenses already allowed as deduction.
1. Regularity of income
2. Form of income
3. Tainted or illegal income
4. Application of incomeVs Diversion
5. Disputed income
6. Contingent income

19. 7. Basis of income
8. Personal gifts
9. Pin money
10. Lump sum receipt
11. Income must come from outside
12. Payment by an insurer of sums insured in life or endowment
policies
13. Charity levies
14. Revenue receiptVs Capital receipt

20.  For the purpose of charge of income tax, all incomes
are classified under the following five heads of income
namely:
1. Salaries
2. Income from house property
3. Profits and gains of business or profession
4. Capital gains
5. Income from other sources

21.  The aggregate of net taxable income under various heads of
income is termed as “Gross total income”.
 This aggregation is not a mathematical process but a legal
concept.
 It is computed after allowing for the deductions specific to
various heads of income, set off of losses and allowances or
set off of carry forward loses and allowances and clubbing the
income of any other person that may be liable to be included
in assessee’s total income

22.  These incomes are either fully or partially
exempted from income tax and therefore, to
the extent of exemption, do not form a part
of the total income and hence are not taxable

23.  Income tax act allows certain specific reductions to be
made from the income of an assessee while
computing the total income.These reductions are
termed as Deductions
 Two types of deductions have been provided under
the act i.e., deductions from the specific heads of
income and deductions from gross total income

24.  Total income, computed in accordance with section 5
according to residential status , is arrived at after
allowing deductions under section 80CCC to Section
80U from the gross total income
 The charge of income tax is on total income of an
assessee. Income exempted from income tax do not
form part of total income

25.  Section 10(1) exempts agricultural income from income tax. By
virtue of section 2(1A) the expression “agricultural income”
means:
1. Any rent or revenue derived from land which is situated in India
and is used for agricultural purposes [section 2(1A)(a)]
2. Any income derived from such land by agricultural operations
including processing of the agricultural procedure, raised or
received as rent-in-kind so as it fit for the market or sale of such
produce [section 2(1A)(b)]

26. 3. Income attributable to a farm house subject
to certain conditions [section2(1A)(c)]
4. Any income derived from saplings or
seedlings grown in a nursery shall be deemed
to be agricultural income[ w.e.f. year 2009-
2010]

27.  Capital receipts
 Capital expenditure
 Revenue receipts
 Revenue expenditure

30.  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 theTax act,1961.There are specific statues
for other taxes levied on companies
 Corporate tax planning refers to the changes in the
corporation’s finance and investment behavior in order to
minimize its corporate tax liability

31.  Corporate tax planning is the arrangement of
financial activities in such a way that the maximum
tax benefits are enjoyed by making use of all
beneficial provisions in the tax laws.
 It entitles the corporate assessee to avail certain
exemptions, deductions, rebates, and etc., so as to
minimize its tax liability

32. The principal objectives of corporate tax
planning may be stated as below:
1. Reduction of tax liability
2. Minimization of litigation
3. Productive investments
4. Healthy growth of enterprise and
5. Economic stability

33.  Company is a juristic person. It is separate and distinct
from its shareholders.
 A company is assessable o its total income. However, it
tax on its book-profits exceeds the tax on its total
income, it is assessed on its book-profits.
 A domestic company is further liable to pay additional
income tax on the amount of dividends declared,
distributed or paid

34. 1. Any Indian company
2. Corporations incorporated outside India
3. Entities assessed or assessable as company
4. Any institution, association or body declared
by the CBDT to be company

35. 1. Company in which the public are substantially interested [section
2(18)]
Widely-held company
Closely-held company
2. Indian company [section 2(26)]
3. Public sector company [section 2(36A)]
4. Domestic company [section 2(22A)]
5. Foreign company [section 2(23A)]
6. Companies registered under section 25 of companies act 1956

36.  Resident and ordinarily resident in India
 Resident and not ordinarily resident in India
 Non-resident in India

37. Following are provisions of corporate tax planning:
1. A domestic/resident company is taxed on:
i. 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
ii. Any income which accrues or arises or is deemed to
accrue or arise in India during the relevant previous year
iii. Any income which accrues or arises outside India during
the relevant previous year

38. 2. A foreign company/non-resident company is taxed on:
i, 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
ii, Any income which accrues or arises or is deemed to be
received in India during the relevant previous year

39. 3. A domestic or resident company would be subjected to an
additional tax called dividend tax on the amount of
dividend declared, distributed or paid.
Dividend tax is charged on the company and not charged on
the hands of the shareholders.
Such tax must be paid within 14 days of declaration or
distribution, whichever is earlier. Any deduction on
account of such tax is not allowed to the company

40. 4. Companies with more than INR 10 million total incomes
are subjected to a surcharge on their taxes. Domestic
companies pay a surcharge of 30% as against foreign
companies that pay a surcharge of 40%
5.Withholding tax is applicable on payments made to
foreign companies operating in India without permanent
establishment
6. Capital gains are subjected to tax

41.  Following are the tax rebates for corporate tax:
1. Domestic companies are allowed to deduct dividend received from other
domestic companies in certain cases
2. Special provisions apply to venture capital
Long-term capital gains have lower taxes
3. Long-term capital gains have lower taxes
4. Deductions are allowed to exports and new undertakings under certain
circumstances
5.Special deductions for developing, maintaining and operating new
infrastructure and power facilities
6. Business Losses can be carried over for eight years

43. Central sales tax is one the most important indirect tax for the
purpose of taxation by state governments
1. Central government will get tax revenue from Income tax (except
on agricultural income), excise (except on alcoholic drinks) and
customs
2. State government will get tax revenue from sales tax, excise on
liquor and tax on agricultural income
3. Municipalities will get tax revenue from OCTROI and house
property tax

44. 1. It extends to whole of India
2. Every dealer who makes an inter-state sale must be registered
dealer and a certificate of registration has to be displayed at all
places of his business
3. There is no exemption limit of turnover for the levy of central
sales tax
4. Under this act, the goods of special importance in inter-state,
i. Declared goods or goods of special importance in inter-state.
ii.Trade or commerce and
Iii. Other goods

45. 5.The rates on declared goods are lower as compared to
the rate of tax on goods in the second category
6.The tax is levied by central government, but it is collected
by state government
7.The rules regarding submissions of returns, payment of
tax, appeals etc., are not given in the act
8. State government are also allowed to frame rules and
regulation subject to notification and alteration as it
deemed to fit

46.  The objectives of the Act are:
1. To formulate the principles for determining:
i. When a sale or purchase takes place in the course of inter-state
trade or commerce
ii. When a sale or purchase takes place outside a state
iii. When a sale or purchase takes place in the course of imports into
or export from India
2.To provide for levy, collection and distribution of taxes on sales of
goods in the course of inter-state trade or commerce
3.To declare certain goods to be of special importance in inter-state
trade or commerce

47. 1. Appropriate state (sec 2(A))
2. Business [sec2(AA)]- Business include any trade or commerce,
manufacture, adventure or concern is carried on with a motive to
make gain or profit and whether or not any gain or profit accrues
from such trade, commerce, manufacture, adventure or concern
3. Dealer [section 2(b)]- Dealer means any person who carries on the
business of buying, selling, supplying or distributing goods, directly
or indirectly for cash or for deferred payment, or for commission,
remuneration or other valuable consideration

48. 4. Goods [section 2(d)] – Goods include all materials, articles,
commodities and all other kinds of movable property, but
does not include newspapers, actionable claims, stocks,
shares and securities
5. Place of business [section 2(dd)] – It includes a warehouse, go
downs, or other places where dealer stores his goods
6. Sales [Section 2(g)] – Sales means any transfer of property in
goods by one person to another for cash or for deferred
payment

49. 7. Sale price [section 2(H)] – sale price means the amount
payable to dealer as consideration for the sale of any
goods.
8.Turnover [Section 2(J)] –Turnover means the aggregate
of the sale prices received and receivable by him in
respect of sales of any goods in the course of inter-state
trade or commerce made during any prescribed period

50. 1. Sales tax revenue to states
2. Tax collected in the state where movement of
goods commences
3. Tax on inter-state sale of goods
4. State sales tax act applicable in many aspects
5. CST act defines some concept
6. Declared goods

51. 1. Inter state sale
2. Sale within a state (Intra state sale)
3. Sales during import/export

52. Rates of central sales tax
(W.e.f 1.6.2008)
Kinds of sale
Rates of sales tax in state 2%
or more Rates of sales tax in state less than 2%
Declared undeclared Declared undeclared
Sales to registered dealer on form
C 2% 2%Rate fo state Rate fo state
Sales to registered dealer on
without form C to unregistered
dealer Rate fo state Rate fo state Rate fo state Rate fo state
Sales of tax free goods Exempted Exempted Exempted Exempted
Partial rebate by state governement
Applicable
rates Applicable ratesApplicable rates Applicable rates

53.  Gross turnover means the aggregate of the sale prices in respect of
sales made during any prescribed period
 The central tax is levied on taxable turnover , not on gross turnover
From the gross turnover the sale prices of the following shall be
deducted:
1. Sale prices of the exempted goods
2. Sale price of the goods exported outside of India
3. Sale price of the goods inside a state
4. Goods purchased and sold outside the state

54. The balance shall be the sale price of goods sold
in the course of inter-state trade or commerce.
From such sale prices after deducting the
followings,
1. Sale price of goods returned
2. Amount of sale tax
3. Other deductions (section 8A)

55.  The period of turnover in relation to any dealer liable to
pay tax under this act shall be same as the period in
respect of which the dealer is liable to submit returns
under the general sale tax law of state.
 Where the dealer is not liable to submit returns under
the general sale tax law of the state, the period of
turnover shall be a quarter ending on the 30th june, 30th
sept, 31st dec, 31st march

56.  The issues involved in CST calculation as follows:
1. Sales tax is a single point system of tax levy
2. In the sales tax structure there was a problem of double
taxation of commodities and multiplicity of taxes
3. It increases the tax burden of the ultimate customer
4. Application of sales tax is restricted only for goods
5. Dealers of reselling goods have no responsibility to
collect tax

57. 6. Sales tax is not levied at the time of purchases against
statutory forms
7. Computation of sales tax is too much complicated
8. Sales tax return are filed separately
9. Assessment of sales tax is entrusted to the sales department
10.There is nor exemption limit of turnover for levy of central
sales tax
11. Sales tax penal provisions for defaulters and evaders of tax
are not strict

58.  Concept:
The value added tax (VAT) is a tax on the value added to goods in the
process of production and distribution
In the old tax structure, there were problems of double taxation of
commodities and multiplicities of taxes, resulting in cascading of tax
burden
The idea of tax on value-added is relatively simple.The final price paid by
a consumer in a shop foe any good is simply the total of all the values
created by the successive chain of production added together

59. 1. Tax levied and collected at every point of sale
2. Tax collected at every point of sale and the tax already paid by the
dealer at the time of purchase of goods will be deducted from the
amount of tax paid at the next sale
3. Dealers reselling tax-paid goods will have to collectVAT and file
returns and payVAT
4. It is transparent and easy
5. Tax on good and services both
6. Self assessment by dealers

60. 1. To have a relatively simple tax system to administer and to
achieve complete compliance of books of account
2. To implement a uniform tax base through out the country
3. To provide a mechanism to collect taxes with reference to
location of economic activities
4. To have uniform rules of taxation on international flow of
goods across the nation
5. To facilitate enforcement by providing audit trial through
different stages of production and sales

61.  All business transactions that are carried on within a state by
individuals/partnerships/ companies etc., will be covered underVAT
 More than 550 items are covered under the new IndianVAT regime out of
which 46 natural and unprocessed local product will be exempt fromVAT
 Nearly 270 items including drugs and medicines, all industrial and
agricultural inputs, capital goods as well as declared goods would attract 4%
VAT in India
 The remaining items would attract 12.5%VAT. Precious metals such as gold
and bullion will be taxed at 1%
 Petrol and diesel are kept out of theVAT regime in india

62.  Gross product variant
 Income variant
 Consumption variant

63. 1. Addition method
2. Subtraction method
i. Direct subtraction method
ii. Intermediate subtraction method
3.Tax- credit method
Tax credit method or invoice method has been universally
because of the internet advantages in the credit method
of calculating tax liability.

64.  Neutral tax
 Spread over a large number of firms
 Minimum loss of revenue through evasion
 Easier to enforce
 Incentive to invest
 Encourage exports
 Increase efficiency in production and distribution
 Selectivity
 Co-ordination ofVAT with direct taxation

65.  VAT is regressive
 VAT is too difficult to operate from the
position of both the administration and
business
 VAT is inflationary
 VAT favors the capital intensive firm