1. Notes: - Direct & Indirect Taxes (Taxation)
Lecture 1
Introduction
What is Tax?
‘Tax’ is a charge levied by the government on its subject (i.e. individual,
company and firm) for the purpose of meeting its expenses. Tax is used to
meet the following expenses
- Defence
- Salaries of Staff
- Interest on Loan
- Maintaining and Developing Infrastructure
- Recurring Expenses
- Maintenance of Roads, Sanitation and Health
Types of Tax
Direct Tax
A Direct tax is a kind of charge, which is imposed directly on the taxpayer
and paid directly to the government by the persons (juristic or natural) on
whom it is imposed. A direct tax is one that cannot be shifted by the
taxpayer to someone else.
Types of Direct Taxes are
Income Tax: Income Tax Act, 1961 imposes tax on the income of the
individuals or Hindu undivided families or firms or co-operative societies
(other tan companies) and trusts (identified as bodies of individuals
associations of persons) or every artificial juridical person. The inclusion of
a particular income in the total incomes of a person for income-tax in India
is based on his residential status. There are three residential status, viz., (i)
Resident & Ordinarily Residents (Residents) (ii) Resident but not

2. Ordinarily Residents and (iii) Non Residents. There are several steps
involved in determining the residential status of a person. All residents are
taxable for all their income, including income outside India. Non residents
are taxable only for the income received in India or Income accrued in
India. Not ordinarily residents are taxable in relation to income received in
India or income accrued in India and income from business or profession
controlled from India
Corporation Tax: The companies and business organizations in India are
taxed on the income from their worldwide transactions under the
provision of Income Tax Act, 1961. A corporation is deemed to be resident
in India if it is incorporated in India or if it’s control and management is
situated entirely in India. In case of non resident corporations, tax is levied
on the income which is earned from their business transactions in India or
any other Indian sources depending on bilateral agreement of that country.
Gift Tax: Gift tax in India is regulated by the Gift Tax Act which was
constituted on 1st April, 1958. It came into effect in all parts of the country
except Jammu and Kashmir. As per the Gift Act 1958, all gifts in excess of
Rs. 25,000, in the form of cash, draft, check or others, received from one
who doesn't have blood relations with the recipient, were taxable.
However, with effect from 1st October, 1998, gift tax got demolished and all
the gifts made on or after the date were free from tax. But in 2004, the act
was again revived partially. A new provision was introduced in the Income
Tax Act 1961 under section 56 (2). According to it, the gifts received by any
individual or Hindu Undivided Family (HUF) in excess of Rs. 50,000 in a
year would be taxable.
Indirect Tax
An indirect tax 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 customer). An indirect tax is one that can be shifted by the taxpayer

3. to someone else. An indirect tax may increase the price of a good so that
consumers are actually paying the tax by paying more for the products.
Customs Duty: The Customs Act was formulated in 1962 to prevent illegal
imports and exports of goods. Besides, all imports are sought to be subject
to a duty with a view to affording protection to indigenous industries as
well as to keep the imports to the minimum in the interests of securing the
exchange rate of Indian currency. Duties of customs are levied on goods
imported or exported from India at the rate specified under the customs
Tariff Act, 1975 as amended from time to time or any other law for the time
being in force.
Service Tax: The service providers in India except those in the state of
Jammu and Kashmir are required to pay a Service Tax under the provisions
of the Finance Act of 1994. The provisions related to Service Tax came into
effect on 1st July, 1994. Under Section 67 of this Act, the Service Tax is
levied on the gross or aggregate amount charged by the service provider on
the receiver. However, in terms of Rule 6 of Service Tax Rules, 1994, the tax
is permitted to be paid on the value received. The interesting thing about
Service Tax in India is that the Government depends heavily on the
voluntary compliance of the service providers for collecting Service Tax in
India.
Sales Tax: Sales Tax in India is a form of tax that is imposed by the
Government on the sale or purchase of a particular commodity within the
country. Sales Tax is imposed under both, Central Government (Central
Sales Tax) and State Government (Sales Tax) Legislation. Generally, each
State follows its own Sales Tax Act and levies tax at various rates. Apart
from sales tax, certain States also imposes additional charges like works
contracts tax, turnover tax and purchaser tax. Thus, Sales Tax Acts as a
major revenue-generator for the various State Governments. From 10th
April, 2005, most of the States in India have supplemented sales tax with a
new Value Added Tax (VAT).

4. Value Added Tax (VAT): The practice of VAT executed by State
Governments is applied on each stage of sale, with a particular apparatus of
credit for the input VAT paid. VAT in India classified under the tax slabs are
0% for essential commodities, 1% on gold ingots and expensive stones, 4%
on industrial inputs, capital merchandise and commodities of mass
consumption, and 12.5% on other items. Variable rates (State-dependent)
are applicable for petroleum products, tobacco, liquor, etc. VAT levy will be
administered by the Value Added Tax Act and the rules made there-under
and similar to a sales tax. It is a tax on the estimated market value added to
a product or material at each stage of its manufacture or distribution,
ultimately passed on to the consumer. Under the current single-point
system of tax levy, the manufacturer or importer of goods into a State is
liable to sales tax. There is no sales tax on the further distribution channel.
VAT, in simple terms, is a multi-point levy on each of the entities in the
supply chain. The value addition in the hands of each of the entities is
subject to tax. VAT can be computed by using any of the three methods: (a)
Subtraction method: The tax rate is applied to the difference between the
value of output and the cost of input. (b) The Addition method: The value
added is computed by adding all the payments that is payable to the factors
of production (viz., wages, salaries, interest payments etc). (c) Tax credit
method: This entails set-off of the tax paid on inputs from tax collected on
sales.
Additional Concepts
Income: The definition of the term “income” in section 2(24) is inclusive and not
exhaustive. Therefore, the term “income” not only includes those things that are
included in section 2(24) but also includes those things that the term signifies according
to its general and natural meaning.
Income includes
· Profit & Gains from Business & Profession.
· Dividend
· Voluntary Contribution received by a trust

5. · Perquisite or Profit in Lieu of Salary
· Any special allowance or benefit granted to meet expenses in performance of
duty
· Export Incentives.
· Value of any Benefit or Perquisite to businessman or professional.
· Interest, Salary, Bonus, Commission or Remuneration received by partner or
partnership firm
· Capital Gains
· Profits of Insurance Business.
· Winning of Lottery, Crossword puzzles, horse races and card games.
· Sum received under Keyman Insurance Policy
· Sum received under an agreement for not carrying out an activity
· Gifts exceeding Rs. 50,000 received by Individual
The Components of Gross Total Income are
As per section 14, the income of a person is computed under the following five heads:
1. Salaries.
2. Income from house property.
3. Profits and gains of business or profession.
4. Capital gains.
5. Income from other sources.
The aggregate income under these heads is termed as “gross total income”.
Financial Year : The year starting from April 1 and ending on March 31 of the next year
is known as a financial year.
Assessment Year: AY is a financial year in which the income earned during the previous
year is taxed.
Previous Year (sec 3): The year in which the income is earned is called the previous
year.
E.g.:

6. 1. Income earned by XYZ Ltd in the year 2007-2008 will be taxed in the year 2008-
2009. The same would be taxable irrespective of the accounting year followed by
the assessee. In the aforesaid the year 2007-08 is the previous year and the year
2008-09 is the assessment year.
Income earned during the previous year is taxed during the assessment year. Therefore
a year is an assessment year and previous year simultaneously. However in certain
cases the income is taxed in the year in which it is earned. The exceptions to the rule are
as under:
1. Income of non-resident from shipping. (sec172)
2. Income of persons leaving India either permanently or for long period of time
(sec174)
3. Income of bodies formed for short duration. (sec174A)
4. Income of persons trying to alienate his assets with view to avoiding payment of
his tax. (sec 175)
5. income of discontinued business.(sec176)
“ Person “sec 2(31):
The term persons include:
a) an individual
b) a Hindu undivided family
c) a company
d) a firm
e) an association of persons and a body of individuals whether incorporated or
not
f) a local authority
g) Every artificial jurisdictional person not falling under any of the preceding
category.
The aforesaid is an inclusive list and the last category covers all those that do not fall in
any of the preceding classification.

7. Assessee [sec2 (7)]:
Assessee means a person by whom any tax or any other sum of money (i.e. penalty or
interest is payable under the act. It includes:
1. Every person in respect of whom any proceeding under the act has been taken
for the assessment of his income or loss or the amount of refund due to him.
2. any person who is deemed to be an assessee.(representative assessee)
3. an assessee in default ( advance tax and TDS not deducted)
company" means—
(i) any Indian company, or
(ii) any body corporate incorporated by or under the laws of a country
outside India, or
(iii) any institution, association or body which is or was assessable or was
assessed as a company for any assessment year under the Indian Income-tax
Act, 1922 (11 of 1922), or which is or was assessable or was assessed
under this Act as a company for any assessment year commencing on or
before the 1st day of April, 1970, or
(iv) any institution, association or body, whether incorporated or not and
whether Indian or non-Indian, which is declared by general or special
order of the Board to be a company :
Provided that such institution, association or body shall be deemed to be a
company only for such assessment year or assessment years (whether
commencing before the 1st day of April, 1971, or on or after that date) as
may be specified in the declaration ;]
(18) "company in which the public are substantially interested"—a
company is said to be a company in which the public are substantially
interested—
[(a) if it is a company owned by the Government or the Reserve Bank of
India or in which not less than forty per cent of the shares are held
(whether singly or taken together) by the Government or the Reserve Bank
of India or a corporation owned by that bank ; or]

8. [(aa) if it is a company which is registered under section 25 of the
Companies Act, 1956 (1 of 1956); or
(ab) if it is a company having no share capital and if, having regard to its
objects, the nature and composition of its membership and other relevant
considerations, it is declared by order of the Board to be a company in
which the public are substantially interested :
Provided that such company shall be deemed to be a company in which
the public are substantially interested only for such assessment year or
assessment years (whether commencing before the 1st day of April, 1971,
or on or after that date) as may be specified in the declaration ; or]
[(ac) if it is a mutual benefit finance company, that is to say, a company
which carries on, as its principal business, the business of acceptance of
deposits from its members and which is declared by the Central
Government under section 620A of the Companies Act, 1956 (1 of 1956), to
be a Nidhi or Mutual Benefit Society ; or]
[(ad) if it is a company, wherein shares (not being shares entitled to a fixed
rate of dividend whether with or without a further right to participate in
profits) carrying not less than fifty per cent of the voting power have been
allotted unconditionally to, or acquired unconditionally by, and were
throughout the relevant previous year beneficially held by, one or more co-operative
societies ;]
[(b) if it is a company which is not a private company as defined in the
Companies Act, 1956 (1 of 1956), and the conditions specified either in
item (A) or in item (B) are fulfilled, namely :—
(A) shares in the company (not being shares entitled to a fixed rate of
dividend whether with or without a further right to participate in profits)
were, as on the last day of the relevant previous year, listed in a recognised
stock exchange in India in accordance with the Securities Contracts
(Regulation) Act, 1956 (42 of 1956), and any rules made there under ;
[(B) shares in the company (not being shares entitled to a fixed rate of
dividend whether with or without a further right to participate in profits)
carrying not less than fifty per cent of the voting power have been allotted

9. unconditionally to, or acquired unconditionally by, and were throughout
the relevant previous year beneficially held by—
(a) the Government, or
(b) a corporation established by a Central, State or Provincial Act, or
(c) any company to which this clause applies or any subsidiary company of
such company 79[if the whole of the share capital of such subsidiary
company has been held by the parent company or by its nominees
throughout the previous year.]
Explanation.—In its application to an Indian company whose business
consists mainly in the construction of ships or in the manufacture or
processing of goods or in mining or in the generation or distribution of
electricity or any other form of power, item (B) shall have effect as if for the
words "not less than fifty per cent", the words "not less than forty per cent"
had been substituted;]]

10. unconditionally to, or acquired unconditionally by, and were throughout
the relevant previous year beneficially held by—
(a) the Government, or
(b) a corporation established by a Central, State or Provincial Act, or
(c) any company to which this clause applies or any subsidiary company of
such company 79[if the whole of the share capital of such subsidiary
company has been held by the parent company or by its nominees
throughout the previous year.]
Explanation.—In its application to an Indian company whose business
consists mainly in the construction of ships or in the manufacture or
processing of goods or in mining or in the generation or distribution of
electricity or any other form of power, item (B) shall have effect as if for the
words "not less than fifty per cent", the words "not less than forty per cent"
had been substituted;]]