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Unit3

LECTURE 2
Taxation system in India
1.0

PAPER IV
GENE RAL STUDIES-III
Tec hnology, Economic
Development, Bio divers ity,
Environment, Security and
Dis aster Management.

Unit 3
Government Budgeting

INTRODUCTION
IndiahasawelldevelopedtaxstructurewithclearlydemarcatedauthoritybetweenCentralandStateGovernmentsand
localbodies.CentralGovernmentleviestaxesonincome(excepttaxonagriculturalincome,whichtheStateGovernments
canlevy),customsduties,centralexciseandservicetax.ValueAddedTax(VAT),stampduty,stateexcise,landrevenue
and profession tax arelevied by the State Governments. Local bodies are empowered to levy tax on properties, octroi
and for utilities like water supply, drainage etc.
Indiantaxationsystemhasundergonetremendousreformsduringthelastdecade.Thetaxrateshavebeenrationalized
andtaxlawshavebeensimplifiedresultinginbettercompliance,easeoftaxpaymentandbetterenforcement.Theprocess
ofrationalization oftax administrationis ongoingin India.

2.0

DIRECTTAXES
Taxesinwhichthepointofpayment
andthe pointof incidenceare the
same are known as direct taxes.
Direct taxes form a substantial
chunkofthegovernment'sreceipts.
Income tax
Thelawregardingincometaxislaid
downbytheIncomeTaxAct1961.
PreviouslyincometaxinIndiawas
governedundertheIndianIncome
Tax Act, 1922. According to the
I n c o m e Ta x A c t , 1 9 6 1 , e v e r y
person, who is an assessee and
whose total income exceeds the
maximumexemptionlimit,shallbe
chargeable to the income tax at
therateorrates prescribedinthe
FinanceAct.Suchincometaxshall
bepaidonthetotalincomeofthe
p r e vi o u s y ea r i n th e r e l ev a n t
assessment year.
Any person by whom (any tax) or
anyothersumofmoneyispayable
under the Income Tax Act, is an
assessee.

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2.1

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Accordingly there are eight

types of persons:
1 . Individual
2 . Hindu Undivided Family
(HUF)
3 . Associ ation of p ersons
(AOP)
4 . Bodyofindividuals(BOI)
5 . Company
6 . Firm
7. A local authority, and
8 . Eve ry ar tific ial judic ial
person not falling within
a n y o f t h e p r e c e d i n g
categories.
Income tax is an annual tax
imposed separately for each
assessment year (also called
the tax year). Assessment
yearcommencesfrom1stApril
and ends on the next 31st
March.
2.1

Residential status and its impact on taxation

ThetotalincomeofanindividualisdeterminedonthebasisofhisresidentialstatusinIndia.Fortaxpurposes,anindividual
may be resident, nonresidentornot ordinarily resident. The kindsof income which areliable to taxin India arebased
on residential status asthe following table illustrates
Status

IndianIncome

ForeignIncome

Resi dentan dordi nari lyresiden t

Taxab le

Taxable

Resi dentbu tno tord inaryresiden t

Taxab le

No ttaxab le

No nResident

Taxab le

No ttaxab le

2.1.1 Personal Income Tax

PersonalincometaxisleviedbyCentralGovernmentandisadministeredbyCentralBoardofDirecttaxesunderMinistry
of Finance in accordance with the provisions of the Income Tax Act.
Individual resident aged below 60 years
(i.e. born on or after 1st April 1954) or any NRI / HUF / AOP / BOI / AJP
IncomeSlabs

TaxRates

i.

Wh ereth etotalin comedoesn otexceedRs.2,50 ,000/

NIL

ii.

Wh ereth etotalin comeexceedsRs.2,5 0,000/bu tdoes

notexceedRs.5 ,00,000/

1 0%ofamoun tbywhichth etotalin comeexceedsRs.2 ,50,000/

Less(in caseofResid entIndividu alson ly):TaxCredit
u/s87A1 0%oftaxableincomeupto amaximumofRs.2 000/

i ii.

Wh ereth etotalin comeexceedsRs.5,0 0,000/bu tdoes

notexceedRs.1 0,00,000/

Rs .25,000/+20% oftheamou ntbywhi cht hetot al income

exceedsRs .5,00,000 /

iv.

Wh ereth etotalin comeexceedsRs.10 ,00,000/

Rs .1,25,000 /+30 %ofth eamou ntb ywh ich thetotalinc ome

exceedsRs .10,00,00 0/

Surcharge:10 %oftheIncomeTax,wheretotaltaxableincomeismorethanRs.1 cro re(MarginalRe liefinSurcharge,ifapplicable)

Education Cess :3%ofthetotalofIncomeTaxand Surcharge

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Individual resident who is of the age of 60 years or more but below the age of 80 years at any time
during the previous year (i.e. born on or after 1st April 1934 but before 1st April 1954)
IncomeSlabs
i.

ii.

TaxRates

Wh ereth et otalin comedoesn otexceedRs.3,00 ,000/

Wh ereth etotalin comeexceedsRs.3,0 0,000/bu tdoes

notexceedRs.5 ,00,000/

NIL
1 0%ofth eamou nt bywh ich theto talincomeexceeds
Rs .3,00,000 /
Less: TaxCred itu/s87 A10%oft axablein comeup toa
maximumofRs .2000/

i ii.

Wh ereth etotalin comeexceedsRs.5,0 0,000/bu tdoes

notexceedRs.1 0,00,000/

Rs .20,000/+20% oftheamou ntbywhi cht hetot al income

exceedsRs .5,00,000 /

iv.

Wh ereth etotalin comeexceedsRs.10 ,00,000/

Rs .1,20,000 /+30 %ofth eamou ntb ywh ich thetotalinc ome

exceedsRs .10,00,00 0/

Surcharge:10 %oftheIncomeTax,wheretotaltaxableincomeismorethanRs.1 cro re(MarginalRe liefinSurcharge,ifapplicable)

Education Cess :3%ofthetotalofIncomeTaxand Surcharge

Individual resident who is of the age of 80 years or more at any time during the previous year
(i.e. born before 1st April 1934)

IncomeSlabs

TaxRates

i.

Wh ereth etotalin comedoesn otexceedRs.5,00 ,000/

NIL

ii.

Wh ereth etotalin comeexceedsRs.5,0 0,000/bu tdoes

notexceedRs.1 0,00,000/

2 0%ofth eamou nt bywh ich theto talincomeexceeds

Rs .5,00,000 /

i ii.

Wh ereth etotalin comeexceedsRs.10 ,00,000/

Rs .1,00,000 /+30 %ofth eamou ntb ywh ich thetotalinc ome

exceedsRs .10,00,00 0/

Surcharge:10 %oftheIncomeTax,wheretotaltaxableincomeismorethanRs.1 cro re(MarginalRe liefinSurcharge,ifapplicable)

Education Cess :3%ofthetotalofIncomeTaxand Surcharge

Cooperative Society

IncomeSlabs

TaxRates

i.

Wh ereth etotalin comedoesn otexceedRs.10 ,0 00/

10% ofthein come

ii.

Wh ereth etotalin comeexceedsRs.10 ,000/bu tdoes

notexceedRs.2 0,000/

Rs .1,000/+20% ofinc omei nexc esso f

Rs .10,000/

i ii.

Wh ereth etotalin comeexceedsRs.20 ,000/

Rs .3,000/+30% oftheamoun tbywhi chth etotali nco me

exceedsRs .20,000/

Surcharge:10 %oftheIncomeTax,wheretotaltaxableincomeismorethanRs.1 cro re(MarginalRe liefinSurcharge,ifapplicable)

Education Cess :3%ofthetotalofIncomeTaxand Surcharge

11.( C) 12.( D) 13.( C) 14.( B) 15.( C) 16.( A) 17.(C) 18.( B) 19.( C) 20.( C)
1.(B)

2.(D)

3.(D)

4.(B)

5.(A)

6.(C)

7.( C)

8.(B)

9.(A) 10.( B)

Answerkey(DPQ)TaxationsysteminIndia
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2.1.2 Corporate tax

A corporate has been defined as an artificial juridical person having an independent and separate legal entity from its
shareholders.Income ofthe companyis computed and assessedseparately in thehandsofthe company. However the
incomeofthecompany,whichisdistributedtoitsshareholders asdividend,isassessedintheirindividualhands.Such
distributionofincomeisnottreatedasexpenditureinthehandsofcompanytheincomesodistributedisanappropriation
of the profits of the company.
Residence of a company
1 . A company is said to be a resident in India during the relevant previous year if:
(a)

It isan Indian company

(b)

If it is not an Indian company but, the control and the management of its affairs is situated wholly in India

2 . A company is said to be nonresident in India if it is not an Indian company and some part of the control and
management of its affairs is situated outside India.
Corporate sector tax: The taxability of
a c om p an y' s i nc om e d ep e nd s o n it s
domicile.Indiancompaniesaretaxablein
India on theirworldwideincome. Foreign
companies are taxable on income that
arisesoutoftheirIndianoperations,or,in
certain cases, income that is deemed to
ariseinIndia.Royalty,interest,gainsfrom
sale of capital assets located in India
(includinggainsfromsaleofsharesinan
Indian company), dividends from Indian
companiesandfeesfortechnicalservices
arealltreatedasincomearisinginIndia.
ThecurrentrateofcorporatetaxinIndia
is30% (5%surcharge and3% education
cess).
2.1.3 Minimum Alternative Tax (MAT)
Normally,acompanyisliabletopaytaxon
the income computed in accordance with
theprovisionsoftheIncomeTaxAct,but
theprofitandlossaccountofthecompany
is prepared as per provisions of the
CompaniesAct.There werelargenumber
ofcompanieswhohadbookprofitsasper
theirprofitandlossaccountbutwerenot
payinganytaxbecauseincomecomputedasperprovisionsoftheincometaxactwaseithernilornegativeorinsignificant.
Insuchcase,althoughthecompanieswereshowingbookprofitsanddeclaringdividendstotheshareholders,theywere
notpayinganyincometax.ThesecompaniesarepopularlyknownasZeroTaxcompanies.Inordertobringsuchcompanies
under the Income Tax Act net, section 115JA was introduced w.e.f assessment year 199798.
A newtax credit schemehas been introduced bywhich MAT paidcan be carriedforwardfor setoff againstregular tax
payable during the subsequent five year period subject to certain conditions, as under:
1 . WhenacompanypaystaxunderMAT,thetaxcreditearnedbyitshallbeanamount,whichisthedifferencebetween
the amount payable under MAT and the regular tax. Regular tax in this case means the tax payable on the basis
of normal computationof totalincome of the company.
2 . MAT credit will be allowed carry forward facility for a period of five assessment years immediately succeeding the
assessmentyearinwhichMATispaid.UnabsorbedMATcreditwillbeallowedtobeaccumulatedsubjecttothefive
year carry forward limit.
3 . In the assessment year when regular tax becomes payable, the difference between the regular tax and the tax
computed under MATfor that year will beset offagainstthe MATcredit available. The credit allowedwill not bear
any interest.

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2.1.4 Fringe Benefit Tax (FBT)

TheFinanceAct,2005introducedanewlevy,namelyFringeBenefitTax(FBT)containedinChapterXIIH(Sections115W
to115WL)oftheIncomeTaxAct,1961.TheoriginofFBTstemsfromthecorporatetrendwhereintheamountofsalary
paid to an employe is less but the perquisites (perks) are more.
Fringe Benefit Tax (FBT) is an additional income tax payable by the employers on value of fringe benefits provided or
deemed to have been provided to the employees. The FBT is payable by an employer who is a company a firm an
association of persons excluding trusts/a body of individuals a local authority a sole trader, or an artificial juridical
person.
This tax is payable even where employer does not otherwise have taxable income. Fringe Benefits are defined as any
privilege, service, facility or amenity directly or indirectly provided by an employer to his employees (including former
employees) byreason of their employment and includes expenses or payments on certain specified heads.
ThebenefitdoesnothavetobeprovideddirectlyinordertoattractFBT.Itmaystillbeappliedifthebenefitisprovided
by athird partyor anassociate of employer or byunder an agreement with the employer. Thevalue of fringe benefits
is computed as per provisions under Section 115WC. FBT is payable at prescribed percentage on the taxable value of
fringe benefits. Besides, surcharge in case of both domestic and foreign companies shall be leviable on the amount of
FBT. On these amounts, education cess shall also be payable.
EverycompanyshallfilereturnoffringebenefitstotheAssessingOfficerintheprescribedformby31stOctoberofthe
assessment year as per provisions of Section 115WD.
As per the current law, stockoption plans (ESOP) are also considered as fringe benefits andareliable to tax. The fair
marketvalueoftheshareonthedateofthevestingoftheoptionby
the employee as reduced by the amount actually paid by him or
recovered fromhim shall be considered to be the fringe benefit. The
fairmarket valueshallbe determined in accordancewith the method
to be prescribed by the CBDT.
2.1.5 Wealth Tax
Wealthtax,inIndia,isleviedunderWealthtaxAct,1957.Wealthtax
is a tax on the benefits derived from property ownership. The tax is
to be paid year after year on thesame property on its market value,
whether or not such property yields any income.
UndertheAct,thetaxischargedinrespectofthewealthheldduring
the assessment year by the following persons:
1 . Individual
2 . HinduUndividedFamily(HUF)
3 . Company
Chargeability to tax also depends upon the residential status of the assessee, same as the residential status for the
purpose of the Income Tax Act.
Wealthtaxisnotleviedonproductiveassets,henceinvestmentsinshares,debentures,UTI,mutualfunds,etcareexempt
fromit.TheassetschargeabletowealthtaxareGuesthouse,residentialhouse,commercialbuilding,Motorcar,Jewellery,
bullion, utensils of gold, silver, Yachts, boats and aircrafts, Urban land and Cash in hand (in excess of Rs 50,000 for
Individual&HUFonly).
Thefollowingwillnot beincludedinAssets:
1 . Assets held as Stock in trade.
2 . A house held for business or profession.
3 . Any property in nature of commercial complex.
4 . A house let out for more than 300 days in a year.
5 . Golddepositbond.
6 . A residential house allotted by a Company to an employee, or an Officer, or a whole time director (Gross salary
i.e. excluding perquisites and before Standard Deduction of such Employee, Officer, Director should be less than
Rs. 5,00,000).
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The assets exempt from Wealth tax are "Property held under a trust", Interest of the assessee in the coparcenary
propertyofaHUFofwhichheisamember,"Residentialbuildingofaformerruler","AssetsbelongingtoIndian
repatriates",onehouseorapartofhouseoraplotoflandnotexceeding500sq.m.(forindividual&HUFassessee).
WealthtaxischargeableinrespectofNetwealthcorrespondingtoValuationdatewhereNetwealthisallassetslessloans
takentoacquirethoseassets,andvaluationdateis31stMarchofimmediatelyprecedingtheassessmentyear.Inother
words, thevalue ofthe taxableassets onthe valuationdate isclubbed togetherandisreduced bytheamountof debt
owed by the assessee. The net wealth so arrived at is charged to tax at the specified rates. Wealth tax is charged at
1 per cent of the amount by which the net wealth exceeds Rs 15 Lakhs.
2.1.6 Dividend Distribution Tax (DDT)
Under Section 115O of the Income Tax Act, any amount declared, distributed or paid by a domestic company by way
ofdividend shallbe chargeableto dividendtax. Onlyadomestic company(notaforeign company)is liablefor thetax.
Taxon distributedprofitis inadditionto incometaxchargeable inrespect oftotalincome. Itisapplicable whetherthe
dividendisinterimorotherwise.Also,itisapplicablewhethersuchdividendispaidoutofcurrentprofitsoraccumulated
profits.
The tax shallbe deposited within 14 days fromthe date ofdeclaration, distribution or payment of dividend, whichever
isearliest.FailingtothisdepositionwillrequirepaymentofstipulatedinterestforeverymonthofdelayunderSection115
PoftheAct.Rateofdividenddistributiontaxistoberaisedfrom12.5percentto15percentondividendsdistributed
bycompaniesandto25percentondividendspaidbymoneymarketmutualfundsandliquidmutualfundstoallinvestors.
2.1.7 Securities Transaction Tax (STT)
SecuritiesTransactionTaxorturnovertax,asisgenerallyknown,isataxthatisleviableontaxablesecuritiestransaction.
STT is leviable on thetaxable securities transactions with effect from 1st October, 2004 as per the notification issued
by the Central Government. The surcharge is not leviable on the STT.
2.1.8 Tax Rebates for Corporate Tax
Theclassicalsystemofcorporate taxationisfollowedinIndia.Corporatesandindividualsaregiven alotoffreedomto
invest and save tax. These rules are influenced by various macro economic conditions that may exist at that time.
1 .
2 .
3 .
4 .
5 .
6 .
7.

Domesticcompanies arepermitted todeduct dividendsreceived fromother domesticcompanies incertain cases.

Inter Company transactions arehonoured if negotiated atarm's length.
Special provisions apply to venture funds and venture capital companies.
Longterm capital gainshave lower tax incidence.
There is no concept of thin capitalization.
Liberaldeductionsareallowedforexportsandthesettinguponnewindustrialundertakingsundercertaincircumstances.
There are liberal deductions for setting up enterprises engaged in developing, maintaining and operating new
infrastructurefacilitiesandpowergeneratingunits.
8 . Business losses can be carried forward for eight years,
and unabsorbed depreciation can be carried indefinitely.
No carry back is allowed.
9 . Dividends, interest and longterm capital gain income
earned by an infrastructure fund or company from
investmentsinsharesorlongtermfinanceinenterprises
carrying on the business of developing, monitoring and
operating specified infrastructurefacilities or in units of
mutual funds involved with the infrastructure of power
sector is proposed to be tax exempt.
2.2

Capital Gains Tax

Acapitalgainisincomederivedfromthesaleofaninvestment.
Acapitalinvestmentcanbeahome,afarm,aranch,afamily
business,workofartetc.Inmostyearsslightlylessthanhalf
oftaxable capitalgains arerealized onthe saleof corporate
stock. The capital gain is the difference between themoney
received from selling the asset and the price paid for it.
Capital gain also includes gain that arises on "transfer"
(includessale,exchange)ofacapitalassetandiscategorized
intoshorttermgainsandlongtermgains.

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The capital gains tax is different from almost all other forms of taxation in that it is a voluntary tax. Since the tax is
paidonlywhenanassetissold,taxpayerscanlegallyavoidpaymentbyholdingontotheirassetsaphenomenonknown
as the "lockin effect."
The scope of capital asset is being widened by including certain items held as personal effects such as archaeological
collections, drawings, paintings, sculptures or any work of art. Presently no capital gain tax is payable in respect of
transferofpersonaleffectsasitdoesnotfallinthedefinitionofthecapitalasset.Torestrictthemisuseofthisprovision,
the definition of capital asset is being widened to include those personal effects such as archaeological collections,
drawings, paintings, sculptures orany work of art.
Transferofaboveitemsshall nowattractcapitalgaintaxthewayjewelleryattractsdespite beingpersonaleffectason
date.
2.2.1 Short Term and Long Term capital Gains
Gains arisingon transfer of a capital asset held for not more than 36 months (12 months in the case of a share held
inacompanyorothersecuritylistedonrecognisedstockexchangeinIndiaoraunitofamutualfund)priortoitstransfer
are"shortterm".Capitalgainsarisingontransferofcapitalassetheldforaperiodexceedingtheaforesaidperiodare
"longterm".
Section112oftheIncomeTaxAct,providesforthetaxonlongtermcapitalgains,at20percentofthegaincomputed
with the benefit of indexation and 10 per cent ofthe gaincomputed (in case of listed securities or units) without the
benefit of indexation.
2.3

Double Taxation Relief

TaxationofthesameincomeofthepersonmorethanonceisknownasDoubleTaxation.Thismayhappenwhenaperson
is liable to pay tax in more than one nation. Due to countries following different rules for income taxation.
Asper the sourceofincomerule,the incomemaybe subjectto taxinthe countrywherethe sourceof suchincome
exists (i.e. where the businessestablishment is situated or where the asset/ property is located) whether the income
earner is a resident in that country or not.
Accordingtothe residencerule,theincomeearnermaybetaxedonthebasisoftheresidentialstatusinthatcountry.
Forexample,ifapersonisresidentofacountry,
he may have to pay tax on any income earned
outside that country as well.
Thereforeaproblemofdoubletaxationarisesifa
person is taxed in respect of any income on the
basisofsourceofincomeruleinonecountryand
onthebasisofresidenceinanothercountryoron
the basis of mixture of above two rules.
Reliefagainstsuchhardshipcanbeprovidedmainly
in two ways:
1 . Bilateralrelief
2 . Unilateralrelief
Bil ateral Reli ef: Th e G ov ern men ts of t wo
countriescanenterintoDoubleTaxationAvoidance
Agreement (DTAA) to provide relief against such
DoubleTaxation,workedoutonthebasisofmutual
agreementbetweenthetwoconcernedsovereign
states. This may be called a scheme of 'bilateral
relief' as both concerned powersagree as to the
basisoftherelieftobegrantedbyeitherofthem.
Unilateralrelief:Theaboveprocedureforgrantingreliefwillnotbesufficienttomeetallcases.Nocountrywillbein
a position to arrive at such agreement with all the countries of the world for all time. The hardship of the taxpayer
howeverisacripplingoneinallsuchcases.Somereliefcanbeprovidedeveninsuchcasesbyhomecountryirrespective
ofwhethertheothercountryconcernedhasanyagreementwithIndiaorhasotherwiseprovidedforanyreliefatallin
respect of such double taxation. This relief is known as unilateral relief.
Double Taxation Avoidance Agreement (DTAA): List of double taxation avoidance agreements in India are as
follows:

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1 .
2 .
3 .
4 .
5 .
6 .

DTAAComprehensive Agreements (With respect to taxes on income)

DTAALimitedAgreementsWithrespecttoincomeofairlines/merchantshipping
LimitedMultilateralAgreement
DTAAOtherAgreements/Double TaxationReliefRules
SpecifiedAssociationsAgreement
TaxInformation ExchangeAgreement(TIEA)

3.0

INDIRECTTAXATION

3.1

Central Sales Tax (CST)

CentralSalestaxisgenerallypayableonthesaleofallgoodsbyadealerinthecourseofinterstatetradeorcommerce
or, outside a state or, in the course of import into or, export from India.
The ceiling rate on central sales tax (CST), a tax on interstate sale of goods, has been reduced from 4 per cent to 3
per cent in the current year.

3.2

Value Added Tax (VAT)

VATisamultistagetaxongoodsthatisleviedacrossvariousstagesofproductionandsupplywithcreditgivenfortax
paidateachstageofValueaddition.IntroductionofstatelevelVATisthemostsignificanttaxreformmeasureatstate
level.ThestatelevelVAThasreplacedtheexistingStateSalesTax.ThedecisiontoimplementStatelevelVATwastaken
in the meeting of the Empowered Committee (EC) of State Finance Ministers held on June 18, 2004, where a broad
consensus was arrived at to introduce VATfrom April 1, 2005. Accordingly, all states/UTs have implemented VAT.

The Empowered Committee, through its deliberations over the years, finalized a design of VAT to be adopted by the
States, which seeks to retain the essential features of VAT, while at the same time, providing a measure of flexibility
totheStates,toenablethemtomeettheirlocalrequirements.SomesalientfeaturesoftheVATdesignfinalizedbythe
EmpoweredCommitteeareasfollows:
3.2.1 Basic features of the VAT system
1 . The rates of VAT on various commodities shall be uniform for all the States/UTs. There are 2 basic rates of4 per
centand12.5per cent,besides anexemptcategory anda special rateof 1 percent fora few selecteditems. The
itemsofbasicnecessitieshavebeenputinthezeroratebracketortheexemptedschedule.Gold,silverandprecious
stones have been put in the 1 per cent schedule. There is also a category with 20 per cent floor rate of tax, but
the commoditieslistedin thisschedule are noteligible for inputtax rebate/set off.This category coversitems like
motor spirit (petrol),diesel, aviation turbine fuel, and liquor.
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2 . Thereis provisionforeliminatingthe multiplicityoftaxes. Infact,all theStatetaxeson purchaseorsale ofgoods

(excluding Entry Tax in lieu of Octroi) are required to be subsumedin VAT or made VATable.
3 . Provisionhasbeenmadeforallowing"InputTaxCredit(ITC)",whichisthebasicfeatureofVAT.However,since
theVATbeingimplementedisintraStateVATonlyanddoesnotcoverinterStatesaletransactions,ITCwillnotbe
available on interState purchases.
4 . Exports will be zerorated, with credit given for all taxes on inputs/ purchases related to such exports.
5 . To make the provisions business friendly there is a facility for selfassessment by the dealers. Similarly, there is
provisionofathresholdlimitforregistrationofdealersintermsofannualturnoverofRs5lakh.Dealerswithturnover
lowerthanthisthresholdlimitarenotrequiredtoobtainregistrationunderVATandareexemptfrompaymentofVAT.
There is alsoprovision for composition of tax liability up to annual turnover limit of Rs. 50lakh.
Regarding the industrial incentives, the
Stateshavebeenallowedtocontinuewith
theexistingincentives,withoutbreaking
the VAT chain. However, no fresh sales
tax/VAT based incentives are permitted.
3.3

Roadmap towards GST

Goods and services tax is India's most
ambitiousindirecttaxreformplan,which
aimstostitchtogetheracommonmarket
by dismantling fiscal barriers between
states.Itisasinglenationaluniformtax
levied across India on all goods and
services.
Theindirecttaxsystemiscurrentlymired
in multi layere d taxe s levi ed by the
Centreandstategovernmentsatdifferent
stagesofthesupplychainsuchasexcise
duty, octroi, central sales tax (CST) and
valueaddedtax(VAT),amongothers.In
GST,all thesewill be subsumed under a
singleregime.
GST,ifadopted,candramaticallysimplifytaxadministrationbyremovinginconsistencies.TheCentreandstateswilltax
goods and services in identicalrates. For instance, if 20% isthe agreed rate on a certain good, the Centre and states
willcollect10%eachonthegood.Theproceedswouldbesharedonthebasisofthedevolutionformularecommended
bytheFinanceCommission.
However,GSTcanbeimplementedonlywhenParliamentpassestheConstitutionAmendmentBill,whichhasbeenpending
since March 2011. That requires votes of at least twothirds of the members in its favour. In addition, at least half of
thestateAssemblieswillhavetopasstheBill.Parliament'sStandingCommitteeonFinancehassubmitteditsreporton
the Bill, in July 2013.
In addition to the passage of the Bill, there are other challenges also. It is also imperative for the success of GST to
havearobustcountrywideITnetworkandinfrastructuretomaketheimplementationseamless.TheITnetworkworkis
stillinprogress.

3.4

Excise Duty
CentralExcisedutyisanindirecttaxleviedongoodsmanufacturedinIndia.Excisablegoodshavebeendefinedasthose,
which have been specified in the Central Excise Tariff Act as being subjected to the duty of excise.
There are three types of Central Excise duties collected in India namely

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3.4.1 Basic Excise Duty

Thisisthedutychargedundersection3oftheCentralExcisesandSaltAct,1944onallexcisablegoodsotherthansalt,
whichareproducedormanufacturedinIndiaattheratessetforthinthescheduletotheCentralExcisetariffAct,1985.
3.4.2 Additional Duty of Excise
Section 3 of the Additional duties of Excise (goods of special importance) Act, 1957 authorizesthe levyand collection
inrespectofthegoodsdescribedintheScheduletothisAct.ThisisleviedinlieuofSalesTaxandsharedbetweenCentral
and State Governments. These are levied under different enactments like medicinal and toilet preparations, sugar etc.
and other industries development etc.
3.4.3 Special Excise Duty
AspertheSection37oftheFinanceAct,1978SpecialExciseDutywasattractedonallexcisablegoodsonwhichthere
isalevyofBasicExciseDutyundertheCentralExcisesandSaltAct,1944.Sincetheneachyeartherelevantprovisions
oftheFinanceActspecifiesthattheSpecialExciseDutyshallbeorshallnotbeleviedandcollectedduringtherelevant
financial year.
3.5

Customs Duty
Customorimportdutiesareleviedbythe
CentralGovernmentofIndiaonthegoods
imported into India. The rate at which
customs duty is leviable on the goods
dependsontheclassificationofthegoods
determinedundertheCustomsTariff.The
Customs Tariff is generally aligned with
theHarmonisedSystemofNomenclature
(HSL).
Inlinewithaligningthecustomsdutyand
bringing it at par with the ASEAN level,
governmenthasreducedthepeakcustoms
duty from 12.5 per cent to 10 per cent
for all goods other than agriculture
p r o d u c t s . H o w e v e r, t h e C e n t ra l
Government has the power to generally
exemptgoodsofanyspecifieddescription
from the whole or any part of duties of
customs leviable thereon. In addition,
preferential/concessional rates of duty
arealsoavailableunderthevariousTrade
Agreements.

3.6

Service Tax
Service tax wasintroduced in India way
back in 1994 and started with mere 3
basic services viz. general insurance,
stock broking and telephony. Today the
counter services subject to tax have
reached over 100. There has been a
steadyincreaseintherateofservicetax.Fromamere5percent,servicetaxisnowleviedonspecifiedtaxableservices
at the rate of 12 per cent of the gross value of taxable services. However, on account of the imposition of education
cess of 3 per cent, the effective rate of service tax is at 12.36 per cent.

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DAILY PRACTICE QUIZ

Paper IV General Studies III
Unit 3 (LECTURE 2)
Taxation system in india

SuggestedTime:10min
1 .

T o t a l q u e s t i o ns : 20

Why are the Indirect Taxes termed as regressive taxing

mechanisms?

6 .

According tothe Income TaxAct of 1961, thereare.....

typesofpersons.

(A) Theyarechargedathigherratesthandirecttaxes

(A) 6

(B)

(B)

(C) 8

(D) 9

Theyarechargedthesameforallincomegroups

(C) They are charged differently for different income

groups

7.

(D) Noneoftheaboveisacorrectreason

Whichofthefollowingimpacttheextentoftaxationofan
assesseeinIndia?
(A) Thesourceofincome

2 .

WhichamongstthefollowingisnottrueaboutVAT?

(B)

(A) AllstateshaveuniformVATforthesameproduct

(C) Both(A)and(B)

(B)

(D) Noneoftheabove

Stateshavethediscretiontofixtherateoftaxwithin
thefourratesprescribed

(C) Itwillpromoteproductionefficiencyofinvestments

8 .

(D) Itwillmakeourexportscompetitive
3 .

TheShomeCommitteewhichwasappointedtolookintothe
guidelines of General Anti Avoidance Rules (GAAR) has
recommendedretrospectiveapplicationoftaxlawonlyin
rarestofrarecases.Whichofthefollowingrecommendation/
sis/aremadebythispanel?
I .

Tocorrectanomaliesinthestatuesoftaxlaws

II.

To protect the tax base from abusive tax planning

schemeswithapurposetoavoidtax

III. Tocorrecttechnical/proceduraldefectsthatimpaira
substantivelaw
(A) Ionly

(B)

(C) IIIonly

(D) I,IIandIII

IIonly

9 .

Inwhichyearwastheservicetaximposedforfirsttimein
India?
(A) 199394

(B)

(C) 199596

(D) 199697

(A) TaxationofsoftwareDevelopmentCentres&ITSector
(B)

TaxationofBiotechnologyandPharmacysector

(C) TaxationofMSMEsector
(D) Noneoftheabove
10. Assessmentyearis
(A) theyearinwhichtheincomeaccruestotheassessee

Whichamongthefollowingis/areindirecttaxes?

theyearinwhichtheincomehastobereportedby
theassessee

Excise

II.

Custom

(C) Both(A)and(B)

III. ServiceTax

IV.

Property Tax

(D) Noneoftheabove

(A) OnlyI&II

(B)

OnlyI,II&III

(C) OnlyIII&IV

(D) I,II,III&IV

I .

199495

Whichoneofthefollowingwasthepurposeofappointment
ofRangacharyCommittee?

(B)
4 .

Theresidentialstatus

11. WhichofthefollowingisnotatypeofdirecttaxinIndia?
(A) Incometax

5 .

Whatdoesthetermtaxavoidancemean?

(B)

(A) Legalminimisationoftheimpactoftaxation

(C) Servicetax

(B)

(D) Fringebenefittax

Illegalattempttoescapetheimpactoftaxes

Dividenddistributiontax

(C) Investment toacquire something of valuewith the

expectationthatitdefertaxes
(D) Alloftheabove

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12. Whichofthefollowingisnotincludedinthecomputationof
totalwealthforthepurposeofcomputingwealthtax?
(A) AssetsheldasStockintrade.
(B) Ahouseheldforbusinessorprofession.
(C) Anypropertyinnatureofcommercialcomplex
(D) Noneoftheabove

17. TheIncomeTaxActwasenactedin
(A) 1952

(B)

(C) 1961

(D) 1965

1957

18. WhichofthefollowingisthebestexplanationofGST?
(A) Itisaformofdirecttax

13. Thetimeperiodafterwhichincomefromsaleofanyasset
(exceptshares)becomesalongtermcapitalgainis
(A) 12months
(B) 24months
(C) 36months
(D) 48months
14. MATwasintroducedforthefirsttimeinthefinancialyear
(A) 199596
(B) 199697
(C) 199798
(D) 199899
15. WhichofthefollowingstatementsaboutMATiscorrect?
(A) Itwasintroducedbecausetherewerelargenumber
ofcompanieswhohadbookprofitsaspertheirprofit
andlossaccountbutwerenotpayinganytaxbecause
incomecomputedasperprovisionsoftheincometax
actwaseithernilornegativeorinsignificant.
(B) In the assessment year when regular tax becomes
payable,thedifferencebetweentheregulartaxand
thetaxcomputedunderMATforthatyearwillbeset
offagainsttheMATcreditavailable.
(C) Both(A)and(B)
(D) Noneoftheabove
16. Whichofthefollowingisthemainreasonforthegovernment
reducingthecustomsdutyfrom12%to10%formanygoods?
(A) ToalignwiththeASEANlevels
(B) ToachievethestandardsaspertheHarmonisedsystem
ofnomenclature
(C) Both(A)and(B)
(D) Noneoftheabove

(B)

ItisasinglenationaluniformtaxleviedacrossIndia
onallgoodsandservices.

(C) Both(A)and(B)
(D) Noneoftheabove
19. WhichofthefollowingarereasonsduetowhichIndianstates
areapprehensiveaboutcommittingtoGST?
(A) Itcouldrobstategovernmentsofdiscretionaryfiscal
power
(B)

Statesalsofearthattheywillsufferheavyrevenue
losses

(C) Both(A)and(B)
(D) Noneoftheabove
20. Whichofthefollowingrequirementswillhavetobefulfilled
beforeimplementingtheGST?
(A) PassingaresolutioninParliamentwith2/3rdmajority
(B)

Passing a resolution in atleast half of the state

assemblies

(C) Both(A)and(B)
(D) Noneoftheabove

Please make sure that you m ark the answers in this scores heet with an HB pencil/pen.
The marking of answers must be done in the stipulated time for the test. Do not take extra time over and above the time limit.

S C O R E S H E E T

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11

D E

12

13

14

D E

15

D E

16

17

18

D E

19

10

20

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