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Taxation- Direct and Indirect

1. Mr Bob is a resident of London. He visits India to understand the business


environment. He is keen to start up a business in India. However, he is not aware of the
tax structure prevalent in India. As a tax consultant, discuss with him the tax structure
in India post the introduction of Goods and Service Tax Act. (10 Marks)

Answer: The Government needs money to maintain law and order in the country and to
undertake certain welfare measures to bring the balanced development of the state. The
government’s prime source of revenue is tax. The tax is divided into two types depending on
its incidence and impact. One is direct tax and another is indirect tax. Direct tax is a form of
income tax wherein its impact and incidence is on the same person.

Taxation is the only tool to achieve growth and economic development in the long run of any
country and it is very important to understand the components of tax which are to be targeted
in order to attain economic growth. Generally the personal income tax had less or no impact
on economic growth in turn corporate income tax had considerable impact on economic
growth. In order to attain the long term economic growth, it is absolute essential to know
targeted revenue sources and it is also imperative to understand which tax components are
relevant in context to attain long run economic growth.

Taxation System of India: In the last decade, Indian taxation system had undergone reforms
tremendous. For better compliance, ease of tax payment and better enforcement, the tax rates
have been rationalized and tax laws have been simplified. Effect of the above the process of
rationalization of tax administration is ongoing. Indian taxation system is classified in two
segments namely direct taxes and indirect taxes.

Pattern of Taxes Before GST:

India had a double arrangement of taxation of products and ventures, which was very unique
in relation to double GST. Central Government levied taxes on the accompanying:
• Income Tax: Tax collected on the income of an individual

• Customs duties: Duties collected on the fares and imports of merchandise

• Service tax: Taxes gathered on different administrations

• Central excise: Taxes on Manufacturing of dutiable products

State Governments levied the following taxes:

• Value Added Tax (VAT): Sales of merchandise include the specific tax. The sales of the
merchandise in intrastate are covered by the VAT Law of that state, while those among the
between state is levied by the Central Sales Tax Act. Indeed, even the income gathered
according to the Central Sales Tax Act is finished by the State Governments and the Central
Government has no job in it.

• Stamp duties and Land Revenue: Since land is an issue on which just State Governments
can administer, in this way the Stamp duties on exchange of immovable properties are levied
by State Governments.

• State Excise on Liquor and certain horticultural products

In India, backhanded taxes are in tremendous numbers as there were a few of taxes to be
caused on manufacture, import, and sale and even buy in specific cases. Further the law was
administered less by the Acts and more by everyday notices, brochures and requests by the
Governing bodies.

Further there are some nearby aberrant taxes levied like Local Body Taxes (LBT) or Octroi.

Types of taxes replaced by GST:

The following is the list of indirect taxes in the pre-GST regime:

 Central Excise Duty


 Duties of Excise
 Additional Duties of Excise
 Additional Duties of Customs
 Special Additional Duty of Customs
 Cess
 State VAT
 Central Sales Tax
 Purchase Tax
 Luxury Tax
 Entertainment Tax
 Entry Tax
 Taxes on advertisements
 Taxes on lotteries, betting, and gambling

CGST, SGST, and IGST has supplanted all the above taxes. Be that as it may, the
chargeability of CST for Inter-state buy at a concessional rate of 2%, by issue and use of c-
Form is as yet pervasive for certain Non-GST products, for example, (i) Petroleum crude; (ii)
High-speed diesel; (iii) Motor spirit (commonly known as petrol); (iv) Natural gas; (v)
Aviation turbine fuel; and (vi) Alcoholic liquor for human consumption. in respect of
following transactions only:

 Resale
 Use in manufacturing or processing
 Use in the telecommunication network or in mining or in the generation or
distribution of electricity or any other power

There are 3 taxes applicable under this system: CGST, SGST & IGST.

 CGST: Collected by the Central Government on an intra-state sale (Eg: transaction


happening within Maharashtra)
 SGST: Collected by the State Government on an intra-state sale (Eg: transaction
happening within Maharashtra)
 IGST: Collected by the Central Government for inter-state sale (Eg: Maharashtra to
Tamil Nadu)

In most cases, the tax structure under the new regime will be as follows:

Transaction New Old Regime


Regime

Sale within CGST + VAT + Central Income will be shared similarly


the State SGST Excise/Service tax between the Center and the State

Sale to IGST Central Sales Tax There may be one kind of tax
another State + Excise/Service (central) if there should arise an
Tax occurrence of between state sales.
The Center will then share the IGST
income dependent on the goal of
products.

Goods and Service Tax, with end-to-end IT enabled tax mechanism, is likely to bring good
amount of revenue to government. It is expected that the nasty activity of tax theft will be
drastically reduce under GST regime in order to benefit both governments and the consumers.
In reality, that extra revenue that the government is expecting to generate would come from
the reduction of tax theft instead from the consumer’s pocket. Though the structure of GST
might not be a perfect one but once it is placed, this tax structure will make India a better
economy advantageous for foreign investments. GST avoid with multiple tax rates by central
and states

2. Income from house property is the only income that is charged on the notional basis.
It means that the incidence of tax depends not only on the income earned from the
property, but also on the inherent potential of the property to earn income. Tax has to
be paid even in cases where no income is being earned. Discuss the Cases where income
from house property is not chargeable to tax under the head ‘Income from House
Property and thus chargeable under any other head.
(10 Marks)

Answer: Income from house property is covered under Sections 22-27 of the Income Tax
Act.
The annual value of a property, consisting of any buildings or lands appurtenant thereto, of
which the assessee is the owner, is chargeable to tax under the head ‘Income from house
property’. However, if a house property, or any portion thereof, is occupied by the assessee
for the purpose of any business or profession carried on by him, the profits of which are
chargeable to income tax, the value of such property is not chargeable to tax under this head.
Thus, three conditions are to be satisfied for property income to be taxable under this head.
1. The property should consist of buildings or lands appurtenant thereto.
2. The assessee should be the owner of the property.
3. The property should not be used by the owner for the purpose of any business or profession
carried on by him, the profits of which are chargeable to income tax.

Exemptions
Under section 10 of the Income-tax Act 1961 following incomes from house property are
exempted from tax. These incomes are not to be included in the total income of assessee.
Hence no tax is payable on such incomes. These incomes are : -

1. Agricultural House Property [Section 2(1)(c)].

Income from such house property which is situated on or in the immediate vicinity of
agricultural land which is used for agricultural purposes by cultivator is exempted from tax.

2. Income from Property held under Trust Wholly for Charitable or Religious Purposes
[Section 11(1)(a)]:

Income derived from property held under trust, wholly for charitable and religious purposes,
shall be exempt—

i. to the extent such income is applied in India for such purposes; and
ii. where any such income is accumulated or set apart for application to such purposes in
India, to the extent to which the income so accumulated or set apart is not in excess of
15% of the income from such property.

3. Income from Property held under trust which is applied in part only for Charitable
or Religious purposes [Section 11(1)(b)]:

Income derived from property held under trust in part only for such purpose, shall be exempt:
i. to the extent such income is applied in India for such purposes, provided, the trust in
question is created before the commencement of Income-tax Act, 1961 i.e. before
1.4.1962; and
ii. where any such income is finally set apart for application to such purposes in India, to
the extent to which the income so accumulated or set apart is not in excess of 15% of
the income from such property.

4. Income from Property held under trust which is applied for Charitable Purposes
outside India [Section 11(1)(c)]:

i. Income derived from property held under trust, created on or after 1.4.1952 for
charitable purpose which tends to promote international welfare in which India is
interested, shall be exempt to the extent to which such income is applied to such
purpose outside India. Religious trusts are not covered here.
ii. Income derived from property held under a trust for charitable or religious purposes,
created before 1.4.1952, shall be exempt to the extent to which such income is applied
to such purposes outside India.

In the above two cases, it is necessary that the Board, by general or special order, has directed
in either case that it shall not be included in the total income of the person in receipt of such
income.
5. Self-Occupied but Vacant House [Section 23(3)].

in case an assessee keeps one of his own houses reserved for self-occupation but is living in a
rented house elsewhere due to his employment or profession the income from such house is
taken to be NIL.

The annual value of self-occupied house shall not be NIL :

1. if such house or part of the house is actually let during the whole or any part of the
previous year; or
2. any other benefit therefrom is derived by the owner from such house.

In the above cases, the annual value shall be determined as per provisions applicable for let
out properties i.e. under clause (a), (b) or (c) of section 23(1).
6. House used for Own Business or Profession.

There is no income chargeable to tax under this head from such house property.

7. Property held by Registered Trade Union [Section 10(24)].

Income from a house property owned by a resIstered trade union is not to be included in its
G.T.I.

8. Income from House Property held by following shall be exempted :

i. House property held by a local authority.


ii. House property held by a scientific research institution.
iii. House property held at a political party.
iv. House property held by a university and any other educational institution working for
spreading education and not to earn profit.
v. House property held by a hospital or medical institution working for the spreading of
medical services to people and are not meant for earning profit.
vi. It is income from a farmhouse.

9. One House Property (a palace) owned by a former ruler of Indian states. [Section
10(19A)]

Ex-rulers of Indian states may be owning many palaces but only one palace of their choice
shall be treated as a self occupied house and shall be exempted.

10. One Self-Occupied House.

In case assessee owns one residential house, the net annual value of the same shall be taken
as nil but in case he owns more than one house, then only one of his choice but normally of
higher value shall be treated as a self-occupied one and other/others are treated as deemed to
be let out.
3. Following information is available for Mr. Saurabh Pandey for Assessment Year
2019-20 with respect to the premium paid of life insurance during Financial Year 2018-
19.
PLEASE FIND THE TABLE BELOW

Policy Issue In the name Capital Sum % Insurance


Date of Assured Restriction Premium
of Sum Paid in
Assured Financial
Year
2018-19
May 01, 2015 Spouse 1.5 lacs 10% Rs 20,000
May 31,2012 Self 2 lacs 20% Rs 50,000
June 01,2015 Daughter 3 lacs 15% Rs 60,000
with a disease
specified
under section
80DDB
Jan 01,2013 Son with a 2 lacs 10% Rs 40,000
disease
defined
under Section
80DDB
May 01, 2015 Parents 5 lacs 10% Rs 75,000

a. Calculate the total eligible deduction, as per Section 80C, with reasons for each
payment inclusion and exclusion, for Mr. Saurabh Pandey (5 Marks)

b. Discuss, briefly the eligibility norms and provisions for claiming deduction under the
said section. (5 Marks)
Answer:

Life Insurance Plans are very popular as a tool to get deduction under section 80C of the
Income Tax Act, 1961. The investment in life insurance can be deducted up to Rs 1,50,000.
(Rs. 1 Lakh upto A.Y. 2014-15). It a common perception that Premium Paid on all Life
Insurance Policies qualifies for deduction under section 80C of the Income Tax Act,1961 and
full premium amount qualifies for deduction under section 80C.

Life Insurance: Premiums paid toward all life insurance policies are eligible for tax benefits
under Section 80C. This deduction can be claimed for premiums paid towards insuring self,
spouse, dependent children and any member of Hindu Undivided Family. An important point
to be noted is that if the policy is issued on or prior to March 31, 2012, annual premium up to
a maximum of 20% of the sum assured becomes tax deductible. For insurance policies issued
on or after April 1, 2012, annual premium up to a maximum of 10% of the sum assured is tax
deductible.

Total Eligible deduction:

1) In respect of premium of Rs. 20,00 on life insurance policy of his spouse which is taken in
May 01, 2015, deduction will be restricted to 10% of capital sum assured. Sum assured is 1.5
lacs and 10% of the same will work out to be Rs. 15,000. Hence, out of Rs. 20,000, he will be
eligible to claim deduction of Rs. 15,000.

2) In respect of premium of Rs. 50,000 on his life insurance policy which is taken in May
31,2012, deduction will be restricted to 20% of capital sum assured. Sum assured is 2 lacs
and 20% of the same will work out to be Rs. 40,000. Hence, out of 50,000, he will be eligible
to claim deduction of Rs. 40,000.

3)As both the children of Mr.Pandey has a disease under section 80DDB so it will not be
taken as deduction under section 80 C.

4) According to the norms of Section 80 C, No deduction is available on account of premium


paid in respect of policy taken in the name of any person other than the taxpayer, his spouse
and his children. Hence, no deduction will be available in respect of premium paid by him on
policy taken in the name of his parents.

Eligible deduction: 15000 + 40,000


Eligible deduction: 55,000 Rs.

b): The eligibility norms and provisions for claiming deduction under section 80C

Answer: Tax deductions provide a means for individuals to reduce their tax burden. Among
the various tax-saving options, most individuals prefer to claim tax deduction under Section
80C of the Income Tax Act, 1961. Section 80C allows individuals and HUFs to claim tax
deduction of up to Rs. 1,50,000 from their gross total income for certain investments and
payments.

The following investments and payments are eligible for deduction under Section 80C of the
Income Tax Act, 1961:

 Life Insurance

 Sukanya Samriddhi Yojana

 Public Provident Fund

 Equity Linked Saving Scheme

 Five Year Bank Deposit

 Stamp Duty and Registration Charges

 Senior Citizens Savings Scheme

 National Savings Certificate

 Home Loan Principal Repayment

Deduction Allowed:

Overall deduction u/s 80C (along with deduction u/s 80CCC & 80CCD) allowed is up to Rs.
1,50,000

How much deduction available u/s 80C for investment in insurance policies???

Section 80C of the Income Tax Act provides deduction up to Rs 1,50,000 provided you
invest according to condition given in section itself. One of the most popular way of saving
tax by deduction u/s 80C is purchase of insurance policy. There is common perception that
premium upto Rs 1,50,000 on any insurance product like life insurance or Unit Linked
Insurance plan is fully allowed. However, this is not correct. The reason for such conclusion
is section 80C (3) and 3(A) of the Income Tax Act which specifies which premium is eligible
for deduction under section 80C of the Income Tax Act,1961.

Restriction on amount of deduction with respect to capital sum assured/ Eligible


Premium under Sub-section (3) and (3A) of 80C of Income Tax Act,1961 For regular
Life Insurance Policies (other than contract for deferred annuity)

Issued from 01.04.2012 – premium paid not in excess of 10% of Capital Sum Assured (as
amended by Finance Act 2012).

Issued from 01.04.2003 and on or before 31.03.2012 – premium paid not in excess of 20% of
Capital Sum Assured

Eligible Premium under Sub-section (3) and (3A) of 80C of Income Tax Act,1961 For Life
Insurance Policies (other than contract for deferred annuity) for (a) a person with disability or
a person with severe disability as referred to in section 80U, or (b) suffering from disease or
ailment as specified in the rules made under section 80DDB,

Issued from 01.04.2013 – premium paid not in excess of 15% of Capital Sum Assured (
Inserted by the Finance Act, 2013, w.e.f. 1-4-2014).

Therefore , it is clear from section 80C (3) that whatever insurance premium is paid for any
insurance policy( other than deferred annuity) or ULIP , the maximum allowable is fixed at
10% of the sum assured.

So, next time you buy any insurance product , think about sum assured and whether the
insurance premium is just below 10 % of sum assured regular policies and 15% for for (a) a
person with disability or a person with severe disability as referred to in section 80U, or (b)
suffering from disease or ailment as specified in the rules made under section 80DDB.

Minimum holding period for Life insurance policy – 2 Years.

Minimum holding period for ULIP- 5 years


Taxability of Premium allowed in Earlier year- If any of Life insurance policy is
terminated, sold, etc., before the minimum holding period specified above, then the deduction
allowed in earlier years would be deemed as income of the previous year of termination, sale,
etc. Further, no deduction will be allowed in respect of contribution, payment, etc., made
towards such policy (i.e., which is terminated) during the year of termination.