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MF0003 (MF0012) Solved Assignment (Set 1 & 2)

MF0003 (MF0012) Solved Assignment (Set 1 & 2)

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Published by: wasimsiddiqui03 on Nov 29, 2010
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02/14/2013

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Q1. What are the incomes from house property which are exempted from tax?Ans:-
The term 'House property' consists of buildings or land appurtenant to such buildings.Income from letting out of vacant plots of land when there is no adjoining building will not betaxed under this head (but will be taxed as income from other sources). The existence of a building is, therefore, an essential prerequisite for taxation of income from house property.'Building' will include residential house (whether let out or self-occupied), office building,factory building, godowns, flats etc. But, the purpose for which the building is used by the tenantis also immaterial. It does not make any difference at all if the property is owned by a limitedcompany or a firm. However, if the building or part thereof is used by the owner himself for the purpose of his own business then there will be no income from such portion of the house property.Under the Income-tax Act, the basis of calculating income from House property is the '
'. This is the inherent capacity of the property to earn income and it has been defined as thesum for which the property might reasonably be expected to let from year to year. Where theactual rent received is more than the reasonable return, it has been specifically provided that theactual rent will be the annual value. Where, however, the actual rent is less than the reasonablerent , the latter will be the annual value.The annual value of property consisting of any buildings or lands appurtenant thereto of whichthe assessee is the owner shall be subjected to Income Tax under the head '
'after claiming deductions (
) provided such property, or any portionof such property is not used by the assessee for the purposes of any business or profession,carried on by him, the profits of which are chargeable to income tax.
PROPERTY INCOMES EXEMPT FROM TAX
Some incomes from house property are exempt from tax. They are neither taxable nor includedin the total income of the assessee for the rate purposes. These are:i.Income from any farmhouse forming part of agricultural income;ii.Annual value of any one palace in the occupation of an ex-ruler;iii.Property Income of a local authority;iv.Property Income of an authority, constituted for the purpose of dealing with andsatisfying the need for housing accommodation or for the purposes of planningdevelopment or improvement of cities, towns and villages or for both. (The Finance Act,2002, w.e.f. 1.4.2003 shall delete this provision.);v.Property income of any registered trade union;vi.Property income of a member of a Scheduled Tribe;vii.Property income of a statutory corporation or an institution or association financed by theGovernment for promoting the interests of the members either of the Scheduled Castes or Scheduled tribes or both;
 
viii.Property income of a corporation, established by the Central Govt. or any State Govt. for  promoting the interests of members of a minority group;ix.Property income of a cooperative society, formed for promoting the interests of themembers either of the Scheduled Castes or Scheduled tribes or both;
x.
Property Income, derived from the letting of godowns or warehouses for storage, processing or facilitating the marketing of commoditiesby an authority constituted under any law for the marketing of commodities;xi.Property income of an institution for the development of Khadi and village Industries;'xii.Self-occupied house property of an assessee, which has not been rented throughout the previous year;xiii.Income form house property held for any charitable purposes;xiv.Property Income of any political party.
Q2. Define the term tax holidays. What are the different tax incentives for new unitsestablished in SEZ?Ans:
-
A
tax holiday
is a temporary reduction or elimination of a tax. Governments usuallycreate tax holidays as incentives for business investment. The taxes that are most commonlyreduced by national andlocal governmentsare sales taxes. Indeveloping countries, governments sometimes reduce or eliminate corporate taxesfor the purpose of attractingForeign Direct  Investment or stimulating growth in selected industries..The tax holiday has been often used by developing and transition countries. It is directed to newfirms and is not available to existing operations. With a tax holiday, new firms are allowed a period of time when they are exempt from the burden of income taxation. Sometimes, this grace period is extended to a subsequent period of taxation at a reduced rate. For transition countries,one advantage of tax holidays is that they provide a simple regime for foreign investors becausethere is no need to calculate taxes in the early years of operation, at a time when the tax systemsare not yet fully developed. This view is certainly not valid for long-term investors, for whom thetax treatment after the holiday has expired is as important as the treatment during the holiday indetermining the after-tax profitability of the investment. In addition, the tax treatment of theinitial capital expenditures made before and during the holiday period must be determined so thatappropriate records will be available for the calculation of depreciation when the holiday ends.A number of technical issues are important in determining the impact of tax holidays on thereturn on investments. The first issue is determining when the holiday starts. It could be when production starts, the first year in which the firm makes a profit, or the first year that the firmachieves a positive cumulative profit on its operations. For large projects in particular, losses areusually generated in the early years of production, when the highest capital costs are incurred,including special costs that are linked to the start-up period, training the workforce, and
 
developing the local market. For such projects, a tax holiday that starts when production occursmay actually increase the taxes paid over the life of the project and so act as a disincentive for investment. If losses are experienced during the holiday period they may not be allowed to becarried forward beyond the holiday period (it would be overly generous to allow losses to becarried forward from a year in which income would not have been subject to tax). Thus, theholiday may occur when no taxes would have been paid in any event and taxes may be increasedfollowing the holiday because no losses are available to offset the profits. A similar situation canoccur if the holiday starts when profits are first generated. Income may be sheltered that wouldhave been eliminated in any case by the use of the tax losses. This may result in an overallincrease in taxation in circumstances when the loss-carryforward period is short or the use of losses is restricted in some way. Tax laws usually specify that the holiday commences when profits first occur. However, they are often ambiguous as to whether this means the first year thatis in itself profitable or the first year that cumulative net profits are positive.6 A related questionis the treatment of depreciation during the holiday period. Should it be deducted during theholiday period or can it be deferred until after the holiday has terminated?Depreciation represents a cost in the calculation of income, and so its deduction is necessary toaccurately measure the amount of income that should be subject to the holiday. Allowing adeferral of the deduction effectively overestimates the costs associated with the postholiday period and so leads to a further reduction in tax, which can result in a very generous incentive.The issue is more complicated if some form of accelerated depreciation is also offered withrespect to the investment. Forcing the use of the accelerated deductions during the holiday periodat the least reduces their value and can actually increase the level of taxation relative to thesituation where no incentives are provided. A complete deferral of the deduction, however, canagain lead to a generous incentive and an effective tax holiday that is much longer than intended.Another design question is the length of the holiday. Most of the holidays offered in transitioncountries have been of short duration, and, as discussed below, are of little benefit to long-termcapital-intensive projects. Longer holidays would be of greater benefit; for example, there issome evidence in Asia and Hungary that the longer holidays succeeded in attracting some long-term investment.7 However, the longer the holiday, the higher the revenue cost and the greater the vulnerability to tax planning schemes.8 The opposite problem arises when a tax holiday provision providing a lengthy tax-free period is repealed. Because an existing company cancontinue to take advantage of the holiday for which it qualified, new investment can bestructured so as to use the corporate form of these existing companies, sometimes by bringingnew investors in or even by selling the holiday company to new investors planning a substantialinvestment. It is therefore desirable, on repeal of a tax holiday, to stipulate that companiescurrently taking advantage of a tax holiday will cease to quality if a substantial change in theownership of the company takes place. Such a provision would prevent at least the most flagrantabuses.
Tax incentives for new units established in SEZ:

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