INTRODUCTION

Taxation can be defined as the governments practice of collecting money from its
citizens and business concerns to support its functions. It applies to various types
of taxes ranging from income tax to gift tax, house tax to sales tax etc. In short
taxation can be defined as the one of the primary powers of the government over
its citizens.
Tax can also be defined as a pecuniary burden imposed on individuals or property
owners in order to support the government. It is generally a payment exacted by
legislative authority. It is not a voluntary payment but is an enforced contribution
and can be defined as any contribution imposed by the government under the name
of toll, tribute, tillage, excise, gable, duty, impost, aid, custom etc.
Taxes primarily are aimed at producing revenue for various government
operations. The quote from the Supreme Court Justice Oliver Wendell Holmes, Jr.
which is inscribed on the IRS office building in Washington D.C says, Taxes are
what we pay for civilized society. Aimed at encouraging or discouraging certain
patterns of behavior in the society, taxation brings everyone under its ambit.
A means by which governments finance their expenditure by imposing charges on
citizens and corporate entities. Governments use taxation to encourage or
discourage certain economic decisions. For example, reduction in taxable personal
(or household) income by the amount paid as interest on home mortgage loans
results in greater construction activity, and generates more jobs. See also taxation
principles.
Taxation can also refer to taxes as an abstract concept, a actual dollar amount of tax
that has been levied or the material funds that have been received as taxes.
Although all of these definitions are technically correct, the one listed above is the
most common. Taxation is one of the primary powers of government over the
people. Taxation refers to the act of a taxing authority actually levying tax.
Taxation as a term applies to all types of taxes, from income to gift to estate taxes.
It is usually referred to as an act; any revenue collected is usually called "taxes."
A fee charged ("levied") by a government on a product, income, or activity. If tax
is levied directly on personal or corporate income, then it is a direct tax. If tax is
levied on the price of a good or service, then it is called an indirect tax. The
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purpose of taxation is to finance government expenditure. One of the most

important uses of taxes is to finance public goods and services, such as street
lighting and street cleaning. Since public goods and services do not allow a nonpayer to be excluded, or allow exclusion by a consumer, there cannot be a market
in the good or service, and so they need to be provided by the government or a
quasi-government agency, which tend to finance themselves largely through taxes.
A tax (from the Latin tax o; "rate") is a financial charge or other levy imposed upon
a taxpayer (an individual or legal entity) by a state or the functional equivalent of a
state such that failure to pay, or evasion of or resistance to collection, is punishable
by law. Taxes are also imposed by many administrative divisions. Taxes consist of
direct or indirect taxes and may be paid in money or as its labour equivalent.
The legal definition and the economic definition of taxes differ in that economists
do not consider many transfers to governments to be taxes. For example, some
transfers to the public sector are comparable to prices. Examples include tuition at
public universities and fees for utilities provided by local governments.
Governments also obtain resources by creating money (e.g., printing bills and
minting coins), through voluntary gifts (e.g., contributions to public universities
and museums), by imposing penalties (e.g., traffic fines), by borrowing, and by
confiscating wealth. From the view of economists, a tax is a non-penal, yet
compulsory transfer of resources from the private to the public sector levied on a
basis of predetermined criteria and without reference to specific benefit received.
In modern taxation systems, taxes are levied in money; but, in-kind and corve
taxation are characteristic of traditional or pre-capitalist states and their functional
equivalents. The method of taxation and the government expenditure of taxes
raised is often highly debated in politics and economics. Tax collection is
performed by a government agency such as the Canada Revenue Agency, the
Internal Revenue Service (IRS) in the United States, or Her Majesty's Revenue and
Customs (HMRC) in the United Kingdom. When taxes are not fully paid, civil
penalties (such as fines or forfeiture) or criminal penalties (such as incarceration)
may be imposed on the non-paying entity or individual.
Income Tax means tax on a persons income. Every person whose income exceeds
or crosses the prescribed limits is liable to be taxed. The Finance Act decides the
limit of taxable income or in other words the limits of income exempted from tax.
In India, the concept of Income tax is being levied by the British Rulers since
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1860. The Government needs to generate revenue to meet its expenses. It carries
out the function of maintaining law, order and peace throughout the country.
Similarly, it is the duty of the Government to ensure security of the nation through
proper defense mechanism. The duty and the scope of the Government has
increased manifold.
This paper is designed to develop an understanding among candidates of the
concepts and principles of personal, business and corporate income taxation,
taxation of specialized entities, withholding taxes, etc. Besides these, legislation
relating to real property gains tax and investment incentives will also be covered.
Candidates are expected to display an understanding of the impact of all major
taxes on the transactions of individuals, companies and special undertakings and be
able to identify and discuss the tax issues in a particular situation as well as
planning opportunities
Various rules and procedures are required coupled with different enforcement
methods to achieve tax compliance. Some of these include fines and penalties to
enable the state to ensure compliance with tax laws. There are various types of
taxes starting with the federal income tax, payroll taxes, excise taxes, taxes on the
usage of tobacco and alcohol products, estate tax, etc.Some of the state taxes
include sales tax, excise taxes on gasoline, telecommunications tax, property taxes
etc.Taxes that come under the ambit of a city are property taxes, utility user taxes,
business license tax etc.Taxes are sometimes also imposed by various
administrative divisions. Taxes comprise of both direct and indirect taxes which
can be paid both in terms of money and as its labor equivalent.
Some of the salient features of taxation are
1.

It is an enforced contribution.

2.

It is generally proportionate in character.

3.

It is generally payable in monetary terms

4.

It is imposed for various public purposes.

5.

It is levied by the State which has jurisdiction over the object of taxation.

6.

It is imposed by the law-making body of the State.

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7.

It is levied on persons, property, or the exercise of a right or privilege.

Some of the important purposes of taxation are

1. Revenue or fiscal: The main aim of taxation is to provide funds or property to
the government to promote the general welfare and the protection of its citizens
and also to finance various activities of the government.
2. Regulatory or Non-revenue: Taxation can also be used for carrying out
regulation or control.
Everyone is subject to tax of some kind. When one purchases most types of
tangible personal property he or she will be charged sales tax. In many states, some
of the services are also subject to sales tax. If one were to own real property, then
we would owe property tax to the state and local governments.
If we have income, we may need to pay federal and state income taxes. For income
tax purposes, a married couple may file one return reporting all of their income.
For business activities, the tax imposed depends on the type of business entity. A
regular corporation is generally taxed on its income while shareholders are also
taxed on dividend income which is a form of double taxation.
However, corporations have their own tax rate schedule different from the rate
schedule for individuals.
Partnerships, limited liability companies, and S Corporations (a corporation with
100 or fewer non-corporate shareholders that elects to be an S corporation for tax
purposes) on the other hand are pass through entities where income is only taxed
to the owners (the partners and shareholders).
In short, the tax rate depends on the type of owner (individual, corporation or
trust). A sole proprietor is subject to only a single layer of tax calculated using
individual tax rates and all income and deductions of the individual.
You might think that taxes are a necessary evil better left for professionals, but
understanding the basics can help you minimize the total amount of taxes that you
pay.
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When planning for taxes, we usually think of the Federal filing deadline of April
15, however, you are required to pay taxes throughout the year. Paying the right
amounts throughout the year will save you from having to pay penalty charges for
underpayments.
For most of us, the payments we make throughout the year are made on our behalf
through our employers. Employers automatically withhold taxes from our gross
earnings before giving us our net earnings, the little numbers on our paychecks (or
big numbers for you lucky ones). Your employer is also responsible for reporting
your total income and taxes paid by submitting form W-2 to the IRS. You must
then file your taxes; which tells you the total amount of taxes owed and the total
amount of taxes already paid-and either pay the difference (if your automatic
deductions were too small) or collect the difference (if your automatic deductions
were too big).
Throughout the year, there are important tips to follow in order to prepare for your
taxes.

First of all, get organized. Experts recommend the use of personal finance
software to enter and maintain accurate records. Keep records of expenses such as
automobile mileage incurred for business purposes and get receipts for charitable
contributions. It is also very important that you maintain accurate records of the
purchasing and selling of stock as well as stock options.

You may have heard before that you should contribute the maximum to your
401(k) retirement plan. Doing so will let you defer the taxes you pay on your
contributions and will allow your contributions to increase through compound
interest.

Adjust your withholding if your marital status changes or if you are in a

different tax bracket than the previous year. If sufficient taxes are not withheld
from your paychecks, or if you are self-employed, make estimated tax payments to
the appropriate tax authority to avoid year-end penalties.

Make contributions to your IRA as early as possible in the year due to the
benefits of compound interest.

Also, consider tax-efficient investments such as tax-free municipal bonds or

tax-efficient mutual funds.
History

The concept of taxing income is a modern innovation and presupposes several

things: a money economy, reasonably accurate accounts, a common understanding
of receipts, expenses and profits, and an orderly society with reliable records.
For most of the history of civilization, these preconditions did not exist, and taxes
were based on other factors. Taxes on wealth, social position, and ownership of
the means of production (typically land and slaves) were all common. Practices
such as tithing, or an offering of first fruits, existed from ancient times, and can be
regarded as a precursor of the income tax, but they lacked precision and certainly
were not based on a concept of net increase. The first known system of taxation
was in Ancient Egypt around 30002800 BC in the first dynasty of the Old
Kingdom. The earliest and most widespread form of taxation was the corve and
tithe. The corve was forced labour provided to the state by peasants too poor to
pay other forms of taxation (labour in ancient Egyptian is a synonym for taxes).
Records from the time document that the pharaoh would conduct a biennial tour of
the kingdom, collecting tithes from the people. Other records are granary receipts
on limestone flakes and papyrus. Early taxation is also described in the Bible. In
Genesis (chapter 47, verse 24 the New International Version), it states "But when
the crop comes in, give a fifth of it to Pharaoh. The other four-fifths you may keep
as seed for the fields and as food for yourselves and your households and your
children". Joseph was telling the people of Egypt how to divide their crop,
providing a portion to the Pharaoh. A share (20%) of the crop was the tax (in this
case, a special rather than an ordinary tax, as it was gathered against an expected
famine).
In the Persian Empire, a regulated and sustainable tax system was introduced by
Darius I the Great in 500 BC; the Persian system of taxation was tailored to each
Satrapy (the area ruled by a Satrap or provincial governor). At differing times,
there were between 20 and 30 Satrapies in the Empire and each was assessed
according to its supposed productivity. It was the responsibility of the Satrap to
collect the due amount and to send it to the emperor, after deducting his expenses
(the expenses and the power of deciding precisely how and from whom to raise the
money in the province, offer maximum opportunity for rich pickings). The
quantities demanded from the various provinces gave a vivid picture of their
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economic potential. For instance, Babylon was assessed for the highest amount and
for a startling mixture of commodities; 1,000 silver talents and four months supply
of food for the army. India, a province fabled for its gold, was to supply gold dust
equal in value to the very large amount of 4,680 silver talents. Egypt was known
for the wealth of its crops; it was to be the granary of the Persian Empire (and,
later, of the Roman Empire) and was required to provide 120,000 measures of
grain in addition to 700 talents of silver. This tax was exclusively levied on
Satrapies based on their lands, productive capacity and tribute levels.
The Rosetta stone, a tax concession issued by Ptolemy V in 196 BC and written in
three languages "led to the most famous decipherment in historythe cracking of
hieroglyphics".

OBJECTIVES
After studying this unit, you will be able to Tell the definition and meaning of tax,
Enumerate and identify the benefits and drawbacks of direct and indirect
taxation,
Know the objectives and scope of taxation,
Know the features (highlights) of the structure of taxation,
Know the canons of taxation,
Know the importance of taxation in revenue generation for the Government.

SCOPE OF INCOME TAX

Under the Income Tax Act, 1961, the income earners pay tax.
While computing the total income of a person income earned by a person, the
following heads of income are taken into account1. Income from Salary.
2. Income from House Property.
3. Income from Business.
4. Capital Gain or Loss.
5. Income from other Source.
Tax is calculated at the rate prescribed in the finance bill for the relevant period.

Purposes and effects

Governments use different kinds of taxes and vary the tax rates. This is done to
distribute the tax burden among individuals or classes of the population involved in
taxable activities, such as business, or to redistribute resources between individuals
or classes in the population. Historically, the nobility were supported by taxes on
the poor; modern social security systems are intended to support the poor, the
disabled, or the retired by taxes on those who are still working. In addition, taxes
are applied to fund foreign aid and military ventures, to influence the
macroeconomic performance of the economy (the government's strategy for doing
this is called its fiscal policy; see also tax exemption), or to modify patterns of
consumption or employment within an economy, by making some class Money
provided by taxation has been used by states and their functional equivalents
throughout history to carry out many functions. Some of these include
expenditures on war, the enforcement of law and public order, protection of
property, economic infrastructure (roads, legal tender, enforcement of contracts,
etc.), public works, social engineering, subsidies, and the operation of government
itself. A portion of taxes also go to pay off the state's debt and the interest this debt
accumulates.
Governments also use taxes to fund welfare and public services. These services
can include education systems, health care systems, pensions for the elderly,
unemployment benefits, and public transportation. Energy, water and waste
management systems are also common public utilities. Colonial and modernizing
states have also used cash taxes to draw or force reluctant subsistence producers
into cash economies of transaction more or less attractive. All large businesses
incur administrative costs in the process of delivering revenue collected from
customers to the suppliers of the goods or services being purchased. Taxation is no
different; the resource collected from the public through taxation is always greater
than the amount which can be used by the government. The difference is called the
compliance cost and includes for example the labour cost and other expenses
incurred in complying with tax laws and rules. The collection of a tax in order to
spend it on a specified purpose, for example collecting a tax on alcohol to pay
directly for alcoholism rehabilitation centers, is called hypothecation. This practice
is often disliked by finance ministers, since it reduces their freedom of action.
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Some economic theorists consider the concept to be intellectually dishonest since,

in reality, money is fungible. Furthermore, it often happens that taxes or excises
initially levied to fund some specific government programs are then later diverted
to the government general fund. In some cases, such taxes are collected in
fundamentally inefficient ways, for example highway tolls.
Some economists, especially neo-classical economists, argue that all taxation
creates market distortion and results in economic inefficiency. They have therefore
sought to identify the kind of tax system that would minimize this distortion.
Since governments also resolve commercial disputes, especially in countries with
common law, similar arguments are sometimes used to justify a sales tax or value
added tax. Others (e.g., libertarians) argue that most or all forms of taxes are
immoral due to their involuntary (and therefore eventually coercive/violent) nature.
The most extreme anti-tax view is anarchy-capitalism, in which the provision of all
social services should be voluntarily bought by the person(s) using them. A nation's
tax system is often a reflection of its communal values and/or the values of those in
power. To create a system of taxation, a nation must make choices regarding the
distribution of the tax burdenwho will pay taxes and how much they will pay
and how the taxes collected will be spent. In democratic nations where the public
elects those in charge of establishing the tax system, these choices reflect the type
of community that the public wishes to create. In countries where the public does
not have a significant amount of influence over the system of taxation, that system
may be more of a reflection on the values of those in power.

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TAXATAION
It is now a generally accepted practice that Government expenditure is met by
raising funds through taxation. The finance Minister while preparing the budget
has to consider how the income through taxation would be increased. The
Government has to design the taxation policy in such a way that would earn
maximum revenue for it and the same time would not be burdensome or
cumbersome to the public at large.

DEFINITION AND MEANING OF TAXATION

Tax is one of the most important means of income for the Government. In
other, words tax could be said as compulsory donation made to the Government
does not assure any special benefits to the tax payers. The Government provides
basic amenities and services to public from the revenue generated through tax
collection. All are benefited from such services. This may not have a direct nexus
with the tax paid by an individual. Tax means compulsorily collected donation by
the Government for fulfilling its function. Tax has been defined by various experts
as underSelingman:Tax means a compulsory collected donation from public which is
used for the benefit of all. Tax does not cater to individual needs.
Taylor: Tax means a compulsory donation by public without any direct benefit
for such donation.
Dr. Dalton: Tax is mandatory liability and it does not resemble any reciprocal or
proportionate benefit.
In short, the amount given by public to the Government with any reciprocal
benefit or consideration means tax. The following features become evident from
the definition of the tax.

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Indirect taxes
A major portion of the countrys income comesfrom the contribution made by
indirect tax. Indirect tax is levied on products and not on people. Since every
person is a buyer of some or the other products; he is automatically pays the taxes.
Such taxes are levied on manufacture of goods, sale of goods and import as well.
This tax is paid by both, poor and rich.

MEANING AND DEFINITION

In these, the tax is not paid on goods to the Government and recovers the
same from the buyers. Indirect tax is the tax that can be transferred on other
person. The burden of charging is on one personand the payment is made by
others.
Dr. Dalton: The tax which is levied on one person but recovered, partly or fully
from some other person can be defined as indirect tax.
Direct Taxes
A Direct tax is paid by person from whom the Government expects the tax
to come. The responsibilities of paying tax are fixed on the person and the burden
of paying tax lies on that person, such tax is called direct tax.
SCOPE OF INCOME TAX
Under the Income Tax Act, 1961, the income earners pay tax.
While computing the total income of a person income earned by a person, the
following heads of income are taken into account1.
2.
3.
4.

Income from Salary.

Income from House Property.
Income from Business.
Capital Gain or Loss.
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5. Income from other Source.

Tax is calculated at the rate prescribed in the finance bill for the relevant period.

PERSON (SECTION 2(a)

As per section 2 (31) of the Income Tax Act, 1961, person includes:
1. Individual: - It indicates only a natural person, i.e., human being. It also
includes a minor or a person of unsound mind.
2. Hindu Undivided Family:- Commonly referred as HUF is one arising
from Hindu law. It consists of all person lineally descended from a common
ancestor and their wives, sons and daughters.
3. Joint Stock Company and Partnership Firm:- A firm is treated as a
separate entity having its own legal status and a perpetual succession distinct
from its partners, though under partnership act, a firm has not be accorded to
have a separate entity.
4. Association of Persons:- It has not been defined by the act. Hence, these
terms must be understood in their plan ordinary meaning. Thus, when there
is a combination of persons, formed for the promotion of a joint enterprise.
They constitute Associations of Persons if they dont satisfy the
partnership clause. The term body of Individuals normally refers to trustees
of a charitable trust-where trustees have come together, not for personal gain
but for social upliftment.
5. Local Authority:- Would include gram panchayat, a municipality, district
municipal corporation board, port trust or any other body entrusted by the
Government with the control and management of a municipal or local body.
6. Other Artificial Persons:- Artificial Juridical Persons would include an
idol, a deity, a university, a bar council, etc.
The above definition of Person gives the classification of the assesses
accordingly to their legal status.

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Kind of Taxes
Taxes on income
Income tax
Many jurisdictions tax the income of individuals and business entities,
including corporations. Generally the tax is imposed on net profits from
business, net gains, and other income. Computation of income subject to tax
may be determined under accounting principles used in the jurisdiction,
which may be modified or replaced by tax law principles in the jurisdiction.
The incidence of taxation varies by system, and some systems may be
viewed as progressive or regressive. Rates of tax may vary or be constant
(flat) by income level. Many systems allow individuals certain personal
allowances and other nonbusiness reductions to taxable income.
Personal income tax is often collected on a pay-as-you-earn basis, with small
corrections made soon after the end of the tax year. These corrections take
one of two forms: payments to the government, for taxpayers who have not
paid enough during the tax year; and tax refunds from the government for
those who have overpaid. Income tax systems will often have deductions
available that lessen the total tax liability by reducing total taxable income.
They may allow losses from one type of income to be counted against
another. For example, a loss on the stock market may be deducted against
taxes paid on wages. Other tax systems may isolate the loss, such that
business losses can only be deducted against business tax by carrying
forward the loss to later tax years.
Negative income tax
In economics, a negative income tax (abbreviated NIT) is a progressive
income tax system where people earning below a certain amount receive
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supplemental pay from the government instead of paying taxes to the

government.

Capital gains tax

Most jurisdictions imposing an income tax treat capital gains as part of
income subject to tax. Capital gain is generally a gain on sale of capital
assets that is those assets not held for sale in the ordinary course of business.
Capital assets include personal assets in many jurisdictions. Some
jurisdictions provide preferential rates of tax or only partial taxation for
capital gains. Some jurisdictions impose different rates or levels of capital
gains taxation based on the length of time the asset was held.
Corporate tax
Corporate tax refers to income, capital, net worth, or other taxes imposed on
corporations. Rates of tax and the taxable base for corporations may differ
from those for individuals or other taxable persons.
Social security contributions
Many countries provide publicly funded retirement or health care systems.
In connection with these systems, the country typically requires employers
and/or employees to make compulsory payments. These payments are often
computed by reference to wages or earnings from self-employment. Tax
rates are generally fixed, but a different rate may be imposed on employers
than on employees. Some systems provide an upper limit on earnings subject
to the tax. A few systems provide that the tax is payable only on wages
above a particular amount. Such upper or lower limits may apply for
retirement but not health care components of the tax.
Taxes on payroll or workforce
Unemployment and similar taxes are often imposed on employers based on
total payroll. These taxes may be imposed in both the country and subcountry levels.
Taxes on property
Recurrent property taxes may be imposed on immovable property (real
property) and some classes of movable property. In addition, recurrent taxes
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may be imposed on net wealth of individuals or corporations. Many

jurisdictions impose estate tax, gift tax or other inheritance taxes on property
at death or gift transfer. Some jurisdictions impose taxes on financial or
capital transactions.
Property tax
A property tax (or millage tax) is an ad valorem tax levy on the value of
property that the owner of the property is required to pay to a government in
which the property is situated. Multiple jurisdictions may tax the same
property. There are three general varieties of property: land, improvements
to land (immovable man-made things, e.g. buildings) and personal property
(movable things). Real estate or realty is the combination of land and
improvements to land.
Property taxes are usually charged on a recurrent basis (e.g., yearly). A
common type of property tax is an annual charge on the ownership of real
estate, where the tax base is the estimated value of the property. For a period
of over 150 years from 1695 a window tax was levied in England, with the
result that one can still see listed buildings with windows bricked up in order
to save their owners money. A similar tax on hearths existed in France and
elsewhere, with similar results. The two most common type of event driven
property taxes are stamp duty, charged upon change of ownership, and
inheritance tax, which is imposed in many countries on the estates of the
deceased.
In contrast with a tax on real estate (land and buildings), a Land Value Tax
(or LVT) is levied only on the unimproved value of the land ("land" in this
instance may mean either the economic term, i.e., all natural resources, or
the natural resources associated with specific areas of the Earth's surface:
"lots" or "land parcels"). Proponents of land value tax argue that it is
economically justified, as it will not deter production, distort market
mechanisms or otherwise create deadweight losses the way other taxes do.
When real estate is held by a higher government unit or some other entity
not subject to taxation by the local government, the taxing authority may
receive a payment in lieu of taxes to compensate it for some or all of the
foregone tax revenues.

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In many jurisdictions (including many American states), there is a general

tax levied periodically on residents who own personal property (personalty)
within the jurisdiction. Vehicle and boat registration fees are subsets of this
kind of tax. The tax is often designed with blanket coverage and large
exceptions for things like food and clothing. Household goods are often
exempt when kept or used within the household. Any otherwise non-exempt
object can lose its exemption if regularly kept outside the household. Thus,
tax collectors often monitor newspaper articles for stories about wealthy
people who have lent art to museums for public display, because the
artworks have then become subject to personal property tax. If an artwork
had to be sent to another state for some touch-ups, it may have become
subject to personal property tax in that state as well.
Inheritance tax
Inheritance tax, estate tax, and death tax or duties are the names given to
various taxes which arise on the death of an individual. In United States tax
law, there is a distinction between an estate tax and an inheritance tax: the
former taxes the personal representatives of the deceased, while the latter
taxes the beneficiaries of the estate. However, this distinction does not apply
in other jurisdictions; for example, if using this terminology UK inheritance
tax would be an estate tax.
Expatriation tax
An Expatriation Tax is a tax on individuals who renounce their citizenship or
residence. The tax is often imposed based on a deemed disposition of the
entire individual's property. One example is the United States under the
American Jobs Creation Act, where any individual who has a net worth of
$2 million or an average income-tax liability of $127,000 who renounces his
or her citizenship and leaves the country is automatically assumed to have
done so for tax avoidance reasons and is subject to a higher tax rate.
Transfer Tax
Historically, in many countries, a contract needed to have a stamp affixed to
make it valid. The charge for the stamp was either a fixed amount or a
percentage of the value of the transaction. In most countries the stamp has
been abolished but stamp duty remains. Stamp duty is levied in the UK on
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the purchase of shares and securities, the issue of bearer instruments, and
certain partnership transactions. Its modern derivatives, stamp duty reserve
tax and stamp duty land tax, are respectively charged on transactions
involving securities and land. Stamp duty has the effect of discouraging
speculative purchases of assets by decreasing liquidity. In the United States,
transfer tax is often charged by the state or local government and (in the case
of real property transfers) can be tied to the recording of the deed or other
transfer documents.
Wealth (net worth) tax
Some countries' governments will require declaration of the tax payers'
balance sheet (assets and liabilities), and from that exact a tax on net worth
(assets minus liabilities), as a percentage of the net worth, or a percentage of
the net worth exceeding a certain level. The tax may be levied on "natural"
or legal "persons". An example is France's ISF.
Taxes on goods and services
Value added tax (Goods and Services Tax)
A value added tax (VAT), also known as Goods and Services Tax (G.S.T),
Single Business Tax, or Turnover Tax in some countries, applies the
equivalent of a sales tax to every operation that creates value. To give an
example, sheet steel is imported by a machine manufacturer. That
manufacturer will pay the VAT on the purchase price, remitting that amount
to the government. The manufacturer will then transform the steel into a
machine, selling the machine for a higher price to a wholesale distributor.
The manufacturer will collect the VAT on the higher price, but will remit to
the government only the excess related to the "value added" (the price over
the cost of the sheet steel). The wholesale distributor will then continue the
process, charging the retail distributor the VAT on the entire price to the
retailer, but remitting only the amount related to the distribution mark-up to
the government. The last VAT amount is paid by the eventual retail customer
who cannot recover any of the previously paid VAT. For a VAT and sales tax
of identical rates, the total tax paid is the same, but it is paid at differing
points in the process.
VAT is usually administrated by requiring the company to complete a VAT
return, giving details of VAT it has been charged (referred to as input tax)
and VAT it has charged to others (referred to as output tax). The difference
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between output tax and input tax is payable to the Local Tax Authority. If
input tax is greater than output tax the company can claim back money from
the Local Tax Authority.
Sales taxes
Sales taxes are levied when a commodity is sold to its final consumer. Retail
organizations contend that such taxes discourage retail sales. The question of
whether they are generally progressive or regressive is a subject of much
current debate. People with higher incomes spend a lower proportion of
them, so a flat-rate sales tax will tend to be regressive. It is therefore
common to exempt food, utilities and other necessities from sales taxes,
since poor people spend a higher proportion of their incomes on these
commodities, so such exemptions make the tax more progressive. This is the
classic "You pay for what you spend" tax, as only those who spend money
on non-exempt (i.e. luxury) items pay the tax.
A small number of U.S. states rely entirely on sales taxes for state revenue,
as those states do not levy a state income tax. Such states tend to have a
moderate to large amount of tourism or inter-state travel that occurs within
their borders, allowing the state to benefit from taxes from people the state
would otherwise not tax. In this way, the state is able to reduce the tax
burden on its citizens. The U.S. states that do not levy a state income tax are
Alaska, Tennessee, Florida, Nevada, South Dakota, Texas, Washington state,
and Wyoming. Additionally, New Hampshire and Tennessee levy state
income taxes only on dividends and interest income. Of the above states,
only Alaska and New Hampshire do not levy a state sales tax. Additional
information can be obtained at the Federation of Tax Administrators website.
In the United States, there is a growing movement for the replacement of all
federal payroll and income taxes (both corporate and personal) with a
national retail sales tax and monthly tax rebate to households of citizens and
legal resident aliens. The tax proposal is named Fair Tax. In Canada, the
federal sales tax is called the Goods and Services tax (GST) and now stands
at 5%. The provinces of British Columbia, Saskatchewan, Manitoba, and
Prince Edward Island also have a provincial sales tax [PST]. The provinces
of Nova Scotia, New Brunswick, Newfoundland & Labrador, and Ontario
have harmonized their provincial sales taxes with the GSTHarmonized
Sales Tax [HST], and thus is a full VAT. The province of Quebec collects the
20

Quebec Sales Tax [QST] which is based on the GST with certain differences.
Most businesses can claim back the GST, HST and QST they pay, and so
effectively it is the final consumer who pays the tax.
Excises
Unlike an ad valorem, an excise is not a function of the value of the product
being taxed. Excise taxes are based on the quantity, not the value, of product
purchased. For example, in the United States, the Federal government
imposes an excise tax of 18.4 cents per U.S. gallon (4.86/L) of gasoline,
while state governments levy an additional 8 to 28 cents per U.S. gallon.
Excises on particular commodities are frequently hypothecated. For
example, a fuel excise (use tax) is often used to pay for public transportation,
especially roads and bridges and for the protection of the environment. A
special form of hypothecation arises where an excise is used to compensate a
party to a transaction for alleged uncontrollable abuse; for example, a blank
media tax is a tax on recordable media such as CD-Rs, whose proceeds are
typically allocated to copyright holders. Critics charge that such taxes
blindly tax those who make legitimate and illegitimate usages of the
products; for instance, a person or corporation using CD-R's for data
archival should not have to subsidize the producers of popular music.
Excises (or exemptions from them) are also used to modify consumption
patterns (social engineering). For example, a high excise is used to
discourage alcohol consumption, relative to other goods. This may be
combined with hypothecation if the proceeds are then used to pay for the
costs of treating illness caused by alcohol abuse. Similar taxes may exist on
tobacco, pornography, etc., and they may be collectively referred to as "sin
taxes". A carbon tax is a tax on the consumption of carbon-based nonrenewable fuels, such as petrol, diesel-fuel, jet fuels, and natural gas. The
object is to reduce the release of carbon into the atmosphere. In the United
Kingdom, vehicle excise duty is an annual tax on vehicle ownership.
Tariff
An import or export tariff (also called customs duty or impost) is a charge
for the movement of goods through a political border. Tariffs discourage
trade, and they may be used by governments to protect domestic industries.
A proportion of tariff revenues is often hypothecated to pay government to
21

maintain a navy or border police. The classic ways of cheating a tariff are
smuggling or declaring a false value of goods. Tax, tariff and trade rules in
modern times are usually set together because of their common impact on
industrial policy, investment policy, and agricultural policy. A trade bloc is a
group of allied countries agreeing to minimize or eliminate tariffs against
trade with each other, and possibly to impose protective tariffs on imports
from outside the bloc. A customs union has a common external tariff, and the
participating countries share the revenues from tariffs on goods entering the
customs union.
In some societies, tariffs also could be imposed by local authorities on the
movement of goods between regions (or via specific internal gateways). A
notable example is the liken, which became an important revenue source for
local governments in the late Qing China.
Other taxes
License fees
Occupational taxes or license fees may be imposed on businesses or
individuals engaged in certain businesses. Many jurisdictions impose a tax
on vehicles.
Poll tax
A poll tax, also called a per capita tax, or capitation tax, is a tax that levies a
set amount per individual. It is an example of the concept of fixed tax. One
of the earliest taxes mentioned in the Bible of a half-shekel per annum from
each adult Jew (Ex. 30:1116) was a form of poll tax. Poll taxes are
administratively cheap because they are easy to compute and collect and
difficult to cheat. Economists have considered poll taxes economically
efficient because people are presumed to be in fixed supply. However, poll
taxes are very unpopular because poorer people pay a higher proportion of
their income than richer people. In addition, the supply of people is in fact
not fixed over time: on average, couples will choose to have fewer children
if a poll tax is imposed. The introduction of a poll tax in medieval England
was the primary cause of the 1381 Peasants' Revolt. Scotland was the first to
be used to test the new poll tax in 1989 with England and Wales in 1990.
The change from a progressive local taxation based on property values to a
single-rate form of taxation regardless of ability to pay (the Community
Charge, but more popularly referred to as the Poll Tax), led to widespread
22

refusal to pay and to incidents of civil unrest, known colloquially as the 'Poll
Tax Riots'.
Direct and indirect
Taxes are sometimes referred to as "direct taxes" or "indirect taxes". The
meaning of these terms can vary in different contexts, which can sometimes
lead to confusion. An economic definition, by Atkinson, states that "...direct
taxes may be adjusted to the individual characteristics of the taxpayer,
whereas indirect taxes are levied on transactions irrespective of the
circumstances of buyer or seller."[17] According to this definition, for
example, income tax is "direct", and sales tax is "indirect". In law, the terms
may have different meanings. In U.S. constitutional law, for instance, direct
taxes refer to poll taxes and property taxes, which are based on simple
existence or ownership. Indirect taxes are imposed on events, rights,
privileges, and activities.[18] Thus, a tax on the sale of property would be
considered an indirect tax, whereas the tax on simply owning the property
itself would be a direct tax.

Structure of Taxation in India

The constitution has defined in its State and Central List as to which areas
of taxation rest with the state and what kind of taxes are to be levied by the Central
Government. The local governing bodies are subsidiary to the state government
23

and under the control of the state Governments. The State Government has
endowed some powers on the Local Governing bodies to levy some taxes.
Capital Expenditure
Any fixed asset which is regularly used for deriving income over a period of
time and the expenditure of which the business will the benefit over such period.
Revenue Expenditure
Expenditure incurred for running of the business towards general
administration of the business is revenue expenditure.
In other words, expenditure incurred to run the business, to preserve the fixed
assets and to maintain the same is termed as revenue expenditure.
Advance Payment of Tax
Every assessee has to pay the advance tax towards his tax liability to be computed
during the assessment year.
Tax Structure in India
1. Direct Tax
2. Indirect Tax
Direct Tax
a) Income tax
b) Wealth tax
c) Gift tax

Indirect tax
a) Excise Duty
b) Customs Duty
c) Sales Duty
24

Importance of Tax in Government Revenue

In countries like India to achieve economic development and create stability,
the place of public funding has gained a lot of importance.
As the objective as shown:
1. To make available resources for the development of public sector.
2. To make the best and maximum use of the available resources.
3. To curb inflation and gain economic stability.
Benefits of Direct Tax
1.
2.
3.
4.
5.
6.
7.

Capacity and Equity

Flexibility
Economical
Certainty
Evasion not possibility
Awareness
Equity

Drawbacks of Direct Tax

Direct Tax has its benefits as well as darker side.
The drawbacks are as follows:
1.
2.
3.
4.
5.
6.

Difficulty in Defining Taxability

Inconvenience
Protest
Expensive
Tyrannical
Limited Base

Features of Indirect Tax

1. Goods and services: Indirect Tax is levied on goods and services.
2. Customers: Person paying the Indirect tax does not bear the burden but the
same is recovered from customers.
25

3. Traders and Customers: Traders and Consumers do not feel the burden of
Indirect tax generally do not prohibit levy of such taxes.
4. Government: Governments get substantial revenue from indirect tax.
Benefits of Indirect Tax
1.
2.
3.
4.
5.
6.
7.

No burden of Tax
Low rate of Tax
Tax according to Capacity
Economical
Indirect tax justified
Progressive Taxation
Unavoidability of Taxes

Drawbacks of Indirect Tax

It is criticized due to the following drawbacks:
1.
2.
3.
4.
5.

Tyrannical and Regressive

Uncertainty of Income
Knowledge/Realization
Economy
Burden of Tax not realized

Person and individual

In everyday speech, we tend to distort the meaning of the word person. What we
call person or personal designates rather more the individual. We have grown
Accustomed to regarding the terms person and individual as virtually
synonymous, and we use the two indifferently to express the same thing. From one
26

point of view, however, person and individual are opposite in meaning (see V.
Lossky, The Mystical Theology of the Eastern Church (London, 1957), p. 121f.)
The individual is the denial or neglect of the distinctiveness of the person, the
attempt to define human existence using the objective properties of mans common
nature, and quantitative comparisons and analogies. Chiefly in the field of
sociology and politics, the human being is frequently identified with the idea of
numerical individuality. Sometimes this rationalistic process of leveling people
Out is considered progress, since it helps to make the organization of society more
Efficient. We neutralize the human being into a social unit, bearing the
characteristics, the needs and desires, which are common to all. We try to achieve
some rationalistic arrangement for the rights of the individual, or an objective
implementation of social justice which makes all individual beings alike and denies
them personal distinctiveness. In everyday life, too, we generally distinguish
persons by applying to individuals the characteristics and attributes common to
human nature, with merely quantitative differentiations. When we want to
designate a person, we make a collection of individual attributes and natural
characteristics which are never personal in the sense of being unique and
unrepeatable; however fine the quantitative nuances we achieve for designating
individuals. We say, for instance, that so-and-so is a man of such-and-such
Height, with such-and-such a facial appearance, character, emotional make-up and
soon. But however many detailed descriptions we give, they are bound to fit more
than one person, for the existential uniqueness and distinctiveness of the personal
manifestation is impossible to define objectively, in the words and formulae of our
common speech. Personal distinctiveness is revealed and known only within the
framework of direct personal relationship and communion, only by participation in
the principle of personal immediacy, or of the loving and creative force which
distinguishes the person from the common nature, And this revelation and
knowledge of personal distinctiveness becomes ever more full as the fact of
communion and relationship achieves its wholeness in love. Love is the supreme
road to knowledge of the person, because it is an acceptance of the other person as
a whole, It does not project onto the other person individual preferences, demands
or desires, but accepts him as he is, in the fullness, of his personal uniqueness. This
is why knowledge of the distinctiveness of the person achieves its ultimate fullness
in the self-transcendence and offering of self that is sexual love, and why, in the
language of the Bible, sexual intercourse is identified with knowledge of a person
(cf. Gn 4:1, 4:17, 4:25; Mt 1:25; Lk 1:34; R. Boltzmann, inTheologisches
Worterbuch zum Neuen Testament, ed. G. Kittle, vol. I (Bonn, 1950), P.
27

199).Personal distinctiveness forms the image of God in man. It is the mode of

existence shared by God and man, the ethos of Trinitarian life imprinted upon the
human being. In the Orthodox Church and its theology, we study man as an image
of God, and not Godas an image of man exalted into an absolute. The revelation of
the personal God in history manifests to us the truth about man, his ethos and the
nobility of his descent. This does not mean that we apply some authoritatively
given theoretical principle to the interpretation of human existence. In the
historical revelation of God, we study true personal existence free from any
constraint from the constraint imposed on man by his own nature after his fall,
which was the free subjection of his personal distinctiveness to the necessities and
dictates of nature individuality.

SALARY
Income under heads of salary is defined as remuneration received by an individual
for services rendered by him to undertake a contract whether it is expressed or

28

implied. According to Income Tax Act there are following conditions where all
such remuneration are chargeable to income tax:
When due from the former employer or present employer in the previous year,
whether paid or not
When paid or allowed in the previous year, by or on behalf of a former
employer or present employer, though not due or before it becomes due.
When arrears of salary is paid in the previous year by or on behalf of
a former employer or present employer, if not charged to tax in the period to
which it relates.
This tax guide gives information for arriving at the taxable income of a salaried
person and computation of tax liability thereof under the Income Tax Ordinance,
2001. It is equally informative and useful from the employers perspective to
determine the amount of tax to be withheld every month from the salary paid to the
employees. It contains the provisions relating to the tax of a resident salaried
person only.
WHAT IS SALARY?
Salary means amount received by an employee from any employment, whether of
a capital or revenue nature. It includes pay and perquisites.Pay means wages or
other remuneration like leave pay, payment in lieu of leave, overtime payment,
bonus, commission, fees and gratuity.
Perquisite means benefit whether convertible to money or not given to employee
over and above pay and wages, e.g. - utilities allowance, conveyance allowance,
provision of vehicle and accommodation etc.
WHO IS A SALARIED PERSON?
An individual is treated as a salaried person if more than 50% of his total income
comprises of salary income or he/she derives income entirely from salary. Every
salaried person is obliged to pay tax on salary, if salary exceeds prescribed limits.
TAXABILITY OF SALARY
While computing the taxable salary income of a person, all perquisites, allowances
or benefits, except exempt items are to be included in the salary and such gross
29

figure shall be treated as the taxable salary income of a taxpayer. Following

allowances are exempt from tax subject to the following conditions:
Medical Allowance
Exempt upto 10% of basic salary, if free medical treatment or hospitalization or reimbursement of medical or hospitalization charges is not provided.
Special Allowance
Exempt if granted to meet expenses for the performance of official duties.
What Income Comes Under Head of Salary?
Under section 17 of the Income Tax Act, 1961 there are following incomes which
comes under head of salary:
1. Salary (including advance salary).
2 . Wag e s
3. Fees
4 . C o m mi s s i o n
5. Pension
6 . An n u i t y
7. Perquisite
8. Gratuity
9 . An n u a l B o n u s
10. Income from Provident Fund
11. Leave Encashment
1 2 . Al l o w a n c e
1 3 . Aw a r d s

TAX ON SALARY INCOME, TDS ON SALARY

Any income received by an employee is chargeable under head Income from
Salaries and tax on salary is levied in the manner as shown below. Income would
30

be taxable under head Income from Salaries only when an employer-employee

relationship exists.
The following computation of Tax on Salary Income and TDS on Salary is
required to be shown by a salaried taxpayer at the time of filing his Income Tax
Return
TDS on Salary
At the time of payment of salary by the employer to the employee, the employer is
also required to mandatorily deduct TDS on Salary under Section 192 and the
balance amount after deduction of TDS is payable to the employee. The TDS on
Salary is required to be deducted on the basis of average rate of income tax of the
taxpayer for that financial year.
The average rate of income tax is to be calculated on the basis of income tax slab
rates in force for that financial year.
TDS on Salary from more than 1 employer
In case an employee changes his job and joins a new organization, he may furnish
to the new employer a statement in Form 12b stating the salary received from the
previous employer and the TDS deducted thereon.
Based on the information furnished by the employer in Form 12b, the new
employer will deduct TDS accordingly keeping in the mind the TDS on salary
deducted earlier.
Deposit of TDS on Salary with the Govt.
Tax on Salary deducted by the employer does not go in the pockets of the employer
as he is required to deposit the TDS on Salary deducted with the Govt before the
prescribed due date. At the time of making the payment of TDS with the Govt, the
employer is also required to mention his TAN No. on the deposit challan.
At the time of deposit of TDS on salary, the employer specifically mentions the
salary paid to each employee and the tax deducted thereon. He is also mandatorily
required to quote the PAN No. of each employee while depositing the TDS with
the govt. If the employer fails to deduct and/or pay the TDS on Salary on time
interest & penalty would be levied on the employer
31

Revision in deduction of TDS on Salary

In case an employer has deducted a lower amount as TDS on Salary in the initial
few months as compared to what he was required to deduct, he can compensate the
same by deducting a higher amount in remaining months and vice-versa.
However, the total TDS on Salary deducted during the year should be equal to the
tax on salary payable by the employee as per his Slab Rates.
In case there is excess deduction of TDS on Salary than what was required to be
deducted, a taxpayer can claim income tax refund of excess tax paid.

INTRODUCTION TO INDIVIDUAL

32

I have taken an imaginary person for obtaining taxable income from salary. Mr.
ABC is working as an accountant in central Railway.
His Monthly Monthly Basic Salary Rs. 5,800/-.
Dearness Allowance Rs. 500/- per month. Special Allowance of Rs. 300/per month.
Bonus Rs. 2,000/ He is provided with Maruti Car for his office use as well as personal use.
The perquisite value of this is ascertained at Rs. 5,920.
Entertainment allowances of Rs. 800/- p.m. since 1-4-85 of which he
actually spent Rs. 8,000/ He spent Rs. 1,500/- on books and paid profession tax Rs. 2,200/-

INCOME SOURCE
The main income source of Mr. ABC is through his salary. There is no other source
of income.
33

Salary [u/s 17(1)]:

Section 17(1) of the Income Tax Act gives an inclusive definition of the term
salary. It covers practically all kind of receipts in the hands of an employee either
in cash or in kind provided by employer.
Income under heads of salary is defined as remuneration received by an
individual for services rendered by him to undertake a contract whether it is
expressed or implied. According to Income Tax Act, there are following conditions
where all such remuneration is chargeable to income tax:
When due from the former employer or present employer in the previous
year, whether paid or not.
When paid or allowed in the previous year, by or on behalf of a former
employer or present employer, though not due or before it becomes due.
When arrears of salary is paid in the previous year by or on behalf of a
former employer or present employer, if not charged to tax in the period to
which it relates
What Income Comes Under Head of Salary?
Under Section 17 of the Income Tax Act,1961, there are following incomes which
comes under head of salary:

Salary (including advance salary)

Wages
Fees
Pensions
Annuity
Perquisite
Gratuity
Annual Bonus
Income from Provident Fund
Leave Encashment
Allowances
Awards

Deductions from salary Income

Certain deductions are available while determining the taxable salary income.
34

(A) Standard Deduction

Income Tax Slabs 2009-2010 (for Men) in India
Income Tax Slab (in rs)
0 to 1,60,000
1,60,001 to 3,00,000
3,00,001 to 5,00,000
Above 5,00,000

Tax
No Tax
10%
20%
30%

Income Tax Slabs 2009-2010 (for Women) in India

Income Tax Slab (in rs)
0 to 1,90,000
1,90,001 to 3,00,000
3,00,001 to 5,00,000
Above 5,00,000

Tax
No Tax
10%
20%
30%

Income Tax Slabs 2009-2010 (for Senior Citizen) in India

Income Tax Slab (in rs)
0 to 2,40,000
2,40,001 to 3,00,000
3,00,001 to 5,00,000
Above 5,00,000

Tax
No Tax
10%
20%
30%

(B) Professional Tax

Professional tax, which is paid, is allowed as deduction.
(C) Arrears Salary
If salary is received in arrears or in advance, it can be spread over the years to
which relates and be taxed accordingly as per section 89(1) of the Income tax Act.
Format for Computation of Income from Salaries:
Name of the assessee:
35

Assessment year:
Legal Status:
Residential Status:
Computation of Income from Salaries
Particulars
A. Salary (Gross)
(including arrears and advance salary received)
Basic Salary/Wages
Fees
Commission
Pension (Taxable Portion)
Gratuity (Taxable Portion)
Leave Salary (Taxable Portion)
Annuity
Bonus (Taxable on Receipt basis)
B. Allowances
Dearness Allowances
HRA
Less: Exempt [u/s 10(13)]
City Compensatory Allowances
Special Allowances
Lunch Allowances
Fixed Medical Allowances
Servant Allowances
Entertainment Allowances received
C. Perquisite taxable
Rent free accommodation
Concession in Rent Benefit/Amenity granted free of
cost to specified employee
Employees obligation discharged by employer
Premium for period for Life of Employee/Annuity
Fring benefit/Amenity
D. Profits in lieu of salary
Compensation received from the employer
Employers contribution to unrecognized P.F. and

Rs.

Rs.
xx

xx
xx
xx
xx
xx

36

interest thereon received Payment received for

understanding performance of duty or on the occasion of
Diwali or Christmas Employers contribution to
Recognized Provident Fund in excess of 12% Basic
Salary
Interest exceeding 905% of Basic Salary
Amount received under Key man Insurance Policy
Gross Salary
Less: Deduction (u/s 16)
(i) Entertainment Allowances [u/s 16(ii)]
(ii) Professional Tax or
Tax on employment [u/s 16(iii)]
Net Taxable Salary

COMPUTATION OF INCOME
37

Computation of Income from Salaries

Particulars
Salary @ Rs 5,800p.m. for 12 months
Dearness Allowance
Special Allowance
Entertainment Allowance
Bonus
Perquisite Value of Car
Less: Deduction u/s 16
(i) Entertainment Allowance
(ii) Professional Tax
Income from Salaries

Rs.
69,600
6,000
3.600
9,600
2,000
5,920
5,000
2,200

Rs.

96,720

7,200
89,520

Points to be noted:
1. Actual expenses incidental to employment such as purchase of books, etc. is
not allowable as deduction.
2. Since Mr. Ajit is a Govt. Employee, deduction in respect of entertainment
allowance is calculated as follows:
(a) Actual entertainment allowances Rs. 9,600/(b) 1/5th of the basic salary Rs. 13,920/(c) Rs. 5,000
The least above three months will be allowed as deduction u/s 16(ii), i.e. Rs.
5,000/-

CONCLUSION

38

Salaried Employee Salaried employee option provides short term and long term
benefits with less flexibility in taxation. The short and long term benefits are
excellent for salaried employee. But less flexibility in taxation increases your tax
outgo. So salaried employee option is good for long term perspective as it provides
long term savings and growth benefits.
Any income received by an employee is chargeable under head Income from
Salaries and tax on salary is levied in the manner as shown below. Income would
be taxable under head Income from Salaries only when an employer-employee
relationship exists. Income under heads of salary is defined as remuneration
received by an individual for services rendered by him to undertake a contract
whether it is expressed or implied.

BIBLIOGRAPHY:

39

WWW.GOOGLE.COM
WWW.WIKIPEDIA.COM
WWW.SCRIBD.COM
WWW.CHARTEREDCLUB.COM
BMS TEXTBOOK-DIRECT & INDIRECT TAX-AUTHOR-RAJIV MISHRA

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