Master of Business Administration - Semester 3 MF 0012: “TAXATION MANAGEMENT” (4 credits) (Book ID: B1210) ASSIGNMENT- Set 1

Q 1. Write a note on the following: a. Tax holidays b. SEZ

Ans. (a) Tax holidays: A tax holiday is a temporary reduction or elimination of a tax. Programs may be referred to as tax abatements, tax subsidies, tax holidays, or tax reduction programs. Governments usually create tax holidays as incentives for business investment. Tax holidays have been granted by governments at national, sub-national, and local levels, and have included income, property, sales, VAT, and other taxes. Some tax holidays are extra statutory concessions, where governing bodies grant reduction in tax not necessarily authorized within the law. In developing countries, governments sometimes reduce or eliminate corporate taxes for the purpose of attracting Foreign Direct Investment or stimulating growth in selected industries. Tax holiday stimulate community revitalization, retain City residents, attract homeowners to the City, and to reduce development costs for homeownership and rental projects. The program provides a benefit for residents who improve their homes and encourages home shoppers to buy in the City. The tax abatement benefits stay with the property the entire length of the abatement and will transfer to any new property owner within that period. (b) SEZ (Special Economic Zone): Special economic zone (SEZ) is a particular area inside a state which acts as foreign territory for tariff and trade operations. Govt. provides tax exemption (IT, Excise, customs, sales etc.), subsidised water and electricity etc. SEZ can be sector specific or multi product sez. It helps in the development of infrastructure of the area around the SEZ, provides employment to ppl, makes the exports more viable. All this will helps the country's products to become more competitive vis-a-vis providing all round development of region.

Q 2. Comment on incomes which are exempted from the tax. Ans. In the following cases, income is absolutely exempt from tax, as it does not form part of total income. (1) AGRICULTURAL INCOME As per section 10(1), agricultural income is exempt from tax if it comes within the definition of ―agricultural income‖ as given in section 2(1A). In some cases, however, agricultural income is taken into consideration to find out tax on nonagricultural income. (2) RECEIPTS BY A MEMBER FROM A HINDU UNDIVIDED FAMILY As per section 10(2), any sum received by an individual as a member of a Hindu undivided family either out of income of the family or out of income of estate belonging to the family is exempt from tax. Such

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receipts are not chargeable to tax in the hands of an individual member even if tax is not paid or payable by the family on its total income. (3) SHARE OF PROFIT FROM PARTNERSHIP FIRM As per section 10(2A), share of profit received by partners from a firm is not taxable in the hand of partners . (4) LEAVE TRAVEL CONCESSION As per section 10(5), the amount exempt under section 10(5) is the value of any travel concession or assistance received or due to the assessee from his employer for himself and his family in connection with his proceeding on leave to any place in India. The amount exempt can in no case exceed the expenditure actually incurred for the purposes of such travel. Only two journeys in a block of four years is exempt. Exemption is available in respect of travel fare only and also with respect to the shortest route. (5) FOREIGN ALLOWANCE As per section 10(7), any allowance paid or allowed outside India by the Government to an Indian citizen for rendering service outside India is wholly exempt from tax. (6) TAX ON PERQUISITE PAID BY EMPLOYER As per section 10(10CC), the amount of tax actually paid by an employer, at his option, on non-monetary perquisites on behalf of an employee, is not taxable in the hands of the employee. Such tax paid by the employer shall not be treated as an allowable expenditure in the hands of the employer under section 40. (7) 3.10 AMOUNT PAID ON LIFE INSURANCE POLICIES As per section 10(10D), any sum received on life insurance policy (including bonus) is not chargeable to tax. Exemption is, however, not available in respect of the amount received on the following policies a. any sum received under section 80DD (3) or 80DDA (3); b. any sum received under a Keyman insurance policy; c. any sum received under an insurance policy (issued after March 31, 2003) in respect of which the premium payable for any of the years during the term of policy, exceeds 20 per cent of the actual sum assured. In respect of (c) (supra) the following points should be noted 1. Any sum received under such policy on the death of a person shall continue to be exempt. 2. The value of any premiums agreed to be returned or of any benefit by way of bonus or otherwise, over and above the sum actually assured, which is received 26 under the policy by any person, shall not be taken into account for the purpose of calculating the actual capital sum assured under this clause. (8) EDUCATIONAL SCHOLARSHIPS As per section 10(16), scholarship granted to meet the cost of education is exempt from tax. In order to avail the exemption it is not necessary that the Government should finance scholarship. (9) DAILY ALLOWANCES OF MEMBERS OF PARLIAMENT Clause (17) of section 10 provides exemption to Members of Parliament and State Legislature in respect of the following allowances: Cases Case 1 Case 2 Nature of allowance Daily allowance Any other allowance received by a Member of Parliament under the Members of Parliament (Constituency Allowance) Rules, 1986 All allowances received by any person by reason of his member-ship of an State Legislature or any Committee thereof How much is exempt Entire amount is exempt Entire amount is exempt

Case 3

Up to Rs.2000 per month in aggregate

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(10)FAMILY PENSION RECEIEVED BY MEMBERS OF ARMED FORCES As per section 10(19), family pension received by the widow (or children or nominated heirs) of a member of the armed forces (including para-military forces) of the Union is not chargeable to tax from the assessment year 2005-06, if death is occurred in such circumstances given below— a. acts of violence or kidnapping or attacks by terrorists or anti-social elements; 27 b. action against extremists or anti-social elements; c. enemy action in the international war; d. action during deployment with a peace keeping mission abroad; e. border skirmishes; f. laying or clearance of mines including enemy mines as also mine sweeping operations; g. explosions of mines while laying operationally oriented mine-fields or lifting or negotiation mine-fields laid by the enemy or own forces in operational areas near international borders or the line of control; h. in the aid of civil power in dealing with natural calamities and rescue operations; and i. in the aid of civil power in quelling agitation or riots or revolts by demonstrators. (11)INCOME OF MINOR As per section 10(32), in case the income of an individual includes the income of his minor child in terms of section 64(1A), such individual shall be entitled to exemption of Rs. 1,500 in respect of each minor child if the income of such minor as includible under section 64(1A) exceeds that amount. Where, however, the income of any minor so includible is less than Rs. 1,500, the aforesaid exemption shall be restricted to the income so included in the total income of the individual. (12)CAPITAL GAIN ON TRANSFER OF US 64 As per section 10(33), any income arising from the transfer of a capital asset being a unit of US 64 is not chargeable to tax where the transfer of such assets takes place on or after April 1, 2002. This rule is applicable whether the capital asset (US64) is long-term capital asset or short-term capital asset. If income from a particular source is exempt from tax, loss from such source cannot be set off against income from another source under the same head of income. Consequently, loss arising on transfer of units of US64 cannot be set off against any income in the same year in which it is incurred and the same cannot be carried forward. (13)DIVIDENDS AND INTEREST ON UNITS As per section 10(34)/ (35), the following income is not chargeable to tax— a. any income by way of dividend referred to in section 115-O [i.e., dividend, not being covered by section 2(22) (e), from a domestic company]; b. any income in respect of units of mutual fund; c. income from units received by a unit holder of UTI [i.e., from the administrator of the specified undertaking as defined in Unit Trust of India (Transfer of Undertaking and Repeal) Act, 2002]; d. income in respect of units from the specified company. (14)CAPITAL GAIN ON COMPULSORY ACQUISITION OF URBAN AGRICULTURAL LAND As per section 10(37), in the case of an individual/Hindu undivided family, capital gain arising on transfer by way of compulsory acquisition of urban agricultural land is not chargeable to tax from the assessment year 2005-06 if such compensation is received after March 31, 2004 and the agricultural land was used by the assessee (or by any of his parents) for agricultural purposes during 2 years immediately prior to transfer. (15)LONG-TERM CAPITAL GAINS ON TRANSFER OF EQUITY SHARES/UNITS IN CASES COVERED BY SECURITIES TRANSACTION TAX As per section 10(38), Long-term capital gains arising on transfer of equity shares or units of equity oriented mutual fund is not chargeable to tax from the assessment year 2005-06 if such a transaction is covered by securities transaction tax.

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The securities transaction tax is applicable if equity shares or units of equityoriented mutual fund are transferred on or after October 1, 2004 in a recognized stock exchange in India (or units are transferred to the mutual fund). If the securities transaction tax is applicable, long-term capital gain is not chargeable to tax; short-term capital gain is taxable @ 10 per cent (plus SC and EC). If income is shown as business income, the taxpayer can claim rebate under section 88E. Q 3. Enumerate the differences between tax planning and tax evasion. Ans. Difference between tax planning and tax evasion: Tax Planning It is a way to reduce tax liability by taking full advantages provided by the act through various exemptions, deductions, rebates and relief. To reduce tax liability by applying script and moral of law. Tax Evasion It is the illegal way to reduce tax liability by deliberately suppressing income or sale or by increasing expenses etc., which results in reduction of total income of the assessee. To reduce tax liability by applying unfair means. Generally, benefits do not arise but it causes penalty and prosecution. It overrules the law. It is tax concealment. It is objectionable. It is immoral in nature.

Definition

Object

Benefit Treatment of Law Practice Need Morality

Generally, arises in long run. It uses benefits of the law. It is tax saving. It is desirable. It is moral in nature.

Q 4. What are the key steps to calculate the tax liability of an individual. ANS: Steps to calculate the tax liability of an individual are:       Determine residential status - First of all to determine the residential status of the Assessee. The incomes are taxed according to residential status i.e. Resident in India, Not Ordinarily resident, or Non-resident. Calculation of gross total income - For the calculation of the gross total income we should have to calculate the income of five heads according to the provisions of Income Tax Act. Exempted Incomes - While calculating the incomes of the different heads, the incomes which are exempted will not be included. Income of other persons to be included in the income of assessee - Few incomes of other persons (Sec. 64) includes in the income of assessee. Set-off of losses - If there is negative income in a particular head then it is to be set-off according to the provisions of Income Tax Act. Deductions u/s 80 - After the above steps, the aggregate amount of income is known as Gross Total Income. From the gross total income few deductions which are provided under section 80 of income tax act will be deducted. After deductions, the balance of income is known as Total Income or Taxable Income. The list of deductions available to an individual are as follows: (1) Investments and deposits (sec 80C)

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(2) (3) (4) (5)

Contribution to certain pension funds (sec 80CCC) Contribution of new pension scheme (sec 80CCD) Payment to medical insurance premium (sec 80D) Medical treatment of handicapped dependents and amount deposited for maintenance of handicapped dependents (sec 80DD) (6) Expenditure on medical treatment of certain diseases (sec 80DDB) (7) Repayment of loan and interest thereon taken for higher education (sec 80E) (8) Donations to certain funds/charitable institutions etc. (sec 80G) (9) Deductions in respect of rent paid (sec 80GG) (10) Donations for scientific research and rural development (sec 80GGA) (11) Contribution to political parties (80GGC) (12) Profit and gain of new industrial undertaking set up for infrastructure development(sec 80IA) (13) Profit and gains of new industrial undertakings (sec 80IB) (14) profit and specific industrial undertakings establish in specific states (sec 80IC) (15) Deduction in respect of profits and gains from business of collecting and processing of bio gradable waste (sec 80JJA) (16) Deduction in respect of certain incomes of offshore banking unit (sec 80LA) (17) Deduction in respect of royalty income to authors (80QQB) (18) Deduction in respect of royalty on patent (sec 80RRB)19.Deduction in case of person with disability (sec 80U)  Total Income rounded off in the multiple of 10 – The total income calculated will be rounded off in multiple of Rs. 10. For this rupee five or more than Rs. 5 will be treated as Rs. 10 and less than Rs. 5 will be deleted.

Q 5. Explain the basic rules of deductions. Ans: The Income Tax Act, 1961 provides for exemptions from income tax liability under specific conditions. These criterions are outlined in the various sections of the Act described below: 1) Section 80 C (Limit: Rs. 1,00,000) An income tax deduction is availed under Section 80C. Section 80C is the most popular because it encourages taxpayers to save a portion of their income. If a taxpayer‘s taxable income lies in the highest tax bracket, he/she can take advantage of Section 80C to reduce his/her taxable income by Rs.1 lakh. This leads to a saving of around Rs. 33,000 in taxes by provisions of Section 80C. The following is a list of important ways in which a taxpayer can get benefit of section 80C of Indian Income Tax Act : Provident Fund (PF): Any contributions to Provident Fund, Voluntary provident Fund (VPF) or savings made in Public Provident Fund (PPF Account) are eligible for income tax deduction under section 80C of Indian Income Tax Act. Life Insurance Premiums: Any Life Insurance premiums (for one or more insurance policies) paid by the individual for himself/herself, his/her spouse or children are eligible under income tax deduction under section 80C of Indian Income Tax Act. ELSS Equity Linked Saving Schemes: Any investment made in certain Mutual Funds called equity linked saving schemes qualifies for section 80C deduction. It is to be noted that not all mutual fund investments are eligible for this deduction. ULIP (Unit Linked Insurance Plan): Investments made in certain ULIPs of Unit Trust of India and LIC of India are eligible for 80C deduction.

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Bank Fixed deposits or Term deposits of more than 5 years: According to a relatively new provision amount saved in fixed deposits of term at least five years is eligible for income tax deduction under section 80C of Indian Income Tax Act. Principal part of EMI on Housing Loan: If an assessee is making EMI payments on a housing loan, the principal part of the EMI is eligible for income tax deduction under section 80C. Note that the interest part is also eligible for tax deduction, but under Section 24 and not Section 80C (please refer below). If one doesn‘t own a house but pays rent for it, deduction can be availed under section 80GG of Indian Income Tax Act which is described below. Tuition Fees: Amount paid as tuition fee for the education of up to two children of the assessee is eligible for deduction under section 80C of Indian Income Tax Act. Other 80C deductions: Amount saved in National Saving Certificate (NSC), Infrastructure Bonds or Infra Bonds, amount paid as stamp duty and registration charges while buying a new home are eligible for income tax deductions under section 80C of Indian Income Tax Act. 2) Section 80 CCF – Additional Rs. 20,000 on investments towards approved Infrastructure bonds Section 80CCF allows an individual to invest an additional Rs. 20,000 in infrastructure bonds, and have that amount deducted from his/her taxable income in addition to the Rs. 100,000 deduction assesse gets from other tax saving instruments. These infrastructure bonds are listed on a stock exchange, however they come with a lock in period, and an individual can‘t sell them before the lock in period expires. For example, the IDFC bond has a lock in period of 5 years, so one can‘t sell these bonds within 5 years. 3) Section 80CCD Where the Central Government or any other employer makes any contribution to the account of employee for the pension scheme, the assessee shall also be allowed a deduction in the computation of his/her total income of the whole of the amount contributed by the Central Govt. or any other employer not exceeding 10% of his salary in the previous year. Contribution to NPS and returns on NPS are tax free, but withdrawals are still taxable. 4) Section 80 D Section 80D of Indian Income Tax Act is especially useful if the employer does not cover their employee‘s health or medical expenses. It is a good idea to get medical insurance or health insurance for the individual, his/her spouse, dependent children or dependent parents, as one can claim a deduction of up to Rs. 15000/- per annum for the premium paid on this insurance. For senior citizen this limit is Rs. 20000. With effect from 1-4-2009, one can claim the total of the following items for deduction under section 80D: Mediclaim Premium on the Health of a) Self Spouse and Children b) Parent/Parents c) If Parent/ Parents Senior citizen 5) Section 80DD Section 80DD of Indian Income Tax Act provides provision for tax deduction if an individual (assessee) incurs medical expenditure for the dependents who are disabled. Here dependent means spouse, children, brothers, sisters or any one of them. Exemption given for Expenditure made for a disabled dependent towards Medical Treatment / Training / Rehabilitation also includes the LIC/Insurance premium paid towards maintenance of such dependant. Investment limit Rs. 15,000 Rs. 15,000 Rs. 20,000

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Maximum deduction allowed is Rs. 50,000/- in case of normal disability and Rs. 1 Lakh in case of severe disability. 6) Section 80DDB Costs incurred for treatment of specified illnesses, could fetch one a tax benefit under section 80DDB. Available Deduction – For individual assesses less than 65 years of age, a deduction limit of Rs. 40,000 is applicable. For a senior citizen, the limit is Rs. 60,000. 7) Section 80E Under section 80E of Indian Income Tax Act, any amount of interest paid on educational loan taken for assessee‘s higher education or higher education of assessee‘s husband / wife or children is deductible from assessee‘s taxable income. Here higher education means – studies for any graduate or postgraduate course in engineering, medicine, management or for post-graduate course in applied sciences or pure sciences including mathematics and statistics. Deduction is allowed for repayment of interest component of Higher Education loan. All education after Class XII is considered, either vocational or Fulltime given that the school/institute/university is recognized by the government. 8) Section 80G Donations made to funds like Prime Minister‘s Relief Fund, National Children Foundation, any University or educational institution of ‗national eminence‘, etc. are deductible from assessee‘s taxable income according to section 80G of Indian Income Tax Act. 9) Section 80U It is deduction in the case of a person with disability. An individual who is suffering from a permanent disability or mental retardation as specified in the Persons with Disabilities (Equal Opportunities, Protection of Rights and Full Participation) Act, 1995 or the National Trust for Welfare of Persons with Autism, Cerebral Palsy, Mental Retardation and Multiple Disabilities Act, 1999, shall be allowed a deduction of Rs 50,000. In case of severe disability the deduction is Rs. 1,00,000. Housing loan interest. Maximum Investment Limit – Rs. 1,50,000 (for loans taken after 1 April 1999. For loans before that date, Maximum Investment Limit is Rs.30,000). 11) Superannuation Any contribution made by a company to a superannuation fund uptoRs. 1,00,000 is tax free in the hands of the employee. 12) Conveyance/Transport Allowance Any Conveyance / Transport Allowance given to an employee is tax free up to Rs. 9,600 /- (No Supporting Bills required) 13) Medical Allowance Any Medical Allowance given to an employee is tax free up to Rs. 15,000 /- (Supporting Bills required) 14) HRA

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Any House Rent Allowance given to an employee is tax free up to the minimum value of the following conditions (subject to – when an employee can produce rent paid receipts from landlord for the period and if the employee has not availed of tax exemptions for home loan interest / principal repayment):    50% of Annual Basic (40% of Annual Basic in case of non-metros) Actual HRA received Rent Paid – (10% of Annual Basic)

15) Professional Tax Any Professional Tax deducted from an employee‘s salary can be reduced from the annual salary income to arrive at taxable salary

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