TAX MANAGEMENT

MID-I
1. What is income tax? Explain the concept of income tax.
2. Discuss the scope and nature of custom duty and explain the types of custom duties.
3. Write a short note on tax planning. Explain the concept of Tax Avoidance and
Evasion.

1. What is income tax? Explain the concept of income tax.

INTRODUCTION
Income tax act 1961, this resource about to tax act 1961, based on Income tax and its
applicable in India. This resource contains introduction of income tax and basics as well as
heads of income. Types of income is also given in this resource.

In India Income tax is governed by the Income tax Act 1961. It was first come into force on 1-
4-1962. Income tax Act is used for determination of taxable income, tax liability and also
provides procedure for assessment, appeal, penalties and prosecutions. Every year Finance
Act brings amendment to this Act. Income Tax Act Contain 298 sections and XIV Schedules.

Income Tax is charge on total income earned by every person during the relevant previous
year.

INCOME TAX

An income tax is a tax imposed on individuals or entities (taxpayers) that varies with their
respective income or profits (taxable income). Many jurisdictions refer to income tax on
business entities as companies tax or corporate tax. Partnerships generally are not taxed;
rather, the partners are taxed on their share of partnership items. Tax may be imposed by
both a country and subdivisions. Most jurisdictions exempt locally organized charitable
organizations from tax.

Income
BASIC tax generally isOF
CONCEPTS computed
INCOME as TAX
the product of a tax rate times taxable income. The tax
rate may increase
An assesses may get as income
taxable from
income increases
different (referred
sources, eg:- to as graduated
salaries-house or progressive
property income-
profits Taxation
rates). and gainsrates
of business
may varyorbyprofession - capital gains
type or characteristics of income from other
the taxpayer. sources
Capital like
gains may
interest on securities , lottery winnings, races etc.
be taxed at different rates than other income. Credits of various sorts may be allowed that
Income from each of these sources calculated first to find out the gross total income, and then
reduce tax. Some jurisdictions impose the higher of an income tax or a tax on an alternative
permissible deduction allowed arriving in total income according to sec 80 c to 80 u. Every
base
personorwhose
measure of income.
taxable income in the previous year exceeds the minimum taxable limit is liable
to pay income tax during the current financial year at the rates applicable to the current
financial year.
ASSESSMENT YEAR SEC 2(9)
Assessment year means the period of 12 months commencing on the first day of April every
year and ending on 31st march of the next year. The current assessment year is 2007 -
008(1.4.2007to31.03.2008).
An Assessee is liable to pay tax on the income of the previous year during the next following
assessment year. Eg: - during the Assessment year 2007-08 income earned during 2006-07 is
taxed.
PREVIOUS YEAR SEC 3
Previous year means the financial year immediately preceding the assessment year. The
previous year relevant to the Assessment year 2007-08 is 2006-07(1.4.06 to 31.03.07).ie the
year in which income is earned is known as previous year.
PERSONS SEC 2(34)
1. Individual
2. Hindu undivided family
3. Company
4. Firm
5. Association of persons or body of individual
6. Local authority
7. Artificial juridical person
ASSESSEE SEC 2(7)
Assessee is a person, who has liability to pay tax or any other sum of money under Income
Tax act of 1961, so the afore said persons include in the category of Assessee. Every
Assessee whose taxable income in the previous year exceeds the minimum taxable limit is
liable to pay income tax during the current financial year at the rates applicable to the current
financial year.
EXCEPTIONS TO THE GENERAL RULE
Generally income earned in the previous year is taxed in the assessment year. But there are
certain exceptions to the general rule. Ie the previous year and assignment year are same; the
Assessee is liable to be assessed in the same year in which he earns the income in the
following case,
1. Income from nonresident shipping company
2. Income of person leaving India
3. Income of person likely to transfer assets to avoid tax
4. Income from discontinued business.
GROSS TOTAL INCOME
It is the aggregate taxable income under the different heads of income such as income from
salary, income from house property, income from profits or gains of business, capital gains
and income from other sources. Ie total income computed in accordance with the provision of
the act before making any deductions under Sec 80 C to 80 U
TOTAL INCOME SEC 2(45)
Total income is arrived after making various deductions from gross total income under
section 80 C to 80 U. It is computed on the basis of residential status of an Assessee
RESIDENTIAL STATUS
Income tax is charged on total income earned by an Assessee during the previous year, but at
the rate applicable to the assessment year. It shall be determined on the basis of the
residential status of the Assessee. Sec.6 of the act divides the Assessee into 3 categories’
*Resident
*Nonresident
*Not ordinary resident
There is basic and additional condition for determining the residential status of different
assessee.
Basic condition: 1. If he has been India in that previous year for a period or periods
amounting in all to 182 days or more

2.if he has been India for a period or periods amounting in all to 365 days or more, during the
4 years preceding the relevant previous year and has been in India for a period or periods
amounting in all to 60 days or more in that previous year.
 Additional conditions: 1.An individual that has been in India at least 2 out of 10 previous
years preceding the relevant previous year.
2. The individual has been India for at least 730 days in all during the 7 previous year
preceding the relevant previous year.
Resident and Ordinary Resident: Persons who are resident in India is popularly known as
ordinary resident. An individual, to become an ordinary resident in India in any previous year
should also satisfy the two additional conditions along with basic conditions.
Not Ordinarily Resident Individual- Sec.6 (6): If an individual fulfills any one of the basic
conditions (specified in the case of resident) but doesn’t satisfy both additional conditions, he
becomes a ‘not ordinary resident’
Non Resident Individual: As per section 2(30) of the income tax act, if an Assessee doesn’t
fulfill any of the two basic conditions or tests will be treated as nonresident Assessee during
the relevant previous year.
2.Discuss the scope and nature of custom duty and explain the types
of custom duties.
INTRODUCTION
The Constitution of India (Article 265) lays down that no tax shall be levied or collected except
by authority of law. The law for the levy and collection of Customs duties is the Customs Act,
1962. This legislation has been enacted by Parliament in exercise of the exclusive power
vested in it under Article 246 read with Entry 83 of list-I of the Seventh Schedule of the
Constitution. The Customs Duties are major tax revenue for the Union Govt. and constitute
around 30% of its total tax revenues. Together with Central Excise duties, the contribution
amount to nearly three-fourth of total tax revenue of the Union Govt.
An Overview of Customs Law: Customs duties are probably the oldest form of taxation in
India. They are as old as international trade itself. Just as domestic production flows provide
the base for excise taxation so also international trade flows are the basis for customs duties.
Meaning of customs duty: Customs duty is a duty or tax, which is levied by Central Govt. on
import of goods into, and export of goods from, India. It is collected from the importer or
exporter of goods, but its incidence is actually borne by the consumer of the goods and not by
the importer or the exporter who pay it. These duties are usually levied with ad valorem rates
and their base is determined by the domestic value ‘the imported goods calculated at the
official exchange rate. Similarly, export duties are imposed on export values expressed in
domestic currency
Development of customs law: There is historical evidence of imposition of import duty
during the ancient and medieval era, the development of organised taxation on imports and
exports to its present form, originated in 1786, when the Britishers formed the first Board of
Revenue in Calcutta. In 1808, a New Board of Trade was established. The provincial import
duties were replaced by uniform Tariff Act through Customs Duties Act, 1859 which was
made applicable all territories in the country. The general rate of duty was 10%, which was
subsequently revised to 7.5% in 1864. Several revisions in the Customs policy and tariff took
place during subsequent years, though such revisions were mainly related to the textile
products.
Sea Customs Act was passed by Government in 1878. The Indian Tariff Act was passed in
1894. Air Customs having been covered under the India Aircrafts Act of 1911, the Land
Customs Act was passed in 1924. The Indian Customs Act, 1934, governed the Customs Tariff.
After Independence, the Sea Customs Act and other allied enactments were repealed by a
consolidating and amending legislation entitled the Customs Act, 1962 (CA). Similarly the Act
of 1934 was repealed by the Customs Tariff Act, 1975(CTA).
Scope and coverage of customs law:There are two Acts, which form part of Customs Law in
India, namely, the Customs Act.1962 and Customs Tariff Act, 1975:
1. The Customs Act, 1962: The Customs Act. 1962 is the basic Act for levy and collection
of customs duty in India. I contain various provisions relating to imports and exports of goods
and merchandize as well as baggage of persons arriving in India. The main purpose of
Customs Act, 1962 is the prevention of illegal imports and exports of goods. The Act extends
to the whole of the India. It was extended to Sikkim w.e.f. 1st October 1979.
2. The Customs Tariff Act, 1975: The Customs Duty is levied on goods imported or
exported from India at the rates specified under the Customs Tariff Act, 1975.The Act
contains two schedules - Schedule 1 gives classification and rate of duties for imports, while
schedule 2 gives classification and rates of duties for exports. In the present Act, the Tariff
Schedule was replaced in 1986. The new Schedule is based on Harmonised System of
Nomenclature (HSN). The Internationally accepted Harmonised Commodity Description and
Coding System.
Objects of customs duty
The customs duty is levied, primarily, for the following purpose:
1. To raise revenue.
2. To regulate imports of foreign goods into India.
3. To conserve foreign exchange, regulate supply of goods into domestic market.
4. To provide protection to the domestic industry from foreign competition by restricting
import of selected goods and services, import licensing, import quotas, and outright import
ban.
Nature of Customs Duty
Entry 82 of List-I (Union List) to the Schedule-VII reads as under 82 ‘Duties of Customs
including Export duties’. Thus, the levy of duty on imports and exports is subject matter of
Union and the parliament derives power to make laws related to the duties of customs.
Accordingly, the Customs Act, 1962 was enacted by the Parliament. Section 12 of the Customs
Act provides that duties of customs shall be levied at such rates as may be specified Under the
Customs Tariff Act, 1975 or any other law for the time being in force, on goods imported into
or exported from’ India. Goods become liable to duty if there is import into and export from
India.
Taxable Event
Goods become liable to import duty or export duty when there is ‘import into, or export from
India
‘Import’, as defined in section 2(23), means ‘bringing into India from a place outside India’.
‘Export’, as defined in section 2(18), means taking out of India to a place outside India’.
‘India’ is defined in section 2(27) to include the territorial waters of India.
The definition of India is an inclusive definition. Article I of the Constitution of India defines
“India” as Union of States. General Clauses Act defines India to mean all territories for the
time being comprised in India.
Type of customs duties
While Customs Duties include both import and export duties, but as export duties contributed
only nominal revenue, due to emphasis on raising competitiveness of exports, import duties
alone constituted major part of the revenue from Customs Duties. The import duties are
imposed under The Customs Act, 1962 and Customs Tariff Act, 1975. The structure of
Customs Duties includes the following:
1. Basic Customs Duty All goods imported into India are chargeable to a duty under
Customs Act, 1962. The rates of this duty, popularly known as basic customs duty, are
indicated in the First Schedule of the Customs Tariff Act, 1975.
2. Additional (Countervailing) Duty This countervailing duty is leviable as additional duty
on goods imported into the country and the rate structure of this duty is equal to the
excise duty on like articles produced in India.
3. Export Duties Under Customs Act, 1962, goods exported from India are chargeable to
export duty. The items on which export duty is chargeable and the rate at which the duty
is levied are given in the customs tariff act, 1975. However, the Government has
emergency powers to change the duty rates and levy fresh export duty depending on the
circumstances.
4. Protective Duties Tariff Commission has been established under Tariff Commission Act,
1951. If the Tariff Commission recommends and Central Government is satisfied that
immediate action is necessary to protect interests of Indian industry, protective customs
duty at the rate recommended may be imposed under section 6 of Customs Tariff Act.
The protective duty will be valid till the date prescribed in the notification.
5. Countervailing Duty on Subsidized goods If a country pays any subsidy (directly or
indirectly) to its exporters for exporting goods to India, Central Government can impose
Countervailing duty up to the amount of such subsidy under section 9 of Customs Tariff
Act.
6. Anti Dumping Duty on dumped articles Large manufacturers from abroad may export
goods at very low prices compared to prices in their domestic market. Such dumping may
be with the intention to cripple domestic industry or to dispose of their excess stock. In
order to avoid such dumping, Central Government can impose, anti-dumping duty up to
the margin of dumping on such articles.
7. Safeguard Duty Central Government is empowered to impose ‘safeguard duty’ on
specified imported goods if Central Government is satisfied that the goods are being
imported in large quantities and under such conditions that they are causing or threatening
to cause serious injury to domestic industry. Such duty is permissible under WTO
agreement. Safeguard duty is to provide need-based protection to domestic industry for a
limited period, with the objective of restoring free and fair competition.
8. National Calamity Contingent Duty A National Calamity Contingent Duty (NCCD) of
customs is imposed under section 129 of Finance Act, 2001.
9. Education cess on customs duty The Education Cess of 2% and Secondary & Higher
Education Cess of 1% of the aggregate duty of customs excluding safeguard duty,
countervailing duty, Anti Dumping Duty is applicable w.e.f. 01.03.2007.
3. Write a short note on tax planning. Explain the concept of Tax
Avoidance and Evasion.
Definition: Tax Planning can be understood as the activity undertaken by the assessee to
reduce the tax liability by making optimum use of all permissible allowances, deductions,
concessions, exemptions, rebates, exclusions and so forth, available under the statute.
Put simply, it is an arrangement of an assessee’s business or financial dealings; in such a way
that complete tax benefit can be availed by legitimate means, i.e. making use of all beneficial
provisions and relaxations provided in the tax law, so that the incidence of the tax is minimum.
This ensures savings of taxes along with conformity to the legal obligations and requirements.
Therefore, it is permitted by law.
Objectives of Tax Planning
 Reduction of Tax Liability: An assessee can save
the maximum amount of tax, by properly arranging
his/her operations as per the requirements of the
law, within the framework of the statute.
 Minimization of Litigation: There is a war-like
situation between the taxpayers and tax collectors
as the former wants the tax liability to be minimum
while the latter attempts to extract the maximum.
So, a proper tax planning aims at conforming to the
provisions of the tax law, in such a way that
incidence of litigation is minimized.
 Productive Investment: One of the major
objective of tax planning is channelisation of
taxable income to different investment plans. It aims at the optimum utilization of resources for
productive causes and relieving the assessee from tax liability.
 Healthy Growth of Economy: The growth and development of the economy greatly
depend on the growth of its citizens. Tax planning measures involve generating white
money that flows freely and results in the sound progress of the economy.
 Economic Stability: Proper tax planning brings economic stability by various techniques
such as mobilizing resources for national projects or availing ways for investments which
are productive in nature.
Tax Planning follows an honest approach, to achieve maximum benefits of tax laws, by
applying the script and moral of law. Therefore the objectives do not in any way contradict the
concept of tax laws.
Types of Tax Planning
1. Short-range and long-range Tax Planning: The tax
planning which is made every year to arrive at specific or
limited objectives, is called short-range tax planning.
Conversely, long-range tax planning alludes to such
practices undertaken by the assessees which are not paid
off immediately.
2. Permissive Tax Planning: Tax planning, wherein the
planning is made as per expressed provision of the
taxation laws is termed as permissive tax planning.
3. Purposive Tax Planning: Purposive tax planning refers
to the tax planning method which misleads the law. Under
this type, there is no expressed provision of the statute.
Tax planning means intelligently applying tax provisions to manage an individual’s affairs, in
order to avail the tax benefits based on the national priorities, in accordance with the interest of
general public and government.
Tax Avoidance
It is an act of dodging tax without breaking the Law. It means when a taxpayer arranges his
financial activities in such a manner that although it is within the four corner of tax law but
takes advantages of loopholes which exists in the Tax Law for reduction of tax a liability. In
other words though he has complied the letter of law but not the sprit behind the law.
Following transactions are held as Tax Avoidance which are :
1. Where tax law is complied with by using colorable devices which means that use o
dubious method or a method which is unfair for reduction of tax liability.
Tax Avoidance Tax Evasion
I. Where the payment of tax is avoided
though by complying with the provisions I. Where the payment of tax is avoided through
of law but illegal means or fraud is termed as tax evasion.
defeating the intension of the law is
known as tax Avoidance.
II. Tax Avoidance is undertaken by
II. Tax evasion is undertaken by employing
taking advantage of loop holes in
unfair means
law
III. Tax Avoidance is done through
III. Tax Evasion is an unlawful way of paying
not malafied intention but
tax and defaulter may punished.
complying the provision of law.
IV. Tax Avoidance looks like a tax
IV. Tax evasion is blatant fraud and is done
planning and is done before the tax
after the tax liability has arisen.
liability arises.