JKSSB 2021

Topic- Direct Tax and Indirect Tax

CA AMARJEET JAISWAL
Contents
Why tax? ................................................................................................................................................ 2
Direct Tax and Indirect Tax................................................................................................................. 2
Administration of Tax Laws................................................................................................................. 3
Basic Principles For Charging Income Tax ...................................................................................... 3
Important Concepts.............................................................................................................................. 3
Heads of Income .................................................................................................................................. 6
Tax rates for AY 2021-22 .................................................................................................................... 7
Rounding-off of total income [Sec. 288A] ......................................................................................... 9
Rounding-off of tax [Sec. 288B] ....................................................................................................... 10
PAN ...................................................................................................................................................... 10
Residential Status .............................................................................................................................. 10
Calculation of total income and tax payable .................................................................................. 11
ADVANCE TAX .................................................................................................................................. 14
Return of Income ................................................................................................................................ 15

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Why tax?

The Government takes primary responsibility for the welfare of its citizens, as in
matters of
• health care,
• education,
• employment,
• infrastructure,
• social security and
• other development needs.

To facilitate these, Government needs revenue.

The taxation is the primary source of revenue to the Government for incurring such
public welfare expenditure.
In other words, Government is taking taxes from public through its one hand and
through another hand.
However, no one enjoys handing over his hard-earned money to the government to
pay taxes. Thus, taxes are compulsory or enforced contribution to the Government
revenue by public.
Government may levy taxes on income, business profits or wealth or add it to the cost
of some goods, services, and transactions.

Direct Tax and Indirect Tax

There are two types of taxes:

• Direct Tax and
• Indirect Tax
Tax, of which incidence and impact fall on the same person, is known as Direct Tax,
such as Income Tax. It means, in the case of Direct Tax, tax is recovered directly from
the assessee, who ultimately bears such taxes. It is Progressive in nature i.e., higher
tax are levied on person earning higher income and vice versa.
On the other hand, tax, of which incidence and impact fall on two different persons, is
known as Indirect Tax, such as GST, it means tax is recovered from the assessee,
who passes such burden to another person & is ultimately borne by consumers of

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such goods or services. It is Regressive in nature i.e. all persons will bear equal wrath
of tax on goods or service consumed by them irrespective of their ability.

Administration of Tax Laws

The administrative hierarchy of tax law is as follows:

CBDT deals with levy and collection of all direct tax whereas matters relating to levy and
collection of Central indirect tax are dealt by CBIC.

Basic Principles For Charging Income Tax

Sec. 4 is a charging section and it is the backbone of the Income Tax Act.

Every Person whose total income exceeds maximum amount which is chargeable to tax
is an assessee & shall pay income tax at the rate or rates prescribed in the finance act as
well as income tax act in the relevant Assessment year.
However, his total income shall be determined on the basis of Residential status in India.
Although tax on income of the previous year is subject to income tax in the Assessment year
but assessee is liable to pay advance tax or he gets the credit of TDS which has been
deducted during the previous year.

Important Concepts

1. Assessment Year

Assessment year means the period of 12 months commencing on the 1st day of April
every year. It is the year (just after the previous year) in which income earned in the
previous year is charged to tax. E.g., A.Y.2020-21 is a year, which commences on
April 1, 2020 and ends on March 31, 2021. Income of an assessee earned in the
previous year 2019-2020 is assessed in the A.Y. 2020-21.

Taxpoint:

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 • Duration: Period of 12 months starting from 1st April.
• Relation with Previous Year: It falls immediately after the Previous Year.
• Purpose: Income of a previous year is assessed and taxable in the immediately
following Assessment Year.

2. Previous Year

• Previous Year means the financial year immediately preceding the Assessment
Year. Income earned in a year is assessed in the next year.
• The year in which income is earned is known as Previous Year and the next
year in which income is assessed is known as Assessment Year.
• It is mandatory for all assessee to follow financial year (from 1st April to 31st
March) as previous year for Income-Tax purpose.

Determination of the first previous year in case of a newly set-up

business or profession or for a new sourc of income

Note - Where an assessee has an existing regular income from various sources and he earns
an income from a new source during the financial year, his previous year shall commence –
• For the existing income: From 1st April of previous year; and
• For new income: From the date when on which the new source of income comes into
existence.
However, assessee is liable to tax on aggregate income from all the sources, therefore,
all the income will be included in the previous year.

3. Person

The term person includes the following:

i) an Individual;
ii) a Hindu Undivided Family (HUF);
iii) a Company;
iv) a Firm;
v) an Association of Persons (AOP) or a Body of Individuals (BOI), whether
incorporated or not;
vi) a Local authority; &
vii) every artificial juridical person not falling within any of the preceding categories.
Individual
The word ‘individual’ means a natural person, i.e. human being. “Individual” includes a minor
or a person of unsound mind. However, Deities are assessable as juridical person. Trustee of
a discretionary trust shall be assessed as an individual.

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Hindu Undivided Family (HUF)
A Hindu Undivided Family (on which Hindu law applies) consists of all persons lineally
descended from a common ancestor & includes their wives & unmarried daughters.

• Buddhists, Jains, and Sikhs can also form a HUF.

• One person cannot form HUF, it can only be formed by a family.
• A HUF is automatically created at the time of marriage.

Domestic Company [Sec. 2(22A)]

Domestic company means an Indian company;
Foreign Company [Sec. 2(23A)]
Foreign company means a company which is not a domestic company.
Firm
As per sec. 4 of Indian Partnership Act, 1932, partnership means “relationship between
persons who have agreed to share profits of the business carried on by all or any one of them
acting for all”.
Persons, who enter into such business, are individually known as partners and such business
is known as a Firm. A firm is, though not having a separate legal entity, but has separate entity
in the eyes of Income-tax Act
Tax point:
► A partnership firm is a separate taxable entity apart from its partners.
► In Income tax, a Limited liability partnership shall be treated at par with firm.
Association of Persons (AOP) or Body of Individuals (BOI)
An AOP means a group of persons (whether individuals, HUF, companies, firms, etc.) who
join together for common purpose(s). Every combination of person cannot be termed as AOP.
It is only when they associate themselves in an income-producing activity then they become
AOP. Whereas, BOI means a group of individuals (individual only) who join together for
common purpose(s) whether or not to earn income.
Difference between AOP and BOI
► In case of BOI, only individuals can be the members, whereas in case of AOP, any person
can be its member i.e. entities like Company, Firm etc. can be the member of AOP but not of
BOI.
► In case of an AOP, members voluntarily get together with a common will for a common
intention or purpose, whereas in case of BOI, such common will may or may not be present.
Local Authority

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As per Sec. 3(31) of the General Clause Act, a local authority means a municipal committee,
district board, body of Port Commissioners, Panchayat, Cantonment Board, or other
authorities legally entitled to or entrusted by the Government with the control and management
of a municipal or local fund.
Artificial Juridical Person
Artificial juridical person are entities –
• which are not natural person;
• has separate entity in the eyes of law;
• may not be directly sued in a court of law but they can be sued through person(s) managing
them
E.g: Deities, Idols, University, Bar Council, etc.
Note: Under the Income-tax Act, such person has been provided exemption from payment of
tax under separate provisions of the Act, if certain conditions mentioned therein are satisfied.
E.g – Charitable trust etc.
4. ASSESSEE

Assessee” means,

a. a person by whom any tax or any other sum of money (i.e., penalty or
interest) is payable under this Act (irrespective of the fact whether any
proceeding under the Act has been taken against him or not);
b. every person in respect of whom any proceeding under this Act has
been taken (whether or not he is liable for any tax, interest or penalty)
for the assessment of his income or loss or the amount of refund due to
him;
c. a person who is assessable in respect of income or loss of another
person; E.g – Transfer of Income without transfer of assets, Income of
minor child, Income of taxpayer’s spouse.
d. every person who is deemed to be an assessee under any provision of
this Act; and E.g – Legal representative of deceased.
e. a person who is deemed to be an ‘assessee in default’ under any
provision of this Act. E.g. A person, who was liable to deduct tax but
has failed to do so, shall be treated as an ‘assessee in default.

Heads of Income

According to Sec.14 of the Act, all income of a person shall be classified under the following
five heads:
1. Salaries;
2. Income from house property;

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3. Profits and gains of business or profession;
4. Capital gains;
5. Income from other sources.
For computation of income, all taxable income should fall under any of the five heads of income
as mentioned above.
If any type of income does not become part of any one of the above mentioned first four heads,
it should be part of the fifth head, i.e. Income from other sources, which may be termed as the
residual head.
Significance of heads of income
• Income chargeable under a particular head cannot be charged under any other head.
• The Act has self-content provisions in respect of each head of income.
• If any income is charged under a wrong head of income, the assessee may lost the benefit
of deduction available to him under the correct head.

Distinguish between Heads of income and Sources of income

There are only five heads of income as per Sec. 14 of the Act, but the assessee may generate
the income from various sources.
In the same head of income, there may be various sources of income. E.g. under the head
‘Income from house property’, there may be two or more house properties and each house
property shall be termed as a source of income. The source of income decides under which
head (among the five heads) income shall be taxable.

Tax rates for AY 2021-22

- Income tax is to be charged at the rates fixed for the year by the Annual Finance Act.
In case of Individual/HUF/Association of Persons/Body of Individuals/Artificial Juridical Person

Total Income Range Rates of Income Tax

Up to Rs. 2,50,000 Nil
Rs. 2,50,001 to Rs. 5,00,000 5% of (Total Income – Rs. 2,50,000)
Rs. 5,00,001 to Rs. 10,00,000 Rs. 12,500 + 20% of (Total income – Rs.
5,00,000)
Rs.10,00,001 and above Rs. 1,12,500 + 30% of (Total income – Rs.
10,00,000)
In case of Senior citizen

Total Income Range Rates of Income Tax

Up to Rs. 3,00,000 Nil
Rs. 3,00,001 to Rs. 5,00,000 5% of (Total Income – Rs. 3,00,000)
Rs. 5,00,001 to Rs. 10,00,000 Rs. 10,000 + 20% of (Total income – Rs.
5,00,000)

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 Rs.10,00,001 and above Rs. 1,10,000 + 30% of (Total income – Rs.
10,00,000)

In case of Super Senior citizen

Total Income Range Rates of Income Tax

Up to Rs. 5,00,000 Nil
Rs. 5,00,001 to `10,00,000 20% of (Total income – Rs. 5,00,000)
Rs.10,00,001 and above Rs. 1,00,000 + 30% of (Total income – Rs.
10,00,000)

Special tax Rate for Individual and HUF (Sec 115BAD)

The Finance Act, 2020, has provided an option to Individuals and HUF for payment of taxes
at the following reduced rates from Assessment Year 2021-22 and onwards:

Total Income (Rs) Rate

Up to 2,50,000 Nil
From 2,50,001 to 5,00,000 5%
From 5,00,001 to 7,50,000 10%
From 7,50,001 to 10,00,000 15%
From 10,00,001 to 12,50,000 20%
From 12,50,001 to 15,00,000 25%
Above 15,00,000 30%

Surcharge

Surcharge is levied on the amount of income-tax at following rates if total income of an

assessee exceeds specified limits: -
Assessment Year 2021-22
Range of Income
Rs. 50 Lakhs to Rs. Rs. 1 Crore to Rs. 2 Rs. 2 Crores to Rs. 5 crores to Rs. 10 Exceeding
1 Crore Crores Rs. 5 Crores Crores Rs. 10
Crores
10% 15% 25% 37% 37%

Health & Education Cess

Applicable on: All assessee
Rate of cess: 4% of Tax liability after Surcharge

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Firm or Limited Liability Partnership (LLP)
A partnership firm (including limited liability partnership) is taxable at the rate of 30%
Surcharge:12% of income-tax (if total income exceeds Rs. 1 crore otherwise Nil)
Health & Education Cess: 4% of tax liability after surcharge
Company

Income-tax rates applicable in case of domestic companies for assessment year 2021-22 are as
follows:
Domestic Company Assessment Year 2021-
22
♦ Where its total turnover or gross receipt during the previous year 25%
2018-19 does not exceed Rs. 400 crore
♦ Any other domestic company 30%

Surcharge: -
The amount of income-tax shall be increased by a surcharge at the rate of 7% of such tax, where
total income exceeds one crore rupees but not exceeding ten crore rupees and at the rate of
12% of such tax, where total income exceeds ten crore rupees.

Foreign Company
Tax Rate - 40%
Health & Education Cess: 4% of tax liability after surcharge
Surcharge - 2% if total income exceeds Rs. 1 Crore but up to 10 Crore
- 5% if total income exceeds Rs. 10 Crore.
Local authority
Tax rate - 30%.
Surcharge: 12% of tax where total income exceeds Rs. 1 crore
Education cess: 4% of tax plus surcharge

Rounding-off of total income [Sec. 288A]

The total income so computed will have to be rounded off to the nearest multiple of Rs. 10, i.e.,
if the last figure in the ‘rupee element’ is Rs. 5 or more, it should be rounded off to the next
higher amount, which is a multiple of Rs. 10.
The ‘paise’ element should be ignored.
Thus, if the total income works out to Rs. 41,645, it should be rounded off to Rs. 41,650, but if it
works out to Rs. 41,644.98, it should be rounded off to Rs. 41,640.

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Rounding-off of tax [Sec. 288B]

The tax calculated on the total income should be rounded off to the nearest Rs. 10. Amount of
tax (including TDS or advance tax), interest, penalty, etc. and refund shall be rounded off to the
nearest Rs. 10.

PAN

PAN stands for Permanent Account Number. A PAN number is a ten-digit number in alphabets
and numerical, or in 'alphanumeric' terms, that is allocated by the income tax department to
all the taxpayers, and is unique with each individual. A PAN number helps the authorities keep
track of the financial activities of any individual, as PAN is integral to all forms of payments. A
PAN number is allotted through a laminated card, which is called a PAN card. A PAN card
contains information like PAN number, Name, DOB, and address.

Residential Status

- Residential status is determined in respect of each previous year. In other

words, residential status of a person may vary from one previous year to
another previous year
- A person can have only one residential status for a previous year i.e. he
cannot be a resident for one source of income and non-resident for another
source
- Citizenship and residential status are two different concepts. A citizen of India
may not be a resident in India for the purpose of income-tax.
- A person can have same residential status in more than one country
Resident in India
An individual is said to be a resident in India, if he satisfies any one of the following
conditions –
i) He is in India in the previous year for a period of 182 days or more [Sec. 6(1)(a)]; or
ii) He is in India for a period of 60 days or more during the previous year and for 365 or
more days during 4 previous years immediately preceding the relevant previous year
[Sec. 6(1)(c)]

Tax point: Given Conditions are alternative in nature i.e. assessee needs to satisfy
any one condition.

Non-Resident in India

An assessee who is not satisfying sec. 6(1) shall be treated as a non-resident in

India for the relevant previous year.

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 Illustration 1

Sam came to India first time during the P.Y. 2019-20. During the previous year, he
stayed in India for (i) 50 days; (ii) 183 days; & (iii) 153 days.

Determine his residential status for the A.Y. 2020-21.

Solution

(i) Since Sam resides in India only for 50 days during the P.Y. 2019-20, he does
not satisfy any of the conditions specified in sec. 6(1). He is, therefore, a non-
resident in India for the P.Y. 2019-20.
(ii) Since Sam resides in India for 183 days during the previous year 2019-20, he
satisfies one of the conditions specified in sec. 6(1). He is, therefore, a
resident in India for the P.Y. 2019-20.
(iii) Sam resides in India only for 153 days during the previous year 2019-20.
Though he resided for more than 60 days during the previous year but in 4
years immediately preceding the previous year (as he came India first time),
he did not reside in India. Hence, he does not satisfy any of the conditions
specified in sec. 6(1). Thus, he is a non-resident for the P.Y. 2019-20.
A resident individual in India can further be categorised as –
i) Resident and ordinarily resident in India
ii) Resident but not ordinarily resident in India
Resident and ordinarily resident
If a resident individual satisfies the following two additional conditions, he will be treated
as resident & ordinarily resident in India –
a) He has been resident in India [as per sec. 6(1)] in at least 2 out of 10 previous years
immediately preceding the relevant previous year; and
b) He has resided in India for a period of 730 days or more during 7 previous years
immediately preceding the relevant previous year.
Taxpoint: - To be a Resident & Ordinarily resident in India, one has to satisfy at least
one condition of sec. 6(1) & both the additional conditions of sec. 6(6).
Resident but not ordinarily resident
If a resident individual does not satisfy both additional conditions as given u/s 6(6), he is
“Resident but not ordinarily resident in India”

Calculation of total income and tax payable

Step 1- Determination of residential Status

Step 2 – Classification of Income under different heads

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Step 3- Computation of Income under each head
Step 4 -Clubbing of Income of spouse, minor child etc.
Step 5 -Set off or carry forward and set off of losses
Step 6 -Computation of Gross total Income
Step 7 – Deduction from Gross total Income

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Step 8 -Total Income

Step 9 - Application of the rates of tax on the total Income

Step 10 - Surcharge/rebate under section 87A
Step 11- Health and education cess
Step 12 – Advance tax and tax deducted at source.
Step 13- Tax payable/Tax refundable.

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Advance Tax

Generally, tax on the income earned in the previous year is paid in the respective assessment
year, but in certain cases, an assessee may be required to pay tax during the previous year
itself, as Advance tax. The scheme of advance tax is based on the concept “Pay as you earn”.
Under this scheme assessee needs to estimate its income and tax liability of the previous year
and pay tax on basis of such estimation in the previous year itself.

Scheme of Advance tax [Sec.208]

Where the advance tax liability of the assessee is Rs. 10,000 or more, the assessee should
pay such tax in the previous year itself within the due date.

Due date for payment of advance tax

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Note - Where an assessee is a senior citizen (or super senior citizen) and does not have any
income chargeable under the head “Profits and gains of business or profession”, provision of
advance tax is not applicable. In other words, senior citizen not having business income is
not liable to pay advance tax.

Return of Income

As per section 139(1), it is compulsory for companies and firms to file a return of Income or
loss for every previous year on or before the due date in the prescribed form.
In case of a person other than a company or a firm, filing of return on or before the due date
is mandatory, if his total income or the total income of any other person in respect of which
he is assessable under this act during the previous year exceeds the exemption limit.
Note – Every person, being an individual or a HUF or an AOP/BOI, whether Incorporated or
not, or an artificial judicial person: -
- Whose total income or the total income of any other person in respect of
which he is assessable under the act during the previous year
- Without giving effect to the provisions of Chapter VI-A or section
54/54B/54D/54EC/54F.
- Exceeded the basic exemption limit
Is required to file a return of his income on or before due date.
The basic exemption limit is Rs. 2,50,000 for individuals/HUF/AOPs/BOIs and artificial
juridical persons, Rs. 300,000 for resident individual at the age of 60 years but less than 80
years and Rs. 500,000 for resident individuals of the age of 80 years or more at any time
during the previous year. These amounts denote the level of total income which is arrived at
after claiming the admissible deductions under Chapter VI-A and exemption under section
54/54B/54D/54EC/54F in respect of capital gain.
However, the level of income is the income to be considered for the purpose of filing of
return of income is the income before claiming the admissible deduction as mentioned
above.
Mandatory furnishing of return in case of high value transactions
A person (other than firm and company), who is not required to furnish a return as per
aforesaid provision, and who during the previous year:
a) has deposited an aggregate amount exceeding Rs. 1 crore in one or more current
accounts maintained with a banking company or a co-operative bank; or
b) has incurred expenditure of an aggregate amounts exceeding Rs. 2 lakh for himself or
any other person for travel to a foreign country; or
c) has incurred expenditure of an aggregate amount exceeding Rs. 1 lakh towards
consumption of electricity; or
d) fulfils such other conditions as may be prescribed, shall furnish a return of his income on
or before the due date in such form and verified in such manner and setting forth such other
particulars, as may be prescribed.

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Due dates of furnishing Return of Income

A return should be filed on or before the following due date (of respective assessment year):

Assessee Due date

Where the assessee is required to furnish a 30th November
report in Form 3CEB u/s 92E pertaining to
international transaction(s)
Where the assessee is a company not 31st October
having international transaction(s)
Any other assessee
- Where accounts of the 31st October
assessee are required to be
audited under any law
- Where the assessee is a 31st October
working partner in a firm and
the accounts of the firm are
required to be audited under
any law
- In any other case 31st July

FEE FOR DEFAULT IN FURNISHING RETURN OF INCOME [SEC. 234F]

Where a person required to furnish a return of income u/s 139, fails to do so within the due
date, he shall pay fee of:

Case Fees
Total income does not exceed Rs. 5 lakh Rs. 1000
Total income exceeds Rs. 5 lakhs
- - If the return is furnished on Rs. 5000
or before 31st December of
the assessment year
- In any other case Rs. 10,000

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