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TAX MANAGEMETN

TAX MANAGEMENT OR PLANNING

 Meaning of Tax: The tax revenue is the most important source of public revenue. A tax is a compulsory
payment levied by the government on individuals or companies to meet the expenditure which is required
for public welfare
Classification of Taxes: The taxes have been variously classified. Taxes can be direct or indirect, they
can be progressive, proportional or regressive, and indirect taxes can be specific or ad-valorem. We spell
out below the meanings of these different types of taxes.
1. Direct Taxes are the taxes that are levied on the income of individuals or organisations. They include
Income tax, corporate tax, wealth tax and inheritance tax.
2. Indirect taxes are those paid by consumers when they buy goods and services.
3. Municipal or Local Taxes in India: The most known tax, which is levied by the local municipal
jurisdictions on the entry of goods, is known as the Entry Tax or the Octori Tax.
4. Income Tax: Income Tax in India includes all income except the agricultural income that is levied and
collected by the central government. This particular income is also shared with the states. The Income
Tax was incorporated in India from the year1860.
5. Consumption Tax: Consumption Tax is applicable on the consumption of any type of good or service.
This particular tax is based on consumption and not on income or labor. The Consumption Tax can be
regarded as a sales tax, as this tax is also regressive in nature like the other pure sales taxes. However,
there are some remedies by which the Consumption Tax can be made progressive in nature. Some of
the methods for reducing the regressive trait of this tax include use of exemptions, deductions,
graduated rates, or rebates. This will in other terms allow accumulation of savings exempting the tax
burdens.
6. Dividend Tax: Dividend Tax is type of an income tax which is levied on the payments made as the
dividend to the shareholders of the company paying the tax. Dividends are the shares of the profit of
the company which are the given to the shareholders.
7. Endowment Tax: Over the years Indian companies have been asking for a break from endowment
taxes so that they can provide the institutions with more funds. Prominent businessmen like Rajan
Mittal, the Vice Chairman cum Managing Director of Bharati Enterprises have lent their support
towards giving business organizations 100 percent break from endowment taxes.
8. Estate Tax of Inheritance Tax or Death Tax: Estate Tax, also referred as Death tax or Inheritance
Tax, is gaining prominence with the boom in the real estate market across the world. The Estate Tax
rates vary widely across countries all over the world.

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9. Flat Tax, also known as Flat Rate Tax: By Flat Tax or Flat Rate Tax it is indicated that the taxes on
household income and corporate profits are fixed at a constant rate. Generally household income
below a statutorily fixed level on the basis of the type and size of the household, are exempted from
paying Flat Taxes. This type of Flat Taxes is not a proper Flat Tax as there is a discrepancy between
the taxable income and the total income.
10. Fuel Tax: Fuel tax is also called as petrol tax, gas tax, gasoline tax, or fuel duty. The fuel tax is a type
of a sales tax which is imposed on the sale of fuel. The fuel tax is one of the important factors
pertaining to taxation in many countries.
11. Gift Tax: Gift tax in India is regulated by the Gift Tax Act which was constituted on April 1, 1958. It
came into effect in all parts of the country except Jammu and Kashmir. As per the Gift Act 1958, all
gifts in excess of Rs. 25,000, in the form of cash, draft, check or others, received from one who doesn't
have blood relations with the recipient, were taxable. More about Gift tax .
12. Sales Tax: Sales tax is levied when goods are sold or bought within a country or a state. More about
sales tax
13. S. E. T. or Self Employment Tax: Self-employment tax (SET) is a type of a taxation pertaining to the
social security tax and the medicare tax for the individuals those who are self employed, i.e., the
people engaged in business or commercial activity of some kind which is legally approved by the
Governmental authorities.
Characteristics/ principles of tax management/ tax planning
1. Productivity or Fiscal Adequacy
2. Elasticity of Taxation
3. Diversity
4. Taxation as in Instrument of Economic Growth
5. Taxation as an Instrument for Improving Income Distribution
6. Taxation for Ensuring Economic Stability.
Objectives of tax management/ tax planning

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 History, Present Act 1961
IMPORATANCE
The Taxation Structure of the country can play a very important role in the working of our economy.
Some time back the emphasis was on higher rates of Tax and more incentives. But recently, the
emphasis has shifted to Decrease in rates of taxes and withdrawal of incentives. While designing the
Taxation structure it has to be seen that it is in conformity with our economic and social objectives.
It should not impair the incentives to personal savings and investment flow and on the other hand it
should not result into decrease in revenue for the State. In our present day economy structure Income
Tax plays a vital role as a source of Revenue and a measure of removal economic disparity. Our
Taxation structure provides for Two types of Taxes --- DIRECT and INDIRECT ; Income Tax , Wealth
Tax and Gift Tax are Direct Taxes whereas Sales Tax and Excise Duties are Indirect Taxes.

HISTORY: The Income Tax was introduced in India for the first time in 1860 by British rulers
following the mutiny of 1857. The period between 1860 and 1886 was a period of experiments in the
context of Income Tax. This period ended in 1886 when first Income Tax Act came into existence. The
pattern laid down in it for levying of Tax continues to operate even to-day though in some changed
form. In 1918, another Act- Income Tax Act, 1918 was passed but it was short lived and was replaced
by Income Tax Act, 1922 and it remained in existence and operation till 31st. March, 1961.

PRESENT ACT: On the recommendation of Law Commission & Direct Taxes Enquiry Committee
and in consultation with Law Ministry a Bill was framed. This Bill was referred to a select committee
and finally passed in Sept. 1961. This Act came into force from 1st.April 1962 in whole of the country.
Income Tax Act, 1961 is a comprehensive Act and consists of 298 Sections. Sub-Sections running into
thousands Schedules, Rules, Sub-Rules, etc. and is supported by other Acts and Rules. This Act has
been amended by several amending Acts since 1961. The Annual Finance Bills presented to Parliament
along with Budget make far-reaching amendments in this Act every year.

 BASIC CONCEPTS OF TAX MANAGEMENT

1. PERSON [ Section 2(31) ]

The word “Person” is a very wide term and embraces in itself the following :

 Individual : It refers to a natural human being whether Male or Female , Minor or Major.
 Hindu Undivided Family (HUF) : It is a relationship created due to operation of Hindu Law.
The Manager of HUF is called “ Karta” and its member are called ‘Coparceners’.
 Company : It is an artificial person registered under Indian Companies Act 1956 or any other
Law.

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  Firm : It is an entity which comes into existence as a result of partnership agreement. The
Income Tax accepts only these entities as Firms which are accessed as Firms under Section 184
of the Act.
 Association of Persons (AOP) or Body of Individuals (BOI) : Co-operative societies,
MARKFED, NAFED, etc are the example of such persons. When persons combine together to
carry on a joint enterprise and they do not constitute partnership under the ambit of law, they are
assessable as an Association of Persons. An A.O.P. can have firms, companies, associations and
individuals as its members. A Body of Individual ( B.O.I.) cannot have non-individuals as its
members. Only natural human being can be members of a Body of Individuals.
 Local Authority : Municipality, Panchayat, Cantonment Board, Port Trust etc. are called Local
Authority.
 Artificial Judicial Person : Statutory Corporations like Life Insurance Corporation, a
University etc. are called Artificial Judicial Persons.

2. Assessee: Assessee means a person by whom income tax are any other some of the money is payable
under the act. It includes every person in the country.
3. Income: Income is money that an individual or business receives in exchange for providing a good
or service or through investing capital. Income is used to fund day-to-day expenditures.

Income includes

 Profit and Gains : For instance, Profit generated by a businessman is taxable as “Income”.
 Dividend : For instance, “Dividend” declared/paid by a company to a shareholders is taxable as
“ income” in the hands of shareholders .
 Voluntary contribution received by a Trust : In the hands of a Trust, income includes
voluntary contributions received by it. This rule is applicable in the following cases..
o Such contribution is received by a trust created wholly or partly for charitable or
religious purpose ; or
o Such contribution is received by a scientific research association ; or
o Such contribution is received by any fund or institution established for charitable
purposes ; or
o Such contribution is received by any university or other educational institutions or
hospital.

FEATURES OF “INCOME’

The following features of income can help a person to understand the concept of income.

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 1. Definite Source : Income has been compared with a fruit of a tree or a crop from the field. Fruit
comes from a tree and crop from fields. Thus the source of income is definite in both cases. The
existence of a source for income is somewhat essential to bring a receipt under the charge of tax.

2. Income must come from Outside : No one can earn income from himself. There can be no
income from transaction between head office and branch office. Contributions made by
members for the mutual benefit and found surplus cannot be termed as income of such group.

3. Tainted Income : Income earned legally or illegally remains income and it will be taxed
according to the provisions of the Act. Assessment of illegal income of a person does not grant
him immunity from the applicability of the provisions of other Act. Any expenditure incurred to
earn such illegal income is allowed to be deducted out of such income only.

4. Temporary or Permanent : Whether the income is permanent or temporary, it is immaterial

from the tax point of view.

5. Voluntary Receipt : The receipts which do not arise from the exercise of a profession or
business or do not amount to remuneration and are made for reasons purely of personal nature
are not included in the scope of total income.

6. Dispute regarding the Title : In case a person is receiving some income but his title to such
receipts is disputed, it will not free him from tax liability. The receipt of such income has to pay
tax.

7. Income in Money or Money’s worth : The income may be in Cash or in kind. It is taxable in
both cases

4. GROSS TOTAL INCOME (GTI) & TOTAL INCOME

U/s 14 the term “Gross Total Income” [ GTI ] means aggregate of incomes computed under the
following Five heads :

 Income under the head “Salaries”

 Income under the head “ House Property”

 Income under the head “Profit and Gains of Business or Profession”.

 Income under the head “Capital Gain”.

 Income under the head “ Other Sources”.

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 After aggregating income under various heads, losses are adjusted and the resultant figure is called “
Gross Total Income” [ GTI ]From Gross Total Income , Deductions u/s 80 are allowed. The resultant
figure is called “Total Income “ on which Rates of Taxes are applied

5. ASSESSMENT YEAR [ Section 2 (9) ]

“ Assessment Year” means the period of 12 months commencing on the 1st day of April every year.
In India, the Govt. maintains its accounts for a period of 12 months i.e. 1st April to 31st March every
year. As such it is known as Financial Year. The Income Tax department has also selected same year for
its Assessment procedure.

The Assessment Year is the Financial Year of the Govt. of India during which income a person relating
to the relevant previous year is assessed to tax. Every person who is liable to pay tax under this Act,
files Return of Income by prescribed dates. These Returns are processed by the Income Tax
Department Officials and Officers. This processing is called Assessment. Under this Income Returned
by the assessee is checked and verified.

Tax is calculated and compared with the amount paid and assessment order is issued. The year in which
whole of this process is under taken is called Assessment Year.At present the Assessment Year 2008-
2009 ( 1-4-2018 to 31-3-2019) is going on.

Example-
Assessment year 2018-19 which will commence on April 1, 2018, will end on March 31, 2019.Income
of Previous Year of an assessee is taxed during the next following Assessment Year at the rates
prescribed by the relevant Finance Act

6. PREVIOUS YEAR [ Section 3 ]

As the word ‘Previous’ means ‘coming before’ , hence it can be simply said that the Previous Year is
the Financial Year preceding the Assessment Year e.g. for Assessment Year 2008-2009 the Previous
Year should be the Financial Year ending 31st March 2008.

 Previous Year in case of a continuing Business : It is the Financial Year preceding the
Assessment Year. As such for the assessment year 2008-2009, the Previous Year for continuing
business is 2007-2008 i.e. 1-4-2007 to 31-3-2008.

 Previous Year in case of newly set up Business :The Previous Year in case of newly started
business shall be the period between commencement of business and 31st March next
following . e.g. in case of a newly started business commencing its operations on Diwali 2007,

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 the Previous Year in relation to Assessment Year 2008-2009. shall be the period between Diwali
2007 to 31 March 2008.

7. Rounding off: The taxable income and tax liability shall be rounded of to the nearest multiple of
rupees. The money may be
Exception vs deduction: If an income is exception from tax, it is not included in the computation of
income. Exception can never exceed the amount of income.
 CONCEPT OF INCOME
Income is money that an individual or business receives in exchange for providing a good or service or
through investing capital. Income is used to fund day-to-day expenditures. People aged 65 and under
typically receive the majority of their income from a salary or wages earned from a job.

RESIDENTIAL STATUS FOR INCOME TAX:

The taxability of an individual in India depends upon his residential status in India for any particular
financial year. The term residential status has been coined under the income tax laws of India and must
not be confused with an individual’s citizenship in India. An individual may be a citizen of India but
may end up being a non-resident for a particular year. Similarly, a foreign citizen may end up being a
resident of India for income tax purposes for a particular year.

Also to note that the residential status of different types of persons viz an individual, a firm, a company
etc is determined differently. In this article, we have discussed about how the residential status of an
individual taxpayer can be determined for any particular financial year

How to determine residential status?

For the purpose of income tax in India, the income tax laws in India classifies taxable persons as:

a. A resident

b. A resident not ordinarily resident (RNOR)

c. A non-resident (NR)

The taxability differs for each of the above categories of taxpayers. Before we get into taxability, let us
first understand how a taxpayer becomes a resident, an RNOR or an NR.

Resident

A taxpayer would qualify as a resident of India if he satisfies one of the following 2 conditions :

1. Stay in India for a year is 182 days or more or

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 2. Stay in India for the immediately 4 preceding years is 365 days or more and 60 days or more in the
relevant financial year

In the event an individual leaves India for employment during an FY, he will qualify as a resident of
India only if he stays in India for 182 days or more. This otherwise means, condition (b) above of 60
days would not apply to him

Resident Not Ordinarily Resident

If an individual qualifies as a resident, the next step is to determine if he/she is a Resident ordinarily
resident (ROR) or an RNOR. He will be a ROR if he meets both of the following conditions:

1. Has been a resident of India in at least 2 out of 10 years immediately previous years and

2. Has stayed in India for at least 730 days in 7 immediately preceding years

Therefore, if any individual fails to satisfy even one of the above conditions, he would be an RNOR.

Taxability

Resident: A resident will be charged to tax in India on his global income i.e. income earned in India as
well as income earned outside India.

NR and RNOR: Their tax liability in India is restricted to the income they earn in India. They need not
pay any tax in India on their foreign income.

Also note that in a case of double taxation of income where the same income is getting taxed in India as
well as abroad, one may resort to the Double Taxation Avoidance Agreement (DTAA) that India would
have entered into with the other country in order to eliminate the possibility of paying taxes twice.

9 Types of income exempted from tax:

1. Receipts from hindu undivided family

2. Interest income on savings bank
3. Shares from a partnership firm
4. Long term capital gains
5. Allowance for foreign services
6. Income from gratuity
7. Scholarships and awards
8. Computation of salary income
9. Voluntary retirement.
 AGRICULTURAL INCOME

What Is Agricultural Income?

Sec.10(1) exempts Agricultural Income from Income-Tax. Bu virtue of Sec.2(1)a the expression
“Agricultural Income” means :
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  Any Rent or Revenue derived from Land which is situated in India and is used for agricultural
purposes. [Sec. 2(1A)(a)]
 Any income derived from such land :
o Use for Agricultural purposes ; or
o Used for agricultural operations means- irrigating and harvesting , sowing, weeding,
digging, cutting etc. It involves employment of some human skill, labour and energy to
get some income from land. ; or

According to Sec. 2(1)(a) , if the following 3 conditions are satisfied, income derived from Land can be
termed as “Agricultural Income”.

Income derived from Land : It is essential that for any income to be termed as agricultural Land must
be effective and immediate source of Income and not indirect and secondary.

As a result, interest on arrears of land revenue, dividend paid by a company out of its profits which
included agricultural income also and salary paid to a manager for managing agricultural farms are not
agricultural incomes because in all these cases land is not the effective and immediate source of income.

Land is used for Agricultural Purposes: To term any income as agricultural income, it is necessary that
income must be the result of agricultural operations performed on agricultural land. Agriculture means
performance of some basic operations— irrigating and harvesting , sowing, weeding, digging, cutting
etc. it involves employment of some human skill, labour and energy to get some income form land.

Land is situated in India: To qualify the exemption u/s 10(1) of the Act, it is necessary that agricultural
income must be derived from land situated in India. In case income is derived from agricultural land
situated outside India or is from any non-agricultural land, it will not be exempted u/s 10(1). It is taxable
income under the head “Income from other Sources”.

Basics of House Property

A house property could be your home, an office, a shop, a building or some land attached to the building
like a parking lot. The Income Tax Act does not differentiate between a commercial and a residential
property. All types of properties are taxed under the head ‘income from house property’ in the income
tax return. An owner for the purpose of income tax is its legal owner, someone who can exercise the
rights of the owner in his own right and not on someone else’s behalf. When a property is used for the
purpose of business or profession or for carrying out freelancing work – it is taxed under the ‘income
from business and profession’ head. Expenses on its repair and maintenance are allowed as business
expenditure.

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 a. Self-Occupied House Property: A self-occupied house property is used for one’s own
residential purposes. This may be occupied by the taxpayer’s family – parents and/or spouse and
children. A vacant house property is considered as self-occupied for the purpose of Income Tax.
b) If more than one self-occupied house property is owned by the taxpayer, only one is considered
and treated as a self-occupied property and the remaining are assumed to be let out. The choice
of which property to choose as self-occupied is up to the taxpayer.
a. Let Out House Property: A house property which is rented for the whole or a part of the year is
considered a let out house property for income tax purposes
b. Inherited Property: An inherited property i.e. one bequeathed from parents, grandparents etc
again, can either be a self occupied one or a let out one based on its usage as discussed above.

Steps to Calculate Income from House Property

Here is how you compute your income from a house property:

a. Determine Gross Annual Value (GAV) of the property: The gross annual value of a self-
occupied house is zero. For a let out property, it is the rent collected for a house on rent.
b. Reduce Property Tax: Property tax, when paid, is allowed as a deduction from GAV of
property.
c. Determine Net Annual Value (NAV) : Net Annual Value = Gross Annual Value – Property
Tax
d. Reduce 30% of NAV towards standard deduction: 30% on NAV is allowed as a deduction
from the NAV under Section 24 of the Income Tax Act. No other expenses such as painting and
repairs can be claimed as tax relief beyond the 30% cap under this section.
e. Reduce home loan interest: Deduction under Section 24 is also available for interest paid
during the year on housing loan availed.
f. Determine Income from house property: The resulting value is your income from house
property. This is taxed at the slab rate applicable to you.
g. Loss from house property: When you own a self occupied house, since its GAV is Nil,
claiming the deduction on home loan interest will result in a loss from house property. This loss
can be adjusted against income from other heads.

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 Capital Gain

What is a Capital Gain?

Simply put, any profit or gain that arises from the sale of a ‘capital asset’ is a capital gain. This gain or
profit is considered as income and hence charged to tax in the year in which the transfer of the capital
asset takes place. This is called capital gains tax, which can be short-term or long-term. Capital gains are
not applicable when an asset is inherited because there is no sale, only a transfer. However, if this asset
is sold by the person who inherits it, capital gains tax will be applicable. The Income Tax Act has
specifically exempted assets received as gifts by way of an inheritance or will.

2. Defining Capital Assets

Here are some examples of capital assets: land, building, house property, vehicles, patents, trademarks,
leasehold rights, machinery, and jewellery. This includes having rights in or in relation to an Indian
company. It also includes rights of management or control or any other legal right. The following are
not considered capital asset:

a. Any stock, consumables or raw material, held for the purpose of business or profession

b. Personal goods such as clothes and furniture held for personal use

c. Agricultural land in rural India

d. 6½% gold bonds (1977) or 7% gold bonds (1980) or national defence gold bonds (1980) issued by the
central government

e. Special bearer bonds (1991)

f. Gold deposit bond issued under the gold deposit scheme (1999)

Definition of rural area (from AY 2014-15) – Any area which is outside the jurisdiction of a
municipality or cantonment board, having a population of 10,000 or more is considered a rural area.
Also, it should not fall within a distance (to be measured aerially) given below – (population is as per
the last census).

Distance Population

2 kms from local limit of If the population of the municipality/cantonment board is more
municipality or cantonment board than 10,000 but not more than 1 lakh

6 kms from local limit of If the population of the municipality/cantonment board is more

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 municipality or cantonment board than 1 lakh but not more than 10 lakh

8 kms from local limit of If the population of the municipality/cantonment board is more
municipality or cantonment board than 10 lakh

3. Types of Capital Assets?

1. Short-term capital asset An asset which is held for not more than 36 months or less is a short-term
capital asset. The criteria of 36 months have been reduced to 24 months in the case of immovable
property being land, building, and house property, from FY 2017-18. For instance, if you sell house
property after holding it for a period of 24 months, any income arising will be treated as long-term
capital gain provided that property is sold after 31st March 2017. 2. Long-term capital asset An asset
that is held for more than 36 months is a long-term capital asset. The reduced period of the
aforementioned 24 months is not applicable to movable property such as jewellery, debt-oriented mutual
funds etc. They will be classified as a long-term capital asset if held for more than 36 months as earlier.
Some assets are considered short-term capital assets when these are held for 12 months or less. This rule
is applicable if the date of transfer is after 10th July 2014 (irrespective of what the date of purchase
is). The assets are:

a. Equity or preference shares in a company listed on a recognized stock exchange in India

b. Securities (like debentures, bonds, govt securities etc.) listed on a recognized stock exchange in India

c. Units of UTI, whether quoted or not

d. Units of equity oriented mutual fund, whether quoted or not

e. Zero coupon bonds, whether quoted or not

When the above-listed assets are held for a period of more than 12 months, they are considered as long-
term capital asset. In case an asset is acquired by gift, will, succession or inheritance, the period this
asset was held by the previous owner is also included when determining whether it’s a short term or a
long-term capital asset. In the case of bonus shares or rights shares, the period of holding is counted
from the date of allotment of bonus shares or rights shares respectively.

 COMPUTATION OF TOTAL INCOME

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 Income-tax is charged on the Total Income of a Previous Year at the rates prescribed for the Assessment
Year. ‘Assessment Year’ means the period of 12 months commencing on April 1, every year. ‘Previous
Year’ is the financial year immediately preceding the assessment year.

A ‘resident’ tax payer is charged to income-tax on his global income, subject to a double taxation relief
in respect of foreign incomes taxed abroad. In the case of a ‘nonresident’, income-tax is charged only on
incomes received, accruing or arising in India or which are deemed to be received, accrued or arisen in
India. For the purpose of computing total income and charging tax thereon, income from various
sources is classified under the following heads:

A. Salaries
B. Income from House Property
C. Profits and Gains of business or profession
D. Capital Gains
E. Income from Other Sources

These five heads of income are mutually exclusive. If any income falls under one head, it cannot be
considered under any other head. Income under each head has to be computed as per the provisions
under that head. Then, subject to provisions of set off of losses between the heads of income, the income
under various heads has to be added to arrive at a gross total income. From this gross total income,
deductions under Chapter VIA are to be allowed to arrive at the total income.

Process of total income computation

1. Determination of residential status
2. Classification of income under different heads
3. Exclusion of income not chargeable to tax
4. Computation of income under each head
5. Clubbing of income of spouse, minor child etc.
6. Set-off or carry forward and set-off of losses
7. Computation of Gross Total Income.
8. Deductions from Gross Total Income
9. Total income
10.

 INDIRECT TAXES

In the case of indirect tax, the burden of tax can be shifted by the taxpayer to someone else. Indirect tax
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 has the effect to raising the price of the products on which they are imposed. Customs duty, central

excise, service tax and value added tax are examples of indirect tax.

Features of Indirect Taxes

 Payment and Tax Load - The service provider makes payment of indirect taxes and this is
transferred to a final consumer.
 Liability of Tax – Here the seller or service provider makes payment on indirect taxes which are
transferred to final consumer.
 Nature – Initially, indirect taxes used to have a regressive nature. Yet, now with the coming of
GST, they have become quite progressive.
 Evasion - Indirect taxes are hard to evade due to direct implementation through goods and
services.
 Investment and Saving - Most indirect taxes are largely growth-oriented since they de-motivate
the consumer and encourage savings.
 Social Coverage - The indirect tax has a much larger coverage since their charge falls upon each
individual buying products or services.

Types of Indirect Taxes

1. Goods and Services Tax: The law on GST was brought to action in July 2017, with 17 indirect taxes
under its purview. All major services and service tax has been subsumed under the GST-

On the state level:

 State excise duty

 Additional excise duty
 Service tax
 Countervailing duty
 Special additional custom duties

At the central level, it covers:

 Sales Tax
 Entertainment Tax
 Central sales Tax
 Octroi and entry Tax
 Purchase Tax
 Luxury Tax
 Taxes on lottery gambling and betting
 Levies on products outside GST purview:

Taxes on products that use alcohol and petroleum products.

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 2. Sales Tax: The tax levied on the sales of goods. The Union Government imposes this sales tax on the
Inter-State sale, while the sale tax on Intra-state sale is levied by the State Government. This tax has a
three-segment bifurcation along

 Inter-State Sale
 Sale during import/export
 Intra-State Sale

3. Service Tax: Service tax are indirect indices which taxpayers pay on various paid services. These paid
services include-

 Telephone
 Tour operator
 Architect
 Interior decorator
 Advertising
 Health centre
 Banking and financial service
 Event management
 Maintenance service
 Consultancy service
 Service tax interest is 15%

4. Value Added Tax: The state governments collect this category of taxes. For instance, when a person
buys a product that it is important, we pay an additional tax known as Value Added Tax. Paid to the
government, the VAT has a rate that is composed along nature of item and respective state of sale.
5. Custom Duty and Octroi Tax: Levied upon goods imported into the country from abroad. The tax of
custom duty is paid at the entry port of a country such as the airport. The rate of taxation is variable as
per product’s nature. Octroi is charged upon the goods entering a municipal zone.
6. Anti-Dumping Duty: This is levied upon goods that are exported at a rate less than the standard rate by
the nation to some other nation. This tax is levied upon by the Central government.
7. Newly Implemented Indirect Tax (GST) GST is a highly regarded tax system for the country. It is
amongst the latest indirect tax systems operating under the constitution of India. The importance of this
taxation regime lies in the fact that it covers under itself various other indirect taxes operating inside the
country. This tax regime has been brought in mark a change in the economy of the country and to lessen
the cascading effects from tax duties that deliver overall market inflation.

Advantages Of Indirect Taxes

 Contribution by the poor: Poor folk are outside the purview of direct taxes and this is the only
way that this section of the society contributes. This goes along the basic principle of giving
every person a share towards the growth of the country using state governments.

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  Convenient: Taxpayers are saved from indirect taxes since they are paid while buying things.
Also, it is easy for state authorities to gather this tax since they are direct upon collection from
the factories / ports, saving effort and time.

 Easy collection: Gathering these taxes is an automatic function performed when purchasing and
selling goods and services.

8. Excise Duty: Excise duty is an indirect tax form that is charged on the goods produced inside a country.
This duty is different from the custom duty. This is also known as CVAT, or Central Value Added Tax.
Scope and Applicability
Excise Duty means the tax to be paid by the manufacturer, on the goods manufactured in India, either at
the time of manufacture or at the time of removal of the goods. Excise Duty can be levied, only on the
fulfillment of the below mentioned conditions.
 The Duty is on Goods
 The Goods must be excisable
 The goods must be manufactured or produced
 Manufacture and Production must be in India

Types of Excise Duties

1. Basic Excise Duty (BED): This is the duty charged under section 3 of the Central Excises and Salt Act,
1944 on all excisable goods other than salt which are produced or manufactured in India. Basic Excise
Duty [also known as Central Value Added Tax (CENVAT)] is levied at the rates specified in Central
Excise Tariff Act.
2. Special Excise Duty (SED): As per the Section 37 of the Finance Act, 1978 Special excise Duty was
attracted on all excisable goods on which there is a levy of Basic excise Duty under the Central
Excises and Salt Act,1944. Special Excise Duty is levied at the rates specified in the Second Schedule
to Central Excise Tariff Act, 1985.
3. Education Cess on Excise Duty: Section 93 of Finance (No. 2) Act, 2004 states that education Cess is
'duty of excise', to be calculated on aggregate of all duties of excise including special excise duty or any
other duty of excise, but excluding education Cess on excisable goods.

UNIT 2

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17
THE DIFFERENCE BETWEEN ‘TAX PLANNING’ AND ‘TAX MANAGEMENT’ .

Tax Planning Tax Management

(i) The Objective of Tax Planning is to The objective of Tax Management is to comply with the
minimize the tax liability provisions of Income Tax Law and its allied rules.
(ii) Tax Planning also includes Tax Tax Management deals with filing of Return in time,
Management getting the accounts audited, deducting tax at source etc.
Tax Management relates to Past ,. Present, Future.
Past – Assessment Proceedings, Appeals, Revisions etc.
(iii) Tax Planning relates to future.
Present – Filing of Return, payment of advance tax etc.
Future – To take corrective action
(iv) Tax Planning helps in minimizing Tax Tax Management helps in avoiding payment of interest,
Liability in Short-Term and in Long Term. penalty, prosecution etc.
(v) Tax Planning is optional. Tax Management is essential for every assessee

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 UNITT – 2

INTRODUCTION: A tax levy is one of the harshest collection mechanism used by the IRS and state
taxing authorities. A levy is the legal seizure of taxpayers assets to satisfy back taxes owed. This is
different from a tax lien because a lien is only a claim to your assets while a levy is the actual seizure of
the assets.

Definition

1. Impose or collect an amount (such as a tax) by compulsion or legal authority.

2. The amount so collected.
3. Appropriation or seizure of a debtor's specific asset or property through a lawful process, or in
satisfaction of a judgment, for the payment of a debt or claim.

Levy Components Levy: The amount the Town raises through the property tax Levy Limit: The
amount of property tax imposed by the Town may only grow each year by 2 ½% of the prior year’s levy
limit, plus new growth, overrides or exclusions.

New Growth: The additional tax revenue generated by new construction, renovations and other
increases in the property tax base during a calendar year.

Debt Exclusions: An action taken by the community through a referendum vote to raise the funds
necessary to pay debt service costs for a particular project from the property tax levy, but outside the
limits under Proposition 2 ½%. This amount exists throughout the life of the debt.

TAX AVOIDANCE:

Lawful minimization of tax liability through sound financial planning techniques such as phasing the
sale of assets over a period long enough to effect maximum exemption from capital gains tax. Whereas
tax avoidance is legal, tax evasion is not.

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UNIT- 2

Tax Planning and Tax Management is what all wants currently every day, as on one hand none wants
to pay a lot of tax and on the opposite hand none wants to evade the tax because the implications ar
strict. That’s why folks elect tax coming up with and tax management as each ar the most effective
choice to lower the tax burden while not moving the spirit of the law.

 Tax Planning :- 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. It helps in minimizing Tax Liability in Short-Term and in Long Term.

NATURE OF TAX PLANNING

1. Tax is a legal collection

2. It is a personal obligation
3. It is a co pulsory contribution
4. It is imposed by government
5. Revenue collection
6. Socio economic objectives
7. It is a condition for payment

OBJECTIVES

1. Raising Public Revenue

2. Regulation and control
3. Reducing inequalities in income and growth
4. Bringing stability in business
5. Promoting capital
6. Political objective
7. Increase in national income

CONCEPT OF LEVY TAXATION

Levy: The amount the Town raises through the property tax Levy Limit: The amount of property tax
imposed by the Town may only grow each year by 2 ½% of the prior year’s levy limit, plus new growth,
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overrides or exclusions. New Growth: The additional tax revenue generated by new construction,
renovations and other increases in the property tax base during a calendar year. Debt Exclusions: An
action taken by the community through a referendum vote to raise the funds necessary to pay debt
service costs for a particular project from the property tax levy, but outside the limits under Proposition
2 ½%. This amount exists throughout the life of the debt..

COMPONENTS

1. It Is An Enforced Contribution
2. It is generally payable in money
3. It is proportionate in character
4. It is levied on persons, property.
5. It is levied by the law making body of the state

Taxation law principles:

Basic concepts by which a government is meant to be guided in designing and implementing an

equitable taxation regime. These include:

1. Adequacy: taxes should be just-enough to generate revenue required for provision of essential
public services.
2. Broad Basing: taxes should be spread over as wide as possible section of the population, or
sectors of economy, to minimize the individual tax burden.
3. Compatibility: taxes should be coordinated to ensure tax neutrality and overall objectives of
good governance.
4. Convenience: taxes should be enforced in a manner that facilitates voluntary compliance to the
maximum extent possible.

(5) Earmarking: tax revenue from a specific source should be dedicated to a specific purpose
only when there is a direct cost-and-benefit link between the tax source and the expenditure,
such as use of motor fuel tax for road maintenance.
5. Efficiency: tax collection efforts should not cost an inordinately high percentage of tax
revenues.
6. Equity: taxes should equally burden all individuals or entities in similar economic
circumstances.
7. Neutrality: taxes should not favor any one group or sector over another, and should not be
designed to interfere-with or influence individual decisions-making.
8. Predictability: collection of taxes should reinforce their inevitability and regularity.

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 9. Restricted exemptions: tax exemptions must only be for specific purposes (such as to
encourage investment) and for a limited period.
10. Simplicity: tax assessment and determination should be easy to understand by an average
taxpayer.
11. Canon of equality
12. simplicity

Rules for interpretation of statues:

The process of understanding expressions of the statute is called interpretation of statute. The object o0f
interpretation of statute is determining the intention of the legislature conveyed expressly or impliedly in
the language used.

For this rules which help to get the right interpretation of law are discussed below

1. Literal interpretation
2. Reasonable construction
3. Harmonious construction
4. Heydon’s rule or mischief rule
5. Exceptional construction
6. Ejusdem generis

A legal lexicon and legal maxims:

A legal maxim is an established rinciple or roposition. The latin term apparently a variant on maxima, is
not to be found in roman law with any meaning exactly analogous to that of a legal maxim in the
dedieval or modern sense of the word but the treatises of many of the roman jurists on regular
definitions and sententiae juris. A legal maxim or legal phrase elucidates or expounds a legal principle,
proposition or concept. There are many legal maxims, which are commonly used. This chapter
selectively seeks to explain some maxims/phrases, which are relevant to tax context.

METHODS USED BY TAXPAYERS TO MINIMIZE TAX LIABILITY.

The following methods are used to reduce the tax liability

1. Tax avoidance
2. Tax evasion
3. Tax planning
1. TAX AVOIDANCE:

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Tax avoidance refers to everything people and companies do legally to reduce their tax bill. If someone
gets an accountant to go through their books and advise them on how to legally pay less taxes, the
accountant is helping their client in their tax avoidance quest. Tax avoidance, which is legal, contrasts
with tax evasion, which is illegal. Tax evasion is the illegal practice of intentionally not paying taxes,
i.e. the method used by the person, company or entity is against the law. If you never complete your tax
return, when you know you should, you are probably guilty of tax evasion.

With tax avoidance, taxpayers are using tax law to obtain a tax advantage – a loophole – that the
authorities had never intended. The term contrasts with tax planning, which uses tax reliefs that the
government deliberately introduced to reduce people’s or company’s tax bills. Definition of tax
avoidance. Tax avoidance is a practice of using legal means to pay the least amount of tax possible.
This is different to tax evasion which is the practice of using illegal methods to avoid
paying tax. ... Tax planning involves usingtax reliefs for the purpose for which they were intended.

METHODS OF TAX AVOIDANCE

2. Legal entities
3. Country of residence
4. Double taxation

2. TAX EVASION
Tax evasion is the criminal act of using illegal means to avoid paying taxes. Tax evasion schemes are
plentiful, but all involve the misrepresentation of an individual’s or business’ income and/or assets when
reporting to the Internal Revenue Service, in order to reduce the amount of taxes they owe.
When a person reduces his total income by making false claims or by with holding the information
regarding his real income. So that his tax liability isreduced is known as tax evasion. The tax evader
reduces his taxable income by one or more of the following steps.
1. Unrecorded sales
2. Claiming bogus expensed
3. Charging personal expenses as business expenses
4. Submission of bogus receipts
Methods of tax evasion
1. Smuggling
2. Customs duty evasion
3. Value added tax evasion
4. Illegal income tax evasion
5. Understatement of receipts
6. Over estimation of business expenses.
CAUSES OF TAX EVASION

1. High rates of taxation

2. Complexity of tax laws
3. Inadequacy of powers
4. Storage of experienced personnel
5. Absence of deterrent punishment
6. Lack of publicity

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 7. Donation to political parties
8. Corrupt business practices.

REMEDIAL MEASURES TO CHECK TAX EVASION

1. Reduction in tax rates

2. Allowance of certain businss expenses
3. Regulation of donation to political parties
4. Uniform tax on agricultural income
5. Changes in penal provisions
6. Public opinion
7. Education to people.

DIFFERENCE BETWEEN TAX AVOIDANCE AND TAX EVASION

TAX PLANNING

It may be defined as an arrangement of ones financial and economic affairs by taking complete
legitimate benefits of all deductions exemptions, allowances and rebates so that tax liability reduces to
minimum. Actually the exemptions, deductions, rebates and relief have been procided by the legislature
to achieve certain social and economic goals.

FEATURES

1. It is legally recognised
2. It is moral
3. Levy
4. Payment transactions.

SCOPE OF TAX PLANNING

1. Location of the business

2. Nature and size of business
3. Forms of business organisations
4. Employees remuneration
5. Mergers
6. Non residents.

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OBJECTIVES;

1. Reduction in tax liability

2. Minimization of litigations
3. Productiove investment
4. Reduction in cost
5. Healthy growth of economy
6. Employment generation.

TYPES OF PAX PLANNING

1. Tax avasion
2. No tax planning
3. Basic tax planning
4. Advanced tax planning

IMPORTANCE

1. No tax planning would lead to least benefits

2. It is more reliable
3. It increase profits

 TAX MANAGEMENT: It is an integral part of tax planning it takes necessary precautions to

comply with legal formalities to a scheme of tax exemption or deduction are contemplated in a
scheme of tax planning.

DIFFERENCE BETWEEN TAX PLANNING AND TAX MANAGEMENT

Points Tax planning Tax management

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