Taxation Policy in

Organization

Group Members
Prasad Shetty- 1222
Pooja Shetty-1220
Ankita Shetty- 1203
Natasha Mohta- 1210
Nikita Rai- 1218

Contents
Introduction
Definition
Purpose and Effects
Types of Taxes
Types of Direct Taxes
Types of Indirect Taxes
Additional Taxes under Direct & Indirect Taxes

Introduction
A tax is a financial charge or other levy

imposed upon a taxpayer (an individual or

legal entity) by a state or the functional
equivalent of a state such that failure to pay
is punishable by law. Taxes are also imposed
by many administrative divisions. Taxes
consist of direct or indirect taxes and may be
paid in money or as its labor equivalent.

Income Tax

Definition
According to Black's Law Dictionary, a tax is

a "burden laid upon individuals or property

owners to support the government, a payment
exacted by legislative authority." It is not a
voluntary payment or donation, but an
enforced contribution, imposed by
government whether under the name of toll,
duty, custom, excise, subsidy, etc.

Purpose and Effects

Money provided by taxation has been used by states

and their functional equivalents throughout history to

carry out many functions. Some of these include
expenditures on war, the enforcement of law and
public order, protection of property, economic
infrastructure (roads, legal tender, enforcement of
contracts, etc.), public works, social engineering,
subsidies, and the operation of government itself.
Governments also use taxes to fund welfare and public
services. A portion of taxes also go to pay off the
state's debt and the interest this debt accumulates.

Purpose and Effects (Cont)

All large businesses incur administrative costs in the process of

delivering revenue collected from customers to the suppliers of the

goods or services being purchased. Taxation is no different, the
resource collected from the public through taxation is always greater
than the amount which can be used by the government. The
difference is called the compliance cost and includes for example the
labor cost and other expenses incurred in complying with tax laws
and rules. The collection of a tax in order to spend it on a specified
purpose, for example collecting a tax on alcohol to pay directly for
alcoholism rehabilitation centre, is called hypothecation. This
practice is often disliked by finance ministers, since it reduces their
freedom of action. Some economic theorists consider the concept to
be intellectually dishonest since, in reality, money is fungible.

Purpose and Effects (Cont)

Some economists, especially neo-classical economists, argue

that all taxation creates market distortion and results in

economic inefficiency. They have therefore sought to identify the
kind of tax system that would minimize this distortion.

Since governments also resolve commercial disputes, especially

in countries with common law, similar arguments are

sometimes used to justify a sales tax or value added tax. Others
(e.g., libertarians) argue that most or all forms of taxes are
immoral due to their involuntary (and therefore eventually
coercive/violent) nature. The most extreme anti-tax view is
anarcho-capitalism, in which the provision of all social services
should be voluntarily bought by the person(s) using them.

Background :
10

Tax Revenue

Indirect Tax

Direct Tax
Income Tax ,
Wealth Tax

Tax Payer

Governmen
t

Income Tax

Service Tax ;
VAT ; Excise

Tax Payer

Manufacturer
/ Dealer

Governmen
t

Types of Taxes
There are basically 2 types of Taxes.

Direct Tax:- A Direct tax is a kind of charge, which is imposed

directly on the taxpayer and paid directly to the government by
the persons (juristic or natural) on whom it is imposed. A
direct tax is one that cannot be shifted by the taxpayer to
someone else.
2. Indirect Taxes:- An indirect tax is a tax collected by an
intermediary (such as a retail store) from the person who bears
the ultimate economic burden of the tax (such as the
customer). An indirect tax is one that can be shifted by the
taxpayer to someone else. An indirect tax may increase the
price of a good so that consumers are actually paying the tax
by paying more for the products.
1.

Types of Direct Tax

1.

Income Tax:Income Tax Act, 1961 imposes tax on the income of the
individuals or Hindu undivided families or firms or cooperative societies (other tan companies) and trusts
(identified as bodies of individuals associations of persons)
or every artificial juridical person. The inclusion of a
particular income in the total incomes of a person for
income-tax in India is based on his residential status.
There are three residential status, viz., (i) Resident &
Ordinarily Residents (Residents) (ii) Resident but not
Ordinarily Residents and (iii) Non Residents. There are
several steps involved in determining the residential status
of a person.

Types of Direct Tax (Cont)

All residents are taxable for all their income,

including income outside India. Non residents

are taxable only for the income received in
India or Income accrued in India. Not
ordinarily residents are taxable in relation to
income received in India or income accrued in
India and income from business or profession
controlled from India.

Types of Direct Taxes (Cont)

2. Corporation Tax:- The companies and
business organizations in India are taxed on the
income from their worldwide transactions under
the provision of Income Tax Act, 1961. A
corporation is deemed to be resident in India if it
is incorporated in India or if its control and
management is situated entirely in India. In case
of non resident corporations, tax is levied on the
income which is earned from their business
transactions in India or any other Indian sources
depending on bilateral agreement of that country.

Types of Direct Taxes (Cont)

3. Property Tax:- Property tax or 'house tax' is a local tax on

buildings, along with appurtenant land, and imposed on owners.

The tax power is vested in the states and it is delegated by law to
the local bodies, specifying the valuation method, rate band, and
collection procedures. The tax base is the annual ratable value
(ARV) or area-based rating. Owner-occupied and other properties
not producing rent are assessed on cost and then converted into
ARV by applying a percentage of cost, usually six percent.
Vacant land is generally exempted from the assessment. The
properties lying under control of Central are exempted from the
taxation. Instead a 'service charge' is permissible under
executive order. Properties of foreign missions also enjoy tax
exemption without an insistence for reciprocity.

Types of Direct Taxes (Cont)

4. Inheritance (Estate) Tax:- An inheritance tax (also known

as an estate tax or death duty) is a tax which arises on

the death of an individual. It is a tax on the estate, or
total value of the money and property, of a person who
has died. India enforced estate duty from 1953 to 1985.
Estate Duty Act, 1953 came into existence w.e.f. 15th
October, 1953. Estate Duty on agricultural land was
discontinued under the Estate Duty (Amendment) Act,
1984. The levy of Estate Duty in respect of property (other
than agricultural land) passing on death occurring on or
after 16th March, 1985, has also been abolished under
the Estate Duty (Amendment) Act, 1985.

Types of Direct Taxes (Cont)

5. Gift Tax:- Gift tax in India is regulated by the Gift Tax Act
which was constituted on 1st April, 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.
However, with effect from 1st October, 1998, gift tax got
demolished and all the gifts made on or after the date were
free from tax. But in 2004, the act was again revived
partially. A new provision was introduced in the Income Tax
Act 1961 under section 56 (2). According to it, the gifts
received by any individual or Hindu Undivided Family (HUF)
in excess of Rs. 50,000 in a year would be taxable.

Types of Indirect Taxes

1. Customs Duty:The Customs Act was formulated in 1962 to

prevent illegal imports and exports of goods.
Besides, all imports are sought to be subject to a
duty with a view to affording protection to
indigenous industries as well as to keep the imports
to the minimum in the interests of securing the
exchange rate of Indian currency. Duties of customs
are levied on goods imported or exported from
India at the rate specified under the customs Tariff
Act, 1975 as amended from time to time or any
other law for the time being in force.

Types of Indirect Taxes (Cont)

2. Central Excise Duty:- The Central Government
levies excise duty under the Central Excise Act, 1944
and the Central Excise Tariff Act, 1985. Central
excise duty is tax which is charged on such excisable
goods that are manufactured in India and are meant
for domestic consumption. The term "excisable
goods" means the goods which are specified in the
First Schedule and the Second Schedule to the
Central Excise Tariff Act 1985. It is mandatory to
pay Central Excise duty payable on the goods
manufactured, unless exempted eg; duty is not
payable on the goods exported out of India.

Types of Indirect Taxes (Cont)

3. Service Tax:- The service providers in India except

those in the state of Jammu and Kashmir are required to

pay a Service Tax under the provisions of the Finance Act
of 1994. The provisions related to Service Tax came into
effect on 1st July, 1994. Under Section 67 of this Act, the
Service Tax is levied on the gross or aggregate amount
charged by the service provider on the receiver. However,
in terms of Rule 6 of Service Tax Rules, 1994, the tax is
permitted to be paid on the value received. The interesting
thing about Service Tax in India is that the Government
depends heavily on the voluntary compliance of the
service providers for collecting Service Tax in India.

Types of Indirect Taxes (Cont)

4. Sales Tax:- Sales Tax in India is a form of tax that is

imposed by the Government on the sale or purchase of a

particular commodity within the country. Sales Tax is
imposed under both, Central Government (Central Sales
Tax) and State Government (Sales Tax) Legislation.
Generally, each State follows its own Sales Tax Act and
levies tax at various rates. Apart from sales tax, certain
States also imposes additional charges like works contracts
tax, turnover tax and purchaser tax. Thus, Sales Tax Acts
as a major revenue-generator for the various State
Governments. From 10th April, 2005, most of the States in
India have supplemented sales tax with a new Value Added
Tax (VAT).

Types of Indirect Taxes (Cont)

5. Value Added Tax:- The practice of VAT executed by State

Governments is applied on each stage of sale, with a particular apparatus

of credit for the input VAT paid. VAT in India classified under the tax slabs
are 0% for essential commodities, 1% on gold ingots and expensive stones,
4% on industrial inputs, capital merchandise and commodities of mass
consumption, and 12.5% on other items. Variable rates (State-dependent)
are applicable for petroleum products, tobacco, liquor, etc.

VAT can be computed by using any of the three methods: (a) Subtraction

method: The tax rate is applied to the difference between the value of
output and the cost of input. (b) The Addition method: The value added is
computed by adding all the payments that is payable to the factors of
production (viz., wages, salaries, interest payments etc). (c) Tax credit
method: This entails set-off of the tax paid on inputs from tax collected on
sales.

Applicability :- Indirect
Tax
23
Value Added Tax : Applicable on Dealer above Turnover of Rs.5.00 lacs
At the rate provided in Act (from 5% to 12%)
Central Excise Duty : Applicable on Manufacturer above Turnover of Rs.1.5 Cr
At the rate provided in Act as per commodity
Service Tax : Applicable on Service provider above service charges of Rs.10.00 lacs
At the rate provided in Act (12%)

Income Tax

Additional Taxes Under Direct & Indirect Taxes:1. Negative Income Tax:- In economics, a negative
income tax (abbreviated NIT) is a progressive
income tax system where people earning below a
certain amount receive supplemental pay from the
government instead of paying taxes to the
government.

Additional Taxes Under Direct & Indirect Taxes (Cont)

2. Capital Gain Tax:- Most jurisdictions imposing an

income tax treat capital gains as part of income

subject to tax. Capital gain is generally a gain on sale
of capital assets that is those assets not held for sale
in the ordinary course of business. Capital assets
include personal assets in many jurisdictions. Some
jurisdictions provide preferential rates of tax or only
partial taxation for capital gains. Some jurisdictions
impose different rates or levels of capital gains
taxation based on the length of time the asset was
held.

Additional Taxes Under Direct & Indirect Taxes (Cont)

3. Social Security Contributions:- Many countries

provide publicly funded retirement or health care systems.

In connection with these systems, the country typically
requires employers and/or employees to make compulsory
payments. These payments are often computed by reference
to wages or earnings from self-employment. Tax rates are
generally fixed, but a different rate may be imposed on
employers than on employees. Some systems provide an
upper limit on earnings subject to the tax. A few systems
provide that the tax is payable only on wages above a
particular amount. Such upper or lower limits may apply
for retirement but not health care components of the tax.

Additional Taxes Under Direct & Indirect Taxes (Cont)

4. Taxes on Payroll and Workforce:- Unemployment and
similar taxes are often imposed on employers based on total
payroll. These taxes may be imposed in both the country and
sub-country levels.

5. Expatriation Tax:- An Expatriation Tax is a tax on

individuals who renounce their citizenship or residence. The tax
is often imposed based on a deemed disposition of all the
individual's property. One example is the United States under the
American Jobs Creation Act, where any individual who has a net
worth of $2 million or an average income-tax liability of $127,000
who renounces his or her citizenship and leaves the country is
automatically assumed to have done so for tax avoidance reasons
and is subject to a higher tax rate.

Additional Taxes Under Direct & Indirect Taxes (Cont)

6. Transfer Tax:- Historically, in many, countries, a contract
needed to have a stamp affixed to make it valid. The charge for
the stamp was either a fixed amount or a percentage of the
value of the transaction. In most countries the stamp has been
abolished but stamp duty remains. Stamp duty is levied in the
UK on the purchase of shares and securities, the issue of bearer
instruments, and certain partnership transactions. Its modern
derivatives, stamp duty reserve tax and stamp duty land tax,
are respectively charged on transactions involving securities
and land. Stamp duty has the effect of discouraging speculative
purchases of assets by decreasing liquidity. In the United
States, transfer tax is often charged by the state or local
government and (in the case of real property transfers) can be
tied to the recording of the deed or other transfer documents.

Additional Taxes Under Direct & Indirect Taxes (Cont)

7. Wealth Tax:- Some countries' governments will

require declaration of the tax payers' balance sheet

(assets and liabilities), and from that exact a tax on
net worth (assets minus liabilities), as a percentage of
the net worth, or a percentage of the net worth
exceeding a certain level. The tax may be levied on
"natural" or legal "persons".

Additional Taxes Under Direct & Indirect Taxes (Cont)

8. License Fees:- Occupational taxes or license fees may

be imposed on businesses or individuals engaged in certain
businesses. Many jurisdictions impose a tax on vehicles.