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INDIAN TAX SYSTEM: AN INTRODUCTION
India has a well-developed three tiered tax structure, controlled by
the three major bodies of the country-Union government, the State
Governments and the Urban and Rural Local Bodies.
Indian taxation system has undergone extreme restructuring from
the past 20 years. The tax rates have been rationalized and tax laws
have been simplified resulting in better compliance, ease of tax
payment and better enforcement. The process ofrestructuring of
tax administration is going on in India and is a continuous process.
The Indian economic policy of 1991 brought a revolutionary
change in the Tax System in India by rationalization of the tax
rates, simplification of the tax laws, easy tax payment, reduction in
customs and excise duties, corporatetax, widening of the tax base
and modulating the tax administration. From April 01, 2005, many
states saw the introduction of a new tax- Value Added Tax (VAT)
which was levied in place of sales tax.
Indian government depends very much on the revenue generated
by the Tax collection. Indirect taxes shares two-thirds of the total
tax intake of the Indian government.
The Tax System in India asks taxpayers to file their returns in a
given period of time. The financial tax year in India starts from the
first day of April and ends with the last day of March. Every
business personality should present an annual return by October31
whereas salaried people need not submit any annual return.
India has a federal system of Government with clear demarcation
of powers between the Central Government and the State
Governments. Like governance, the tax administration is also
based on the principle of separation therefore well defined and
demarcated between Central and State Governments and local

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bodies. The tax on incomes, customs duties, central excise and
service tax are levied by the Central Government. The state
Government levies agricultural income tax (income from
plantations only), Value Added Tax (VAT)/ Sales Tax, Stamp
Duty, State Excise, Land Revenue, Luxury Tax and Tax On
Professions. The local bodies have the authority to levy tax on
properties, octroi/entry tax and tax for utilities like water supply,
drainage etc.
CONSTITUTIONALLY ESTABLISHED SCHEME
OF TAXATION
Article 246 of the Indian Constitution, distributes legislative
powers including taxation, between the Parliament of India and
the State Legislature. Schedule VII enumerates these subject
matters with the use of three lists;
 List - I entailing the areas on which only the parliament is
competent to make laws,
 List - II entailing the areas on which only the state legislature can
make laws, and
 List - III lists the areas on which both the Parliament and the State
Legislature can make laws upon concurrently,
Separate heads of taxation are is no head of taxation in the
Concurrent List (Union and the States have no concurrent power of
taxation). The list of thirteen Union heads of taxation and the list of
nineteen State heads is given below:

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Central Government:
S.
No.
Parliament of India
1 Taxes on income other than agriculture income (List I, Entry
82)
2 Duties of customs including export duties (List I, Entry 83)
3 Duties of excise on tobacco and other goods manufactured or
produced in India except (i) alcoholic liquor for human
consumption, and (ii) opium, Indian hemp and other narcotic
drugs and narcotics, but including medicinal and toilet
preparations containing alcohol or any substanceincluded in
(II). (List I, Entry 84)
4 Corporation Tax (List I, Entry 85)
5 Taxes on capital value of assets, exclusive of agricultural
land, of individuals and companies, taxes on capital of
companies (List I, Entry 86)
6 Estate duty in respect of property other than agricultural land
(List I, Entry 87)
7 Duties in respectof successionto property other than
agricultural land (List I, Entry 88)
8 Terminal taxes on goods orpassengers, carried by railway,
sea or air; taxes on railway fares and freight (List I, Entry 89)
9 Taxes other than stamp duties on transactions in stock
exchanges and futures markets (List I, Entry 90)
10 Taxes on the sale or purchase of newspapers and on
advertisements published therein (List I, Entry 92)
11 Taxes on sale or purchase of goods other than newspapers,
where such sale or purchase takes place in the courseof
inter-state trade or commerce (List I, Entry 92A)
12 Taxes on the consignment of goods in the course of inter-
state trade or commerce (List I, Entry 93A)

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State Government:
S.
No.
State Legislature
1 Land revenue, including the assessment and collection of
revenue, the maintenance of land records, survey for revenue
purposes and records of rights, and alienation of revenues
(List II, Entry 45)
2 Taxes on agricultural income (List II, Entry 46)
3 Duties in respectof successionto agricultural income (List
II, Entry 47)
4 Estate Duty in respectof agricultural income (List II, Entry
48)
5 Taxes on lands and buildings (List II, Entry 49)
6 Taxes on mineral rights (List II, Entry 50)
7 Duties of excise for following goods manufactured or
produced within the State (i) alcoholic liquors for human
consumption, and (ii) opium, Indian hemp and other narcotic
drugs and narcotics (List II, Entry 51)
8 Axes on entry of goods into a local area for consumption,
use or sale therein (List II, Entry 52)
9 Taxes on the consumption or sale of electricity (List II, Entry
53)
10 Taxes on the sale or purchase of goods other than
newspapers (List II, Entry 54)
11 Taxes on advertisements other than advertisements published
in newspapers and advertisements broadcastby radio or
television (List II, Entry 55)
12 Taxes on goods and passengers carried by roads or on inland
waterways (List II, Entry 56)
13 Taxes on vehicles suitable for use on roads (List II, Entry 57)
14 Taxes on animals and boats (List II, Entry 58)
15 Tolls (List II, Entry 59)
16 Taxes on profession, trades, callings and employments (List
II, Entry 60)
17 Capitation taxes (List II, Entry 61)

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Any tax levied by the government which is not backedby law
or is beyond the powers of the legislating authority may be
struck down as unconstitutional.
History
Income tax is today an important sourceof revenue for government
in all the countries.
More than 3,000 years ago, the inhabitants of ancient Egypt and
Greece used to pay income tax, consumption taxes and custom
duties.
Income-tax was first introduced in India in 1860 by James Wilson
who become Indian’s first Finance Member.
INCOME-TAX AUTHORITIES
Central Government: - Income-tax, Excise Duty and Customs
Duty.
State Governments: - Sales tax, VAT, Excise and tax on
agricultural income.
Municipalities: - Octroiand House property tax
IMPORTANCE’S OF TAX
Economic growth
Government revenue
Private savings
Restraining the consumer demand

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WHAT IS TAX?
A tax may be defined as a "pecuniary burden laid upon individuals
or property owners to supportthe government, a payment exacted
by legislative authority. India has a well-developed taxation
structure.
TYPES OF TAXES
DirectTax (Central Board of DirectTaxes):This kind of tax is
named so as such a tax is directly paid to the Union Government of
India. A direct tax is one that cannot be shifted by the taxpayer to
someone else.
Types of Direct Tax: -
1.Individual Income Taxand Corporate Tax
2. WealthTax
3.CapitalGains Tax
4.Securities TransactionAct
1) Indirect tax (Central BoardOf Excise and Customs):An
indirect tax is a tax collected by an intermediary (such as a retail
store) from the personwho 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.
Types of Indirect Tax:-
1.Excise Duty
2.CustomDuty
3.Service tax
4.Value Added Tax
3.CentralSales Tax

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TAX SYSTEM IN INDIA IS A THREE TIER
SYSTEM:
Central Govt State Government LocalBodies
IncomeTax Sales Tax Tax on properties
Service Tax Stamp Duty Octroi
CustomDuties State Excise Tax on Market
Central Excise Land Revenue User Charges for
Sales Tax Duty on Entertainment utilities like water
nm Tax on Profession supply,etc
WHO ARE LIABLE FOR TAX?
1. Individuals: - If an individual who satisfies understatedboththe
conditions of section6 of the Income-tax Act, thenhe becomes a
non-resident.
Condition Status :- He is not in India for 182 days or more during
the relevant previous year. If yes, then he is a non-resident. (so
check the next condition.). He is not in India for 60 days or more
during the previous year and he is not in India for 365 days or more
during the 4 years prior to the previous year. If yes, then he is a
non-resident. If you are not satisfying any of
the above conditions to become non-resident, check whether
following assists you to becomea non-resident.
2. Hindu Undivided families :- As per section 6(2), a Hindu
undivided family (like an individual) is either resident in India or
non-resident in India. A resident Hindu undivided family is either
ordinarily resident or not ordinarily resident.
A Hindu undivided family is said to be resident in India if control
and management of its affairs is wholly or partly situated in India.
A Hindu undivided family is non-resident in India if controland
management of its affairs is wholly situated outside India.

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3. Companies: - As per section 6(3), an Indian company is always
resident in India. A foreign company is resident in India only if,
during the previous year, control and management of its affairs is
situated wholly in India. However, a foreign company is treated as
non-resident if, during the previous year, control and management
of
its affairs is either wholly or partly situated out of India.
4. Firms (partnerships) :- As per section 6(2), a partnership firm and
an association of persons are said to be resident in India if control
and management of their affairs are wholly or partly situated
within India during the relevant previous year. They are, however,
treated as non-resident in India if control and management of their
affairs are situated holly outside India.
5. Association of persons or bodies of individuals
6. Local authority (municipal bodies)
7. Artificial juridical person .

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BASIC CONCEPTS – DEFINITIONS
1. Assessee– section2(7)
Any personwho is liable to pay any tax or any other sum under the
Income Tax Act, 1961
Assesseeincludes:-
(a) Every personin respect of whom any proceedings has been
taken for the assessment.
(b) Every personwho is deemed to be an assesseeunder the Act.
(c) Every personwho is deemed to be an assesseein default under
the Act.
2. Assessment– section2 (8)
Process of determining and computing the amount of income and
tax dues of a person.
3. Assessmentyear– section2(9)
AssessmentYear means the period of twelve months commencing
on the 1st day of April every year.
The year for which tax is paid is called Assessment Year.
The present Assessment Year is 2013-14 relating to previous year
2012-2013.
4. Person– section2(31)
According to law an assesseeis a personby whom any tax is
payable. Person includes
j An individual A firm
n A HUF A local authority
n A company
5. Previous year – section3
Year in which the income is received.
Always ends on 31st march.
6. Capital Asset:[Section2(14)]

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TYPES OF DIRECT TAX
INCOME TAX
Income Tax Act, 1961 imposes tax on the income of the
individuals or Hindu undivided families or firms or co-operative
societies (other than companies) and trusts (identified as bodies of
individuals associations of persons)or every artificial juridical
person. There are three residential status, viz.,
(i) Resident& Ordinarily Residents (Residents)
(ii) Resident but not Ordinarily Residents and
(iii) Non Residents.
DETERMINATIONOF RESIDENTIAL STATUS [SECTION
6]
Total income of an assesseecannot be computed unless the
person’s residential status in India during the previous year is
known. Section 6 of the Income-tax Act prescribes the tests to be
applied to determine the residential status of all tax payers for the
purposes ofincome-tax. According to the provisions relating to
residential status, a person can either be;
(i) Residentin India or
(ii) Non-resident in India
However, individual and HUF cannot be simply called resident in
India. If individual or HUF is a resident in
India, they will be either;
(a) Resident and ordinarily resident in India (ROR) or
(b) Resident but not ordinarily resident in India (RNOR or
NOR).
Persons other than individual and HUF will be either resident in
India or non-resident in India.
1. ResidentialStatus of Individual [Section6(1) and 6(6)]
Provisions relating to determination of residential status of
individuals are summarised as follows:
Resident If satisfies any one of the two basic conditions.
Non-Resident If does not satisfy any one of the two basic
conditions.

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Basic Conditions
1. Stay of Individual in India should be 182 days or more during
relevant Previous Year (PY); OR
2. Stay of Individual in India should be 60 days or more during
relevant PY and 365 days or more during 4 PYs immediately
preceding relevant PY.
Exception to Basic Conditions
In following cases, only 1st Basic condition needs to be checked:
1. Indian Citizen
- who comes on a visit to India during relevant PY; or
- who is a crew member of an Indian Ship; or
- who goes abroad for employment purposes.
2. Personof Indian Origin (who himself or his parents or his
grandparents were born in undivided India) who comes on a visit to
India during relevant PY
ROR If Resident Individual satisfies both the additional conditions.
RNOR If Resident Individual does not satisfy both the additional
conditions.
Additional Conditions
1. Individual should be resident (by satisfying any of the two basic
conditions or
first basic condition, if falls in exception to basic conditions) in at
least 2 PYs out of 10 PYs immediately preceding relevant PY; and
2. Stay of Individual in India should be 730 days or more during 7
PYs immediately preceding relevant PY.

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CORPORATE TAX
ACCORDING TO COMPANIES ACT 1956
DOMESTIC COMPANIES:
• Domestic Corporations / Private Limited Companies 33.99%
• Domestic Corporations / Public Limited Companies 33.99%
• Limited Liability Partnership (LLP's) 30.9%
THE ABOVE TAX RATES INCLUDES SURCHARGE
FOREIGN COMPANIES
• Dividends20% Interest Income 20%
• Royalties 30% Technical Services30%
• Other income 55%
THE ABOVE TAX RATES INCLUDES SURCHARGE
WEALTH TAX
Wealth tax, in India, is levied under Wealth-tax Act, 1957. Wealth
tax is a tax on the benefits derived from property ownership. The
tax is to be paid year after year on the same property on its market
value, whether or not such property yields any income. Similar to
income tax the liability to pay wealth tax also depends upon the
residential status of the assessee. The assets chargeable to wealth
tax are Guest house, residential house, commercial building, Motor
car, Jewellery, bullion, utensils of gold, silver, Yachts, boats and
aircrafts, urban land, cash in hand (in excess of INR 50,000 for
Individual & HUF only), etc. But in reality majority of the
potential taxpayers do not pay this tax as most of the movable
items such as jewellery, bullion etc are stashed away from
accounting. Invariably they just pay tax for the immovable wealth
such as real estate.

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ASSETS EXEMPTED FROM WEALTH TAX
Property held under a trust.
Interest in the property of HUF for a family member.
Residential building of an ex-ruler.
Jewellery of an ex-ruler.
Any house or plot of an individual or HUF up to 500 sq meters.
CAPITAL GAINS TAX
The central government also charges tax on the capital gains that is
derived from the sale of the assets. The capital gain is the
difference between the money received from selling the asset and
the price paid for it. To restrict the misuse of this provision, the
definition of capital asset is being widened to include personal
effects such as archaeological collections, drawings, paintings,
sculptures or any work of art.
Capital gain also includes gain that arises on “transfer” (includes
sale, exchange) of a capital asset and is categorized into short-term
gains and long-term gains. The Long-term Capital Gains Tax is
charged if the capital assets are kept for more than three years or 12
months in the case of securities and shares that are listed under any
recognized Indian stockexchange or mutual fund. Short-term
Capital Gains Tax is applicable if the assets are held for less than
the aforesaid period.
In case of the long term capital gains, they are taxed at a
concessionrate. Normal corporateincome tax rates are applicable
for short term capital gains. In case of the short term and long term
capital losses, they are allowed to be carried forward for 8
consecutive years.

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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'thave blood relations with the
recipient, were taxable.
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.

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TYPES OF INDIRECT TAXES
Excise Duty
The central government levies excise duty under the Central Excise
act of 1944 and the Central Excise Tariff Act of 1985. Central
Excise duty is an indirect tax levied on goods manufactured in
India and meant for domestic consumption. The Central Board of
Excise and Customs under the Ministry of Finance, administers the
excise duty. Central Excise Duty arises as soonas the goods are
manufactured. It is paid by a manufacturer, who passes on its
incidence to the customers. Excisable goods have been defined as
those, which have been specified in the Central Excise Tariff Act
as being subjected to the duty of excise.
There are three main types of excise duty –
 Basic Excise Duty is charged on all excisable goods other
than salt at the rates mentioned in the said schedule.
 Additional Duties of Excise is charged on goods of special
importance, in lieu of sales Tax and shared between Central
and State Governments.
 SpecialExcise Duty is charged on all excisable goods on
which there is a levy of Basic excise Duty. Every year the
annual Budget specifies if Special Excise Duty shall be or
shall not be levied and collected during the relevant financial
year.
Note:Under the Cenvat (Central Value Added Tax) Scheme,
introduced under The Cenvat Credit Rules, 2004, a manufacturer of
productor provider of taxable service shall be allowed to take
credit of duty of excise as well as of service tax paid on any input
received in the factory or any input service received by
manufacturer of final product. Such credits can be used to set off
any excise duty tax payable.

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In the recent budget, a number of tax exemptions have been
initiated. Specific goods enjoy concessionalduty rates. Exemptions
are allowed to taxpayers engaged in the manufacture of certain
goods suchas, water treatment, bio-diesel, processed food etc. and
certain types of establishments such as small scale industries,
cottage industries that create jobs are also exempted.
Customs Duty
Customs duty in India falls under the Customs Act 1962 and
Customs Tariff Act of 1975. Customs duty is the tax levied on
goods imported into India as well as on goods exported from India.
Taxable event is import into or export from India. Additionally
educational cess is also charged. The customs duty is evaluated on
the value of the transaction of the goods. TheCentral Board of
Excise and Customs under the Ministry of Finance manages the
customs duty process in the country. The rate at which customs
duty is applicable on the goods depends on the classification of the
goods determined under the Customs Tariff. The Customs Tariff is
generally aligned with the Harmonized System of Nomenclature
(HSL). It should be noted that preferential/concessional rates of
duty are also available under the various Trade Agreements.
The various types of duties leviable are as follows:
Basic Duty: This duty is levied on imported goods under the
Custom Act, 1962.
Additional Duty (Countervailing Duty): This is levied under
section 3 (1) of the Custom Tariff Act and is equal to excise duty
levied on a like productmanufactured or produced in India. If a
like productis not manufactured or produced in India, the excise
duty that would be leviable on that producthad it been
manufactured or produced in India is the duty payable.

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Anti – Dumping Duty: Sometimes, foreign sellers abroad
may export into India goods at prices below the amounts
charged by them in their domestic markets in order to
capture Indian markets to the detriment of Indian industry.
This is known as dumping. In order to prevent dumping, the
Central Government may levy additional duty equal to the
margin of dumping on such articles.
Service Tax
Service tax was introduced in India way back in 1994 and started
with mere 3 basic services viz. general insurance, stockbroking
and telephone. SubsequentBudgets have expanded the scopeofthe
service tax as well as the rate of service tax. More than 100
services are subjected to tax under this provision. An education
cess is also charged on the tax amount. The Central Board of
Excise and Customs under the Ministry of Finance manages the
administration of service tax.
Every service provider of a taxable service is required to register
with the Central Excise Office in the concerned jurisdiction.
Exemptions are available for services that are exported, small
service providers whose revenue fall below the prescribed level,
services provided to UN and International Agencies and supplies to
SEZ (Special Economic Zones). Subject to conditions, service tax
is not payable on value of goods and material supplied while
providing services.

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Securities Transaction Tax
Transactions in equity shares, derivatives and units of equity-
oriented funds entered in a recognized stockexchange attract
Securities Transaction Tax. Service Tax, Surcharge and Education
Cess are not applicable on STT. Taxation of profit or loss from
securities transactions depends on whether the activity of
purchasing and selling of shares / derivatives is classified as
investment activity or business activity. Treatment of STT also
depends upon whether the income from these securities
transactions are included under the head “Income from Capital
Gains” or under the head ‘Profits and Gains of Business or
Profession’.
Note:The Indian Government is keen on merging all taxes like
Service Tax, Excise and VAT into a common Goods and Service
Tax (GST). GST system has been proposed in order to simplify
current indirect tax system which is very tedious and complicated.
All goods and services will be brought into the GST base. There
will be no distinction between goods and services. Alcohol,
tobacco, petroleum products are likely to be out of the GST regime.
The state and central combined tax rate is speculated to be between
16%-20% in line with the global trend. Originally slated for
implementation by the year 2010 it has been postponed twice and
now scheduled for the year 2012. The central and state tax
authorities which had locked horns earlier are seemingly nearing a
consensus. If implemented this will be the mostoutstanding reform
ever to the Indian tax system.

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Value Added Tax
Sales tax charged on the sales of movable goods has been replaced
with VAT in most of the Indian states since 2005. This was
introduced to counter the rampant double taxation issues and
resultant cascading tax burden that occurred due to the flaws
inherent in the previous sales tax system.
VAT, chargeable only on goods and does not include services, is a
multi-stage system of taxation, whereby tax is levied on value
addition at each stage of transaction in the supply chain. The term
‘value addition’ implies the increase in value of goods and services
at each stage of production or transfer of goods and services. VAT
is a tax on the final consumption of goods orservices and is
ultimately borne by the consumer. VAT comes under the state list.
Taxpayers can claim credit for the taxes paid at earlier stages and
purchases known as an Input Tax Credit, by producing relevant tax
invoices. The credit can be used to set off any VAT tax liability.
Different rates of VAT are charged depending on the category to
which the goods belong. Rates vary for essential commodities,
bullion and valuable stones, industrial inputs and capital goods of
mass consumption, and others. Petroleum tobacco, liquor and so on
are subjected to higher rate and differ from state to state.
Notably, there is no VAT on imports and export sales are not
subjected to VAT. Therefore VAT charged on inputs purchased
and used in the manufacture of export goods orgoods purchased
for export, is available as a refund.
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 item

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Stamp Duty
It is a tax that is levied on the transaction performed by means of a
document or instrument as per the regulations of Indian Stamp Act,
1899. It is collected by the government of the state where the
transaction is carried out. Stamp duty rates vary between the states.
Stamp duty is paid on instruments, which are essentially a
document to create, transfer, limit, extend, extinguish or record a
right or liability. Document acquires legality once it is stamped
properly after the payment of the requisite stamp duty charges.
Stamp duty is payable for transfer of shares, share certificate,
partnership deed, bill of exchange, shares, share transfer, leave and
license agreement, debentures, gift deed, bank guarantee, bonds,
demat shares, development agreement, demerger, power of
attorney, home loans, houses & house purchase, lease deed, loan
agreement and lease agreement.
State Excise
Power to impose excise on alcoholic liquors, opium and narcotics
is granted to States under the Constitution and it is called ‘State
Excise’. The Act, Rules and rates for excise on liquor are different
for each State.
In addition to the above taxes by the Central and State
Governments the local bodies have the authority to levy tax on
properties, octroi/entry tax and tax on utilities.

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INCOME EXEMPT FROM TAX
1. Agriculturalincome sec 2(1A)
2. Sum received by a member from HUF
3. Tax-free income under the head salary
4. Exempted to former ruler: sec – 10 (19A)
5. Awards: sec – 10(17A)
6. Income of local authority: Sec – 10(20)
7. Any sum received under a life insurance policy
8. Income of any regimental fund of the armed forces
9. Income of certain national funds; sec – 10(23-c)
10.Income of mutual funds
11.Income of Registered Trade union – section 10(24)
12. Income of provident funds: sec – 10(25)
13. Relief to foreign Govt. Employees
14. Relief to foreign companies
15. Incomes of non-residents
16. Interest on certain securities: sec-10(15)
17. Share of profit from partnership firm
18. Income of SAARC fund
19. Capital gain on transfer of US 64 units of the UTI
20. Exemption to political parties – section 13A

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OTHER KEY NOTES
Periodic returns must be submitted by companies registered for
CENVAT or VAT/CST or Service Tax in India.
 CENVAT filings are monthly, on the 10th day following the
period end.
 VAT reporting is either monthly or quarterly, depending on
the particular State’s rules.
 Service Tax filings are bi-annual.
Permanent Account Number (PAN)
PAN is an all India, unique ten-digit alphanumeric number, issued
in the form of a laminated card by the Income Tax Department.
Who must have a PAN :-
Every person,
 If his total income or the total income of any other person in
respect of which he is assessable, during any previous year,
exceeded the maximum amount which is not chargeable to
income-tax; or
 Carrying on any business or profession whose total sales,
turnover or gross receipts are or is likely to exceed INR
500,000 in any previous year; or
 Who is required to furnish a return of income or
 Being an employer, who is required to furnish a return of
fringe benefits
PAN is increasingly being recognized as a valid Identity Proof
across India and a mandatory document for important transactions
such as purchase of property, motor vehicles, share transactions,
opening of bank accounts, obtaining loans, maintaining deposits

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etc., therefore any person not fulfilling the above conditions may
also apply for allotment of PAN.
Tax deduction at Source (TDS)
The Income-tax Act enjoins on the payer of specific types of
income, to deducta stipulated percentage of such income by way
of Income-tax and pay only the balance amount to the recipient of
such income. Some of such incomes subjected to T.D.S. are salary,
interest, dividend, interest on securities, winnings from lottery,
horse races, commission and brokerage, rent, fees for professional
and technical services, payments to non-residents etc.
Tax Collection at Source (TCS)
Tax is collected at the point of sale. It is to be collected at source
from the buyer, by the seller at the point of sale. Such tax
collection is to be made by the seller, at the time of debiting the
amount payable to the account of the buyer or at the time of receipt
of such amount from the buyer, whichever is earlier. The goods to
be subjected to TCS are clearly specified and the type of buyers,
sellers and purposeare clearly defined in the Act. Tax rates vary
depending on the goods.
Note: All those persons who are required to deducttax at sourceor
collect tax at sourceon behalf of Income Tax Department are
required to apply for and obtain Tax Deduction and Collection
Account Number (TAN), a 10 digit alpha numeric number, which
is required to be quoted in all documents involving TDS/TCS
transactions. Failure to apply for TAN or not quoting the same in
the specified documents attracts a penalty.

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Double Taxation Relief
India has entered into the Avoidance of Double Taxation
Agreement (DTAA) with 65 countries including countries like
U.S.A., U.K., Japan, France, Germany, etc. The agreement
provides relief from the double taxation in respect of incomes by
providing exemptions and also by providing credits for taxes paid
in one of the countries. These treaties are based on the general
principles laid down in the model draft of the Organisation for
Economic Cooperation and Development (OECD) with suitable
modifications as agreed to by the other contracting countries. In
case of countries with which India has double taxation avoidance
agreements, the tax rates are determined by such agreements and
vary between countries.
Unilateral Relief
The Indian government provides relief from double taxation
irrespective of whether there is a DTAA between India and the
other country concerned, if
 The personor company has been a resident of India in the
previous year.
 The same income must be accrued to and received by the
taxpayer outside India in the previous year.
 The income should have been taxed in India and in another
country with which there is no tax treaty.
 The personor company has paid tax under the laws of the
foreign country concerned.

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SOME RELEVANT CASE-LAWS
1.1 EMPLOYER-EMPLOYEE RELATIONSHIP:
The nature and extent of control which is the basic requisite to
establish employer- employee relationship would vary from
business to business. The test which is uniformly applied in order
to determine the relationship is the existence of a “right to control”
in respect of the manner in which the work is to be done.
(Dharangadhra Commercial Works v State of Saurashtra 1957 SCR
152)
1.2 LEAVE ENCASHMENT (S.10 (10AA)):
“Retirement” includes resignation. What is relevant is retirement:
how it took place is immaterial for the purpose of this clause.
Therefore, even on resignation, if an employee gets any amount by
way of leave encashment, S.10(10AA) would apply.(CIT v D.P.
Malhotra (1997) 142 CTR 325(Bom)). (CIT v R.J. Shahney (1986)
159 ITR 160(Mad))
1.3 HOUSE RENT ALLOWANCE (S.10 (13A)):
When commission is paid to a person based upon fixed percentage
of turnover achieved by the employee it would amount to “Salary”
for the purposeof Rule 2 (h) of part A of IV Schedule (Gestetner
Duplicators v CIT 117 ITR 1 (SC)).
1.4 PERQUISITE (S. 17):
1.4.1 One can not be said to allow a perquisite to an employee if
the employee has no vested right to the same. (CIT v L.W. Russel
(1964) 531 ITR 91 (SC)). 70 71
1.4.2 Reimbursement of expenses incurred by the employee has
been intended to be roped in the definition of “ Salary” by bringing
it as part of “Profit in lieu of salary.” (I.E. I Ltd. v CIT (1993) 204
ITR 386(Cal)

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1.5 RENT FREE ACCOMMODATION:
A rent free accommodationwas provided to the assesseeby his
employer but he never occupied it. Held that, unless the employee
expressly forgoes his right to occupying it, the perk value would be
taxable even though he never occupies it.(CIT v B.S. Chauhan 150
ITR 8(Del)).
1.6 DEDUCTION UNDER S.80G:
By the very nature of calculation required to be made u/s 80G(4) it
is necessary that all deduction under chapter VIA be first
ascertained and deducted before granting deduction u/s 80G
(Scindia Steam Navigation Co v CIT (1994) 75 Taxman
495(Bom))
1.7 DEDUCTION U/S 80RRA:
Fees received by a consultant or technical for rendering services
abroad would also come within the purview of S. 80RRA (CBDT v
Aditya V. Birla (1988) 170 ITR 137(SC))
1.8 RELIEF U/S 89:
Where arrears of salary are paid under orders of court, the
employee would be entitled to relief u/s 89 (K.C. Joshi v Union of
India (1987) 163 ITR 597(SC).
1.9 REVISED RETURN:
A belated return filed u/s 139(4) cannot be revised u/s 139(5).
(Kumar J.C. Sinha v CIT (1996) (86 Taxman 122(SC)).
1.10 Return showing income below taxable limit is a valid
return.(CIT v Ranchhoddas Karosands (1959) (361 ITR 869 (SC)).

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CONCLUSION
Thus, the following basic conclusions emerge from the study:
1. The Government has tried to achieve the objective of social
welfare by providing various incentives for education,
health, housing, savings, pension schemes, donations, senior
citizens and women assessees, and 260 generating
employment etc. These incentives are appreciable as these
are related with the basic necessities of a common man.
However, in case of some incentives the monetary ceiling
seems to be illogical or very low as it has not been revised
since a long time e.g. medical expenses, interest on self
occupied housing loan, saving schemes.
2. Certain Rationalization and Simplification Measures have
been taken during the study period such as lowering income
tax rates in caseof all the assessees, introducing standard
deduction at the rate of 30 per cent of net annual value in
case of let out house property, providing depreciation on
intangible assets etc.
3. The Government has tried to achieve all round economic
objectives by providing incentives for infrastructure
development, balanced regional growth, scientific research
and development, capital market and exemption of
agricultural income.
4. Widening of tax base has remained one of the main
objectives of tax policy during the study period. The
Government has adopted certain measures towards this
direction. The main measures are introduction of mandatory
Permanent AccountNumber, Annual Information Return, E-
filing of income tax return, Online tax accounting system,
Dividend distribution tax and widening the scopeofTDS.
Further, certain measures were introduced and withdrawn
during the study period such as compulsoryfiling of return
based on certain economic criteria, Banking Cash
Transaction Tax (BCTT)and Fringe Benefit Tax (FBT).
Moreover, standard deduction for salaried 261 class and

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deduction in relation to interest income on specified deposits
were withdrawn during the study period.
5. Revenue from personal income tax as well as corporatetax
increased during the study period. Tax to GDP ratio and
buoyancy coefficient in case of personal income tax as well
as corporatetax showed an upward trend. Further, the
absolute number of personal assessees and corporate
assesses increased but the rate of increase in number of
personal assessees having more than 10 lakh income
remained lower as compared to other categories. Moreover,
the share of direct taxes as a percentage of total tax revenue
of central Government increased, while the share of indirect
taxes declined during the study period. This can be
considered as a positive development on the assumption that
direct taxes are more equitable in impact and propooras
compared to indirect taxes.
6. Maharashtra and Delhi remained best performing states in
terms of share in total income tax revenue and income tax to
SDP ratio. Whereas, the states of Bihar & Jharkhand, J & K
and Himachal Pradesh experienced the lowest average
income tax to SDP ratio and made the lowest contribution
towards total income tax revenue as compared to other states
during the study period.
7. Costper rupee of tax collection and costper assessee
declined during the study period. On an average around 90
per cent of gross collection from personal income tax and 80
per cent of gross collection from corporatetax was realised
at pre assessmentstage, which might have contributed to
262 reduction in costof collection per rupee of tax revenue.
Thus, Income Tax Department has shown significant
improvement in controlling cost. Further, the number of
outstanding refund claims declined during the study period
due to computerization. However, the amount of refund and
interest on refunds increased during this period. Actual
collection of income tax remained less than budgeted
estimates during these years except in four years (2000-
2001, 2003-04, 2006-07 and 2007-08). Number of pending
assessments under scrutiny & summary schemes, number of
pending cases under penalty and prosecution proceedings,

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amount of arrear in case of corporate tax as well as personal
income tax, total certified demand due for recovery and
number of pending appeals relating to high amount
increased considerably during this period. Moreover,
assessment cases involving mistakes and consequent
revenue loss increased during this period. All this puts a
question mark on performance of Income Tax Department.
8. Further, a vast majority of tax professionals opined that tax
evasion and corruption are prevalent in the Indian Income
Tax System. They pointed out that multiple taxes, high tax
rates, manipulations on detection, social acceptance of tax
evasion, low probability of detection and low tax morality
are main reasons responsible for tax evasion. Excessive
discretionary powers available with income tax authorities,
lack of awareness regarding rights available with tax payers
and time consuming and costly judicial process have been
identified as main reasons for corruption. A discussion with
tax professionals revealed that refund claims pertaining to
relatively smaller amounts are settled earlier by tax
authorities as compared to refunds 263 of large amounts and
there is unreasonable delay in refunds. The respondents have
identified high TDS rates and increase in number of returns
as main reasons for delay in refunds.
9. The respondents opined that income tax staff is available in
the office and manpower is overburdened in Income Tax
Department. However, they also opined that Income tax
administration is not taxpayer friendly and it is difficult to
satisfy assessing officers regarding correctness of
information. People perceive tax officers as tax enforcers
and not as tax facilitator. Moreover, they opined that
inefficiency in Income Tax Department is one of the main
causes responsible for tax evasion in addition to social,
economic and political reasons. Corruption in Income Tax
System is prevailing due to harassment to taxpayers and
lack of integrity on the part of tax officials in addition to
earlier mentioned reasons. They also viewed that shortage of
staff, inefficient staff and intentional delay to get bribe are
also important reasons causing unreasonable delay in
refunds.

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10. Majority of the respondents have rated office space,
working conditions, drinking water, waiting room facility,
wash room facility and parking facility as satisfactory.
However, the respondents tend to be dissatisfied with the
position of enquiry office.
11. A very high number of cases remained pending with the
Supreme Court, High Court and Income Tax Appellate
Tribunal and Settlement Commission during the study
period.
12.Tax professionals opined that tax rates are reasonable for
individuals and HUFs and high for AOPs and BOIs, firms
and companies. The respondents are not in favour of
phasing out tax incentives completely and introducing EET
system. The respondents considered complexity of income
tax law, frequent changes in tax law and procedures,
minimisation of tax burden and avoiding mistakes in tax
compliance are the main causes for which taxpayers seek
guidance of tax professionals. The respondents have pointed
out that complicated tax law, high tax rates, corruption, high
compliance costand lengthy return forms are the major
problems discussed with them by their clients.

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BIBLIOGRAPHY
1. http://www.sethassociates.com/taxation-system-in-
india.html
2. http://www.indiacompanysetup.com/india-tax-structure/
3. http://en.wikipedia.org/wiki/Taxation_in_India
4. http://india.gov.in/citizen/taxes.php?id=2
5. http://www.firstpost.com/economy/why-is-indias-tax-to-
gdp-ratio-so-low-239152.html
6. http://data.worldbank.org/indicator/GC.TAX.TOTL.GD.ZS
7. http://www.slideshare.com/india-tax-structure

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Appendices
Appendix 1
Components of total tax revenue are given below:

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Appendix 2
Direct tax trend over the years in given below:

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Appendix 3
Indirect tax trend over the years in given below:
Appendix 5
India’s tax to GDP ratio is given for year 2001 to 2010.
Ratios are mentioned in percentage terms.
Source: World Bank statistics

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CERTIFICATE
I hereby certify that the work which is being presented in the Project Report
entitled “TAX LAW”, submitted to the Mercantile Law Professor of IBS-
Indian Business School, Gurgaon is an authentic record of my own work
carried out during a period from November 2014 to December 2014( 2nd
semester) under the supervision of , Mercantile Law Professor.
The matter presented in this Project Report has not been submitted by
me for the award of any other degree elsewhere.
Signature of Student
This is to certify that the above statement made by the student(s) is correct to
the best of my knowledge
Signature of Supervisor
Date: