TAXATION ISSUES FOR ENTREPRENEURS by : DR. T.K. JAIN AFTERSCHO ☺ OL centre for social entrepreneurship sivakamu veterinary hospital road bikaner 334001 rajasthan, india FOR – PGPSE / CSE PARTICIPANTS mobile : 91+9414430763
My words.... Ours is a great country with immense entrepreneurial potential. However, our legal system and taxation system is so cumbersome that our creativity and talent is wasted / unnecessarily diverted in these sectors. I wish that these are simplified so that an ordinary entrepreneur can understand these without help from any expert. Here I present a few basic questions for fundamental understanding of taxation system in India. I wish that more people should become entrepreneurs. An ordinary Indian entrepreneur wishes to remain an honest entrepreneur and contribute to the development of nation, but our systems and processes ...
Is Carry-forward and set-off of losses allowed in case of change in constitution of firm? the firm is not entitled to carry forward and set off so much of the loss proportionate to the share of a retired or deceased partner as exceeds his share of profits
How is Carry-forward and set-off of losses allowed in case of succession of business or profession? If the succession is by inheritance, the heir-at-law is entitled to carry-forward and set-off the losses sustained by the predecessor provided the business in question continues to be carried on by the successor.
Is it necessary to submit Return for Loss ? An assessee is not entitled to carry-forward a loss unless he has filed a return of loss to the Department in time and in the prescribed form. It is obligatory on the part of the assessee to file such return, otherwise he will be deprived of the benefit of carry-forward of losses
What is section relating to Deduction in respect of donations to certain funds, charitable institutions? Section 80G
What is section relating to Deduction for contribution to pension fund ? Section 80CCC
What is section relating to Deduction in respect of contribution to pension scheme of Central Government ? Section 80CCD
What is section relating to Deduction in respect of repayment of loan taken for higher education ? Section 80E
What is section relating to Deduction in respect of medical treatment, etc. ? Section 80DDB read with Rule 11DD
What is the section relating to Deduction in respect of medical insurance premia ? Section 80D
What is section relating to Deduction in respect of maintenance including medical treatment of a dependant who is a person with disability ? Section 80DD
What is the section relating to Deduction in respect of rent paid ? Section 80GG
What is section relating to Share of member of an association of persons or body of individuals in the income of the association or body ? Section 86
What is the section relating to Deduction in respect of donations for scientific research or rural developmen? Section 80GGA
What is the section relating to Deduction in respect of contributions given by companies to political parties ? Section 80GGB
What is section relating to Deduction in respect of contributions given by any person to political parties ? Section 80GGC
What is the section relating to Deduction in respect of profits and gains from projects outside India ? Section 80HHB
What is section relating to Deduction in respect of royalty income, etc., of authors of certain books other than text books? Section 80QQB
What is the Deduction in respect of remuneration from certain foreign sources in the case of Professors, Teachers etc. ? Section 80R
What is section relating to Deduction in respect of remuneration received for services rendered outside India from foreign employer ? Section 80RRA
What is section relating to Deduction in respect of royalty on patents? Section 80RRB
What is the section relating to Deduction in case of a person with disability? Section 80U
What is section relating to Deduction in respect of profits and gains from housing projects? Section 80HHBA
What is section relating to Profits from Exports ? Section 80HHC
What is section relating to Deduction in respect of certain incomes of Offshore Banking Units ? Section 80LA
What is section relating to Deduction in respect of royalties etc., from certain foreign enterprise ? Section 80-O
What is section relating to Deduction in respect of income of co-operative societies? Section 80P
What is section relating to Special provisions in respect of certain undertakings or enterprises in certain special category States? Section 80-IC
What is section relating to Deduction in respect of profits and gains from export or transfer of film software? Section 80HHF
What is section relating to Deduction in respect of employment of new workmen? Section 80-JJAA
What is section relating to Deduction in respect of income by way of dividends, interest on securities? Section 80L
What is section relating to Deduction in respect of earnings in convertible foreign exchange ? Section 80HHD
What is section relating to Deduction in respect of profits and gains from the business of collecting and processing bio-degradable waste? Section 80-JJA
What is section relating to Deduction in respect of profits and gains from certain industrial undertakings other than infrastructure development undertakings ? Section 80-IB
What is section relating to Deduction in respect of profit and gains by an undertaking a enterprise engaged in development of Special Economic Zone ? Section80-IAB
What is the section relating to Deduction in respect of profits from export of computer software? Section 80HHE
What is the section relating to Deduction in respect of profits and gains from industrial undertakings or enterprise engaged in infrastructure development ? Section 80-IA
When was service tax introduced in India ? It was imposed at a uniform rate of 5% in the Union Budget for 1994-95. The Tax Reforms Committee headed by Dr. Raja J Chelliah had recommended imposition of service tax on select services.
Who is liable to pay service tax? 1. In general Insurance or Life Insurance services, the person carrying on the business of Insurance is liable and not the insurance agent. 2. In the case of services received in India from a place or person outside India, the recipient is liable. 3. In specified cases consignor or consignee who is paying freight charges is liable to pay service charge for the services received from a Goods Transport Agency. 4. In case mutual fund services, the mutual fund or asset management company is liable and not the agent. 5. For sponsorship services, the recipient body corporate or firm is liable.
What is the periodicity of payment of service tax ? The service tax is payable either on monthly (by the 5th of the next month) or quarterly basis. The credit that is available at the end of the month or the quarter can be utilized for payment of service tax relating to that month or quarter.
When is e-payment of service tax mandatory? e-payment is mandatory for those who paid Rs. 50 lakh or more in cash during the last financial year. Interest is payable @13% per annum per delayed payment of service tax under Section 75. The payment may be made either by cheque or cash depositing it through GAR-7 Challan.
Is registration under service tax compulsory ? It is mandatory for every person liable to pay service tax to get registered with Superintendent of Central Excise. A person providing a taxable service is liable to pay service tax in terms of Section 68.
How should application be made for registration under service tax? form (ST-1). within a period of thirty days from the date on which the service tax is leviable. With the following documents: — Permanent Account number (PAN); — An affidavit declaring the commencement of the services; — Copy of passport/ration card etc., showing proof of residence; — Passport size photograph of the assessee in case of an individual. In case of partnership firm, copy of partnership deed duly certified to be true copy along with registration certificate in case the firm is registered; — In case of corporate assessee, copy of memorandum, articles of association
What will happen if an entrepreneur sells his business to another person? In case of transfer of business by the assessee to another person, the transferee is required to obtain a fresh Certificate of Registration from the Superintendent of Central excise (who grants a certificate of registration in Form ST-2 with in 7 days of the date of receipt of the application.). This certificate gives the details of all the taxable services provided by the service provider.
What will happen if an entrepreneur closes / partially closes his business ? He must surrender his Certificate of Registration to the Superintendent of Central Excise. In case of a partial closure, a partial surrender can be made of the services which are discontinued. In such case, he can get it endorsed on the registration certificate.
What is the time limit for filing service tax returns ? Return under Service Tax is required to be filed by every assessee on half yearly basis in Form ST-3 or Form ST-3A, as the case may be, along with a copy of the Form TR-6, in triplicate for the months covered in the half-yearly return. Time limit = by 25 th of the next month following half year
What are the penalties for delay in filing returns ? Delay upto 15 days Rs. 500/- Delay upto 30 days Rs. 1,000/- Delay beond 30 days Rs. 1,000 + Rs. 100/- per day subject to a maximum of Rs. 2,000/- Rule 7B :a revised return can be filed within 60 days from the date of filing after rectification of mistakes.
What is the time limit for payment of service tax collected ? by the 5th of the next month. If the assessee is an individual or partnership firm, the service tax received during any quarter shall be paid by the 5th of the month after the end of the quarter. Where payment is made through internet banking, such e-payment can be made by 6th of the month.
what is doctrine of unjust enrichment Since service tax is indirect tax, it is recoverable from customer. If you recover the amount from customer and again claim refund, you will get double benefit.
What is Penalty for non-payment or delayed payment of service tax? If service tax is not paid or belatedly paid, penalty shall be imposed, which will be minimum Rs. 200 per day during which such failure continues or @2% per month, whichever is higher
What is Penalty for contravention of Act or Rules? Penalty for contravention of any provision of the Chapter or Rules (of service tax) can be upto Rs. 1,000 [Section 77]. The penalty can be waived under Section 80, if assessee proves that failure was due to reasonable cause.
What is input service ? Rule 2(l)(ii) of Cenvat Credit Rules: any service – (i) used by a provider of taxable service for providing an output service; or (ii) used by the manufacturer, whether directly or indirectly, in or in relation to the manufacture of final products and clearance of final products, upto the place of removal
Is development and supply of content to telecommunication companies taxable under service tax ? Yes Section 65(105)(zzzzd): Content developed for use in telecommunication, advertisement and internet or websites are leviable to service tax presently under “business support service”
Are design services taxable ? Yes conceptualizing, outlining, creating the designs and preparing patterns for costumes, apparels, garments, clothing accessories, jewellery or any other articles intended to be worn by human beings are leviable to service tax under fashion designing service [Section 65(105)(zv)]
Are asset management services taxable? Yes Asset management including portfolio management, and all forms of fund management provided by a banking company or a financial institution including a non-banking financial company or any other body corporate or commercial concern is leviable to service tax under banking and other financial service [Section 65(105)(zm)]
Are softwares taxable under service tax? Yes w.e.f. 16.5.2008. Information Technology Software Services and Supply of tangible goods for use (hire services) are taxable.
What is the current limit for exemption under service tax? Exemption limit to small service providers increased from Rs. 8 lakhs to Rs. 10 lakhs per annum w.e.f. 1.4.2008
Is rent a cab service taxable ? Yes, Cab= motor vehicles including those vehicles capable of carrying more than twelve passengers for hire or reward. However, motor vehicle capable of carrying more than twelve passengers and maxicab, rented to an educational body, imparting skill or knowledge or lessons or any subject or field, other than a commercial training or coaching centre, is specifically excluded from the scope of the term “cab”.
A maxicab is used for the students of university, is it liable to service tax ? No
A maxicab is used for the students of a coaching institution, is it liable to service tax ? Yes
What is a financial lease ? International Accounting Standards Committee: “lease that transfers substantially all the risks and rewards incidental to ownership of an asset, title may or may not eventually be transferred”.
What are essential conditions for a financial lease ? 1. a contract for leasing of a specific asset is entered into between two parties, 2. the contract is for use and occupation of the specific asset, 3. the lease payments are calculated so as to cover the full cost of the asset together with the interest charges, and 4. the lessee is entitled to own or has the option to own, the asset at the end of the lease period after completing the lease payment.
Is computer hardware engineering consultancy leviable to service tax? Yes
Are Resident Welfare Associations liable to pay service tax? No Resident Welfare Associations (RWA) are associations where membership is restricted to only members of the residential complex. RWAs provide various services to their members such as maintenance of common area, facilitating payments etc. For this purpose, each member is required to make monthly contribution of specified amount.They are exempted from service tax.
How should an entrepreneur use efiling facility for service tax ? Go to http://servicetaxefiling.nic.in. Assesses having a 15-digit Sevice Tax Payers (STP) code can avail of the facility of electronic filing of their return. Assesses who opt for the e-filing of return should make an application to concerned Assistant/ Deputy Commissioner in the prescribed form. The assessee is thereupon provided a unique user name and password
Where can appeal be made regarding service tax ? Appeal to CESTAT (Tribunal) can be made against order of Commissioner passed by him under Section 73, 83A or 84 or to Commissioner (Appeals) under Section 85 [order in appeal from order of AC/DC] The appeal of assessee should be in form ST-5 in quadruplicate cross objection should be in form st-6 in quadruplicate.
Who are coparceners? : The lineal male descendants of a person upto the third generation of such person are known as coparceners.
Can Karta be some younger also ? the senior member may give up his right of management and a junior member may be appointed as Karta with the consent of all other members. ordinarily HUF is managed by the father or other senior member for the time being of the family.
In the absence of a male member in the family or when all male members are minors, who will be the Karta (manager) of HUF ? a woman member can be treated as manager of the family for income-tax purposes.
What is known as converted property? an individual being a member of Hindu undivided family transfers his separate property to the family for the common benefit of the family, otherwise than for adequate consideration
When do we have total partition of an HUF ? Where the entire joint family property is divided among all coparceners and the family ceases to exist as an undivided family, the partition is total.
When can we assess a firm as a partnership firm ? The partnership is evidenced by an instrument i.e. partnership deed. The individual shares of the partners are specified in that instrument. A copy of the partnership deed certified by all the partners in writing
A partnership firm has book profit of Rs. 1000000, what is the tax ? The firm is in specified profession 90% of book profit for first 1 lakh = 90000 60% of book profit for next 1 lakh = 60000 40% of book profit for remaining amout = 320000 total = 470000 answer
A partnership firm has book profit of Rs. 850000, what is the tax ? The firm is in specified profession 90% of book profit for first 75000 = 67500 60% of book profit for next 75000 = 45000 40% of book profit for remaining amout =280000 total tax = (67500+45000+280000) =392500 answer
What is the impact of change in partnership structure on carry forward / set off ? Where a change has occurred in the constitution of a firm on account of death or retirement, the firm is not entitled to carry forward and set off so much of the loss proportionate to the share of a retired or deceased partner as exceeds his share of profits, if any, in the firm in respect of the previous year.
What is succession of one firm by another firm? When all the partners in the predecessor firm are replaced by new partners in the successor firm, it is known as succession of one firm by another firm. If a firm is dissolved and some of the partners take over the firm’s business or carry on a similar business with or without new partners, it would be a case of succession by a new firm
How is tax calculated in case of retail trade in small scale ? in terms of Section 44AF, 5% of his total turnover in the previous year on account of such business shall be deemed to be his income so long as his turnover from such business does not exceed Rs. 40 lac
Give examples of AOP? Co-heirs, co-legatees or co-donees, joining together in a common purpose Members of erstwhile HUF earning income jointly even after partition of HUF Company joining with two other companies in joint venture Where receivers were appointed in a suit for dissolution of a firm, the firm would be AOP
Is every group of individuals an AOP? No A mere collection of individuals without a common tie or common aid cannot be taken to be a body of individuals failing under Section 2(31) of the Income-tax Act, 1961.
Is a non-resident is liable to pay tax on his foreign income ? A non-resident is not liable to pay tax on his foreign income until and unless it is received in India
Is there any tax liability on Non-Residents relating to income from newspapers etc? No, in the case of a non-resident, being a person engaged in the business of running a news agency or of publishing newspapers, magazines or journals, no income shall be deemed to accrue or arise in India
What is the tax rate for a non-resident and a foreign company ? 1. On dividend incom @ 20% 2. Interest received from Government or an Indian concern on money borrowed or debt incurred by Government - @ 20% 3. Income received in respect of units, purchased in foreign currency of a Mutual Fund specified in Section 10(23D) (i.e., a mutual fund set-up by a public sector bank or a public financial institution) or of the Unit Trust of India @ 20%
Will a person be taxed under house property for income which is not his own but acquired on lease ? Yes A person who has acquired a right in a building (under clause (f) of section 269UA), by way of a lease for a term of not less than 12 years (whether fixed originally or extended through a provision in the agreement), is the deemed owner of the property.
What are rules regarding PAN ? The application for obtaining PAN No. is made in from no. 49A along with a prescribed fee and documents. Computer allots the PAN randomly. It is unique for every person. PAN is a 10 digit alphanumeric code the first 5 digits are the alphabets, next 4 digits are the numbers and the last one digit is also an alphabet, e.g., TDRLS7498A is an example of PAN. It is mandatory to mention the PAN on income tax return. Wrong quoting of PAN is an offence, which is punishable with a fine of Rs. 10,000.
Give some examples of income from other sources ? 1. Income from subletting 2. Interest on bank deposits and loans and securities. 3. Agricultural income from a place outside India. 4. Rent of plot of land (not included in house property) 5. Mining rent and royalty. 6. Casual income under a will, contract, trust deed. 7. Salary payable to a member of parliament. 8. Income from undisclosed sources. 9. Gratuity paid to a director who is not an employee of a company. 10. Any casual income exceeding Rs. 5,000.
What are rules regarding TDS On dividend ? dividend is taxable on the basis of its declaration while deemed dividend and interim dividend is taxable on the basis of payment.If the dividend is more than the specified limit under section 194 (which is at present Rs. 2,500 in a year) then the dividend has to be paid only after TDS
Give examples of assets which are exempt from capital gains tax (the assets which are not taken as capital assets)? ssets exclude: 1. Stock in trade held for business 2. Agricultural land in India not in urban area i.e., an area with population more than 10,000. 3. Items of personal effects, i.e., personal use excluding jewellery, costly stones, silver, gold 4. Special bearer bonds 1991 5. 6.5%, 7% Gold bonds & National Defence Bonds 1980. 6. Gold Deposit Bonds 1999.
Give examples of capital assets, where long term capital gain is taken after 12 months (instead of 36 months)? Equity or Preference shares, Securities like debentures, government securities, which are listed in recognised stock exchange, Units of UTI Units of Mutual Funds Zero Coupon Bonds
What are included in transfer as per the provisions of capital gain tax? • Sale of asset • Exchange of asset • Relinquishment of asset (means surrender of asset) • Extinguishments of any right on asset (means reducing any right on asset) • Compulsory acquisition of asset.
How is indexed cost of acquisition calculated ? Indexed Cost of Acquisition = COA X CII of Year of transfer / CII of Year of acquisition COA = cost of acquisition CII = cost index
How is indexed cost of acquisition calculated ? Indexed Cost of improvement = COA X CII of Year of transfer/ CII of Year of improvement
Does the cost of asset include the cost of brokerage etc. Also ? Yes Expenditure incurred by buyer at the time of buying the capital assets like brokerage, commission, registration fees, cost of stamp paper etc. are to be added in the cost of acquisition before indexation.
What exemption is available under sec. 54 on capital gain on sale of house property ? House Property transferred was used for residential purpose. 2. House Property was a long term capital asset. 3. Assesses has purchased another house property within a period of one year before or two years after the date of transfer or has constructed another house property within three years of date of transfer i.e. the construction of the new house property should be completed within three years.
What are the 4 conditions for depreciation on assets ? Asset must be owned by the assessee. It must be used for the purpose of business or profession. It should be used during the relevant previous year. Depreciation is available on tangible as well as intangible assets.
What depreciation is allowed when written down value has been reduced to zero? No depreciation is admissible where written down value has been reduced to zero, though the block of assets does not cease to exist on the last day of the previous year.
What conditions are necessary for taxation as per sec. 44AF? The taxpayer may be an individual, HUF, AOP, BOI, firm, company, co-operative society or any other person. He or it may be a resident or a non-resident. The taxpayer is engaged in the business of retail trade in any goods or merchandise. Total turnover from the above business does not exceed Rs. 40 lakh. Tax will be 5% on total turnover, no deduction under section 30 to 38 is available
What are the tax aspects relating to construction business (small scale)? The taxpayer may be an individual, HUF, AOP, BOI, firm, company, co-operative society or any other person. He or it may be a resident or a non-resident. The taxpayer is engaged in the business of civil construction or supply of labour for civil construction work. The taxpayer may be a contractor or sub-contractor. Gross receipts from the above business do not exceed Rs. 40 income tax is estimated at 8 per cent of the gross receipts
A person has gross receipts of Rs. 30 lakh from the business of retail trade and Rs. 35 lakh from wholesale trading in paper. His total gross receipts are Rs. 65 lakh, Is he requied to have compuslsory audit as per sec. 44AB he will not be required to have his accounts audited, since his gross receipts after excluding those from the business of retail trade are still less than Rs. 40 lakh, the limit provided in section 44AB.
[deduction under SEC. 35(2AA)] Payment of Rs. 1 lakh has been made – The payment is made to approved National Laboratory for undertaking scientific research programme. How much deduction is allowed ? 125000
Give examples of preliminary expenditures allowed under sec. 35D ? Expenditure in connection with preparation of feasibility report, preparation of project report, conducting a market survey (or any other survey necessary for the business of the assessee), etc. Legal charges for drafting any agreement. Legal charges for drafting the memorandum and articles of association. Printing expenses of the memorandum and articles of association. Registration fees of a company under the provisions of the Companies Act. Expenses in connection with the public issue of shares or debentures of a company, underwriting commission, brokerage and charges for drafting, typing, printing and advertisement of the prospectus.
How much deduction is allowed under sec. 35D for preliminary expenditure ? 5 per cent of cost of project; or b. 5 per cent of capital employed, (for corporates)
What is included in Capital employed in the business of a company ? It means the aggregate of the issued share capital, debentures and long-term borrowings, as on the last day of the previous year in which the business of the company commences.
What is included in Cost of project for sec. 35D ? It means the actual cost (or additional cost incurred after commencement of business in connection with extension or setting up an industrial undertaking) of fixed assets, namely, land, buildings, leaseholds, plant, machinery, furniture, fittings and railway sidings (including expenditure on development of land and buildings), which are shown in the books of the assessee as on the last day of the previous year
What expenditures are not allowed as per sec. 40(a) INTEREST, ROYALTY, FEES FOR TECHNICAL SERVICES PAYABLE TO A NON-RESIDENT
AMOUNT IN RESPECT OF PAYMENT TO RELATIVES IS ALLOWED OR NOT ? NOT IT IS NOT ALLOWED AS DEDUCTIBLE EXPENDITURE
When advance tax is payable ? Tax is paid in advance when the liability of advance tax is Rs.5, 000 or more. (pay as you earn)
For non-corporate assessees, how much advance tax must be paid by what dates ? On or before 15 September - not less than 30% of tax payable On or before 15 December - not less than 60% of tax payable On or before 15 March - not less than 100% of tax payable
For corporate assessees, how much advance tax must be paid by what dates ? On or before 15 June - not less than15% of tax payable On or before 15 September - not less than 30% of tax payable On or before 15 December - not less than 60% of tax payable On or before 15 March - not less than 100% of tax payable
What is TDS rate for winnings from lottery etc? Any person responsible for paying income on winning from lottery or crossword puzzle shall deduct tax @ 30% plus surcharge plus education cess. TDS is payable if the amount of winning exceeds Rs 5,000 (for lottery etc and this is Rs. 2500 for winnings from horse races etc.)
What is TDS rate for rent ? Tax to be deducted @ 20 % plus surcharge plus education cess of total amount (15% in case payment is made to Individual or HUF). TDS only if amount exceeds Rs. 1, 20,000.
What are rules regarding TDS on debentures ? NO TDS is required if : 1. Interest is paid by A/c payee cheque 2. Interest is paid to an resident Individual and 3. If interest is less then Rs.2, 500 p.a. 4. Debentures are listed in a stock exchange The rate of T.D.S is: • 10% plus surcharge plus education cess -for Listed Debentures • 20% plus surcharge plus education cess-for Non- Listed Debentures
What are rules regarding TDS On professional fees ? Tax to be deducted @ 5 % plus surcharge plus education cess of total amount. TDS only if amount exceeds Rs. 20,000
What are rules regarding TDS On rent ? Tax to be deducted @ 20 % plus surcharge plus education cess of total amount (15% in case payment is made to Individual or HUF) TDS only if amount exceeds Rs. 1, 20,000.
What are the different names of VAT ? Value Added Tax (VAT) is a type of sales tax. In some countries, including Australia, Canada, New Zealand and Singapore, this tax is known as “goods and services tax” or GST; and in Japan it is known as “consumption tax”
When did European countries adopt VAT ? Frnce was the first to adopt it in 1954. On January 1, 1968, Germany replaced its multi-point sales tax on goods and services, which extended down to the retail stage, by a VAT with a normal rate of 10 per cent and a reduced rate of 5 per cent on foodstuffs and agricultural products. On 1/4/73, UK also adopted VAT. The EC Fiscal and Financial Committee had recommended in1962 that all member-countries should shift to the VAT system, the change was completed only in 1973 when Italy switched over to the VAT.
Who are the dealers, who must get registration? dealers with gross annual turnover above Rs.5 lakh have to compulsorily get registered.
What is the benefit of registration under VAT ? Every dealer up to the retailer level musst get registered with the Sales Tax department to get the benefit of the credit of input tax.
Are Stock/Consignment transfers exempt from VAT? Yes
Under VAT, what is tax credit ? Input tax paid in excess of 4% are eligible for tax credit. When calculating tax, these taxes will be deducted
How should tax credit be given in output tax ? Output tax is the tax that a dealer charges on his sales that are subject to tax. The input tax credit is to be given for both manufacturers and traders for purchase of inputs/ supplies meant for both sale within the State as well as to other States, irrespective of when these were utilized or sold
What are methods for computation of VAT ? 1. The Subtraction method: Under this method the tax rate is applied to the difference between the value of output and the cost of input; 2. The Addition method: Under this method value added is computed by adding all the payments that are payable to the factors of production (viz., wages, salaries, interest payments, etc.); 3. Tax Credit method: Under this method, it entails set-off of the tax paid on inputs from tax collected on sales. Indian States opted for tax credit method, which is similar to CENVAT.
What is the difference between FPT & LPT? The First point tax (FPT) was a system where tax was placed at first stage. It was convenient to the revenue but had inbuilt cascading effect. The Last Point Tax (LPT) was a system, where tax was put at the last point of sale (when goods were sold to ultimate customer). It is an ideal system but it was evasion prone. Now we use VAT, which takes advantages of both these sysems
What will be service tax if a person renders a taxable service of the value of Rs.10000? the service tax @12% will be Rs.1200. The education cess and Secondary & Higher education cess @3% on Rs.1200 will be Rs.36. The total tax will be Rs.1236
Will you add income of a child artist (who performs in TV shows) in his parents' income? No Income derived by the minor from manual work or from any activity involving application of his skill, talent or specialised knowledge and experience will not be included in the income of his parent. It it was not the case, then income of the minor will be included in the income of that parent whose total income excluding income includible under this sub-section is greater
Can the loss of non-speculation business be set-off against the income from speculation business? Yes
Can the loss of speculation business be set-off against the income from non-speculation business. No
Can the loss from any activity other than the business of owning and maintaining race horses be set off against income from the business of owning and maintaining race horses. Yes
Can loss from business of owning and maintaining race horses be set off against income from the business other than that of owning and maintaining race horses. No
Can we set off unabsorbed depreciation before carried forward business loss ? No Where any unabsorbed depreciation or capital expenditure on scientific research has been brought forward alongwith business loss, the business loss is first to be set-off.
Can a transferor transfer income without tranferring the asset or transfer the asset and keeps the income for himself ? Where a person transfers to any other person income (whether revocable or not) from an asset without transferring that asset, the income shall be included in the total income of the transferor. If the transferor transfers the asset and keeps the income for himself, the income shall be included in the income of transferor.
Can a person make revokable transfer? Where a person transfers any asset to any other person with a right to revoke the transfer, all income accruing to the transferee from the asset shall be included in the total income of the transferor.
Income of a minor All income which arises or accrues to the minor child (not being a minor child suffering from any disability of the nature specified in Section 80U) shall be clubbed in the income of his parent.
Income of life partner Where a person transfers some assets directly or indirectly to a person or association of persons (trustee or body of trustees or juristic person) without adequate consideration for the immediate or deferred benefit of his or her spouse, all such income as arises directly or indirectly from assets transferred shall be included in the income of the transferor.
What is cash credit ? Where any sum is found credited in the books of an assessee maintained for any accounting year and the assessee is not in a position to offer explanation about the nature and source thereof or the explanation offered by him is not satisfactory in the opinion of the Assessing Officer, the sum so credited may be treated as the income of the assessee in respect of the accounting year in which the cash credits are found to have made in the books (sec 68)
What are exception to set off ? Loss from Speculation Business Loss from the activity of owning and maintaining race horses long-term capital loss can be set off only against long-term capital gain.
Are Jain families also HUF? Jain and Sikh undivided families are also treated as Hindu undivided families
If a Hindu converts to christianity, is his family still HUF ? No If a Hindu gets converted as a Christian, the family of such a person will not be an HUF. However a Hindu, along with his son (by a christian wife) who has been brought up as a Hindu will be a HUF
Can we have an HUF within HUF? YES A HUF may consist of a number of smaller HUFs. A smaller HUF has a legal existence and may be assessable as an independent unit
What are the schools in Hindu Law ? HUFs are governed by two schools viz. Mitakshara and Dayabhaga.
Can a son demand partition in HUF ? A Mitakshara son, in whom the interest in family property is vested by birth, all along possesses a right to demand partition. A Dayabhaga son, on the other hand acquires no interest in the family property by birth and, consequently, has no right to demand partition of the HUF property from his father.
Is there any impact on carry forward of losses in case of death of partner in a partnership firm ? Yes Where a change has occurred in the constitution of a firm on account of death or retirement, the firm is not entitled to carry forward and set off so much of the loss proportionate to the share of a retired or deceased partner as exceeds his share of profits, if any, in the firm in respect of the previous year.
Gautam is employed in Delhi. His basic Salary is Rs. 5,000 per month. He receives Rs. 5,000 p.a. as house rent allowance. Rent paid by him is Rs. 12,000 p.a. Find out the amount of taxable house rent allowance. As per rule 2A : least of the following : 1. Rs. 5,000 (actual HRA) 2. Rs. 6,000 (being excess of rent over 10% of salary) 3. Rs. 30,000 (in Delhi, so one-half of the salary of the assessee). Least is 5000
Mr. X is the owner of a house property. He lets this property during the previous year 2007-08 for Rs. 7,000 p.m. The house was occupied from 1.4.2008 to 31.1.2009. From 1.2.2009 it remained vacant. Mr. X fails to realize Rs. 10,000 from the tenant. The Expected rent of the house is Rs. 80,000 p.a. Higher of (expected rent or actual rent) = 80000 less : loss due to vacancy (but it must be more than or equal to actual rent received) (80000 – 14000) = 66000 gross annual value = 66000
Mr. R. owns a house. The Municipal value of the house is Rs. 74,000. He paid Rs. 8,000 as local taxes during the year. He uses this house for his residential purposes but lets out half of the house @ Rs. 3,000 p.m. Compute the annual value of the house. Higher of annual value / municipal value : (74000 or (12*6000) = 74000 less municipal taxes = 8000 net = 66000 less 50% for SOP (self occupied property) = 33000 less standard deduction 11000 net value : 22000 : answer
M is the owner of a house. The municipal value of the house is Rs. 40,000. He paid Rs. 8,000 as local taxes during the year. He was using this house for his residential purposes but let out w.e.f. 1.1.2009 @ Rs. 4,000 p.m. Compute the annual value of the house. Higher of municipal value / fair rent (40000 or 48000) = 48000 less municipal tax 8000 gross value 40000 vacancy allowance = nil standard deduction = 13333 net value = 26667
Which of these will you include in calculation of salary for the purpose of valuation of house property? Salary , Entertainment Allowance Bonus Dearness Allowance (not recognised for computing retirement benefit) Employer’s contribution to provident fund (recognised) Education Allowance for one child Lunch Allowance (Rs. 1000 per month) answer : salary+bonus+entertainment allowance+lunch allowance
What is salary for entertainment allowance ? Basic Salary exclusive of any allowance, benefit or other perquisite.
What is salary for valuation of Rent-free House or Concession in rent? Salary + all taxable alloance + bonus etc. (excluding bonus – if it is not part of retirement benefit)
What is salary for HRA ? Basic + DA (if part of contract for employment) + commission
What is salary for gratuity ? Basic Salary, D.A. (if given under the terms of employment) and Commission based on fixed percentage of turnover. (It does not include bonus, other commission, H.R.A. over-time wages and any other allowance and perquisites.) If the employee is covered by the Gratuity Act, D.A. will always be included in salary.
What is salary for Determi-nation of Rs. 50,000 regarding taxability of perquisites u/s 17(2)(iii)(c) Basic Salary, Dearness Allowance, All other taxable allowances, benefits received in cash, Bonus, Commission, etc. and all monetary payments
What is salary for Compensation u/s 10(10B) Salary, allowance, value of rent-free or concessional accommo-dation light, water or any other amenity and travel concession; (it does not include Bonus, Gratuity employer’s contribution to any fund for retirement benefits.)
Jai works for Government of Rajasthan. He gets earned leave of Rs. 2,00,000. How much is tax free ? 100% x
Medical expenses reimbursed by employer: Rs. 7,200 for the period from 1/4/ 2010 to 30/4/10. Is it tax free ? Yes (upto Rs. 15000 in one year)
Mr. Anand and his family also availed LTC - they visited Mumbai and the expenses of Rs. 5,600 being the cost of air conditioned second class rail tickets was reimbursed by the employer. It is tax free (we assume that other conditions are fulfilled) (rule 2b and sec. 10(5) )
The employer provides Ravi a car for personal purposes and expenses are incurred by the employer amounted to Rs. 9,900. It is taxable there is no tax exemption here
Employer of A made payment of club bills to the extent of Rs. 3600 for the year. Is it tax free ? No however, if it is proved that this club membership was for office purpose only then it will be tax free
An employee having his own house was given HRA is it taxable ? Yes
Mr. Ajay received Rs. 1,50,000 as gratuity. He is not covered by the Payment of Gratuity Act. He worked for 20 years and 9 months and the average salary for last 10 months has been 20000. The least of the following is taxfree : 1. 20*20000 * ½ = 200000 2. 3.5 lakhs 3. actual gratuity amount = 1.5 lakhs
Is hill allowance taxable ? Yes, It is given to employees working in hilly areas on account of high cost of living in hilly areas as compared to plains. It is fully taxable, if the place is located at less than 1,000 metres height from sea level.
Is group medical insurance of employees taxable in salary head ? No it is tax free Group medical insurance obtained by the employer for his employees (including family members of the employees) or all medical insurance payments made directly or reimbursement of insurance premium to such employees who take such insurance.
Are reimbursement of medical expenses taxable ? They are tax free upto a limit Reimbursement of medical expenses actually incurred by the employee upto a maximum of Rs. 15,000 in the aggregate.
Is reimbursement of travel and stay expenses abroad tax free ? Yes, but only when the employee’s gross total income reimbursement of this expenditure does not exceed two lakh rupees
Is recreational facility tax free ? Yes The value of recreational facilities provided is exempt. However, the facility should not be restricted to a selected few
Is value of free rations given to the armed forces personnel taxfree. Yes
Is the amount spent by an employer on the promotion of family planning amongst its employees tax free? yes
Are privilege ticket orders granted by Railways to its employees tax free? Yes
Are Sum paid by an employer to pension or deferred annuity scheme taxfree? Yes
Is Rent-free furnished residence provided to an Officer of Parliament / Union Ministry / leader of opposition in Parliament tax free? Yes
Is Interest free loan to an employee tax free? Yes but Only if the amount of loan does not exceed Rs. 20,000/-.
a professional jockey receives present from his employer on winning the race – is it taxfree? No
Are legal charges incurred by the employer to defend the employee taxable ? Yes even if the legal charges are related to work performed during employment
Are payments made by employer of any loan due to the employee taxfree. No
Are reimbursement of tuition fees of the children of the employee taxfree? Only upto Rs. 100 per month per child (for 2 children)
Is payment (by employer) of club bills of the employee taxfree ? No
Is payment (by employer) of hotel bills of the employee taxfree? No
Is income-tax paid by the employer due from the employee taxfree? No
Is the value of recreational facilities provided taxfree? Yes
What will be the income under the head salary from the following : Basic : Rs. 20000 per month DA : 50% of basic Bonus : 8% of basic + DA Commission : 1% of sales, commission = Rs. 100000 HRA : 30% of basic Free telephone, mobile, car facility is provided to employee. Education expenses of his two sons (Rs. 10000 per annum) is borne by employer. He is also provided 1 LTC in 4 years.
Solution : Basic : 20000*12 = 2,40,000 DA : 1,20,000 Bonus : = 28,800 commission = 1,00,000 HRA is tax free upto 40% or 50% of basic + DA = nil all other perquisites are tax free, so they will not be taxed. Total salary = 488800 answer
An employee is a director of a company. He also has 12% of the shares of the company. Will his salary be a salary of income from business and profession ? Yes, it will be salary as he is getting it as salary for working in a company
Calculate salary from the following information : Sitting fees Rs. 20000 Non-practising allowance : Rs. 24000 Hill allowance : Rs. 10000 (the place 800 meter high) Technical journal allowance Rs. 5000 solution : 20000+24000+10000 = 54000 technical journal allowance is tax free
A company provides free lunch facility to company. It costs Rs. 40 per lunch. Is it taxable as perquisite? No Upto Rs. 50 is tax free
A company provides free transport facility to office and home. Is it taxable ? Tax free
Example : For the financial year 2008-09, ‘A’, a Central Government Officer receives salary of Rs. 77,000 (including dearness allowance of Rs. 42,000) and entertainment allowance of Rs. 18,000. His contribution to provident fund during this period is Rs. 7,200. In addition, he has purchased National Savings Certificates (VIII Issue) for Rs. 6,000. He has been provided with accommodation by the Government for which the rent determined is Rs. 375 per month and this is recovered from A’s salary. Compute A’s tax liability for the assessment year 2009-10 assuming that he has no other income.
Solution .. Salary+ DA is taxable : 77000 entertainment allowance : (exemption 1/5 or 5000, for govt. Employee) (18000-5000) = 13000 contribution to PF and NSC is allowed as deduction in 80C : 13200 taxable income : 90000 – 13200 =76800, which is tax free.
What are Sections 15 to 17 of income tax about ? Salary
What are Sections 22 to 27 of Income tax about ? Income from house property
What are Sections 28 to 44D of Income tax about ? Profits and gains of business or profession
What are Sections 45 to 55A of income tax about ? Capital gains
What are Sections 56 to 59 of Income tax about ? Income from other sources
Where can we include the income of official liquidator? An official liquidator appointed by the Court or by the Central Government is also become an employee of the Central Government under Section 448 of the Companies Act, 1956 and consequently the remuneration due to him would also be assessable under the head ‘Salaries’.
if an employee receives any money from his employer as part of the terms of employment for not carrying on any profession, where will go as per income tax ? Salary
Where will you put personal gifts received by the employee from his own employer on account of the personal regard or love and affection for income tax purpose ? It is tax free
What should we take as salary – amount actually received or gross amount ? Gross amount any tax deducted at source or other deductions on account of provident fund, insurance premium, or on any other account made by the employer from the salary income, should be added to the net salary received by the employee.
The employer becomes insolvent and therefore salary remains outstanding for an employee. Is he still liable to pay tax ? Yes Salary is taxable even if the money is not received or could not be recovered from the employer due to his insolvency or any other reason
A payment in appreciation of personal qualities is a salary or not, it is made by employer ? No it is not salary
Raju is employed in a Gas supply company, the company supplies free gas to Raju, is it taxable ? Yes it is taxable at cost to the employer
Are the following facilities taxable to a non-specified employee : free sweeper, gardener, cook, lunch, car facility ? No
Are the following facility taxable to a non-specified employee :Rent free house? Rent Free house is taxable in the hands of all the assessees
How much exemption is provided for Compensation received by a workman under the Industrial Disputes Act, 1947 ? Rs. 50000 (the limit may change as per govt. Notification)
An employee gets commuted pention, he also receives gratuity, how much is tax free ? (Assuming it to be a non-government employee) one-third of the pension which he is normally entitled to receive
Can a firm avoid income from housing property by transferring it to individuals ? No If a firm transfers its house property to its partners, before dissolution, merely by book entries, annual value of the property is taxable in the hands of the firm
Can an individual have concession for self occupied property for two houses? No Where the assessee has occupied more than one house for the purposes of residence for himself and family members, he has to make a choice of one house only in respect of which he would like to claim exemption. Other self-occupied houses will be treated as if they were let out
Can depreciation be claimed in respect of leased assets ? No Depreciation is allowable to the assessee only in respect of those capital assets which are owned by him.
What is the difference between salary and wages ? ‘Salary’ is generally used in respect of payment for services of a higher class, whereas ‘wages’ is confined to the earnings of labourers. However, for income-tax purposes there is no difference between salary and wages.
What is pension ? Pension is a periodical payment for past services.
What is annuity ? Annuity is annual grant made by the employer to the employee.
What is gratuity ? Gratuity is a lump sum payment for past services.
What is perquisite ? Any gain or profit incidentally made from employment in addition to the regular salary / wages / remuneration.
What are tax-free perquisites ? Medical benefits tea, snacks residetial accommodation at site reimbursement of mobile / telephone bills employer's contribution to staff insurance scholarship to children of employee interest free or concessional upto 20000 journal / periodicals related to work refresher courses/ training laptops / computers
What are taxable perquisites ? Rent free accommodation (sec. 17(2)(i)) residential accommodation club membership payment of loans of employees payment of educational expenses of employee domestic servant interest free loan / concessional interest loan
What is the difference between revenue and capital receipt ? An amount referable to fixed capital is a capital receipt whereas a receipt referable to circulating capital would be a revenue receipt Only revenue receipt is taxable in income tax and only revenue expenditure is allowed
If you receive any compensation on cancellation of a contract, is it a capital receipt ? compensation received for the loss of a capital asset is a receipt of a capital nature whereas the compensation received for damage to or loss of a trading asset is a revenue receipt.
What type of receipt is commutation of service or insurance amount received? a lump sum payment received in commutation of salaries or pension is a capital receipt, However, it would be taxable as salary income. Any amount received under a policy of insurance would be a revenue receipt if the policy was held by the assessee as a trading asset and it would be a capital receipt if the policy was held as a capital asset.
Will it be taxable for a debenture holder : the premium received on redemption or the discount on issue of the debentures by the company No, It would be a capital receipt and would not consequently be liable to tax
Royalty received by a mine owner shold be income from business and profession – is it true ? No Royalties in every case are taxable as ‘income from other source
Compensation received on cancellation of agency should be a capital receipt, so it should not be taxed – is it true ? No it is taxable as business income by virtue of the specific provision in Section 28 of the Act
An employee director of a company was paid Rs. 7,50,000 as a lump sum consideration for not resigning from the directorship. Should it be taxed ? It is a reward received from the employer. Therefore it is a revenue receipt.
the sales-tax collected from the buyer of goods is a capital receipt. - it is true ? No the sales-tax collected from the buyer of goods is a revenue receipt.
Receipt in substitution of a source of income is a capital receipt – is it true ? Yes
If you have spent money on training of production manager abroad to study new methods of production- is it a revenue expenditure Yes Amount spent by a company for sending its production manager abroad to study new methods of production is a revenue expenditure
What will be the date of receipt – the date of cheque / date of encashment ? If the payment is made by the drawee on presentment of the cheque, the date of receipt of the cheque and not the date of its encashment shall be the date of receipt.
How will you determine the place of receipt of some payment ? If the postal expenses are borne by the creditor, the place of debtor would be place of receipt. If, on the other hand, the debtor bears the postal expenses, the place of creditor would be the place of receipt.
What will be the Date and place of receipt in case of articles sent by V.P.P. In this case the place of the delivery by the Post Office would be the place of receipt and the date of receipt would be the date of payment by the buyer.
What are the incomes deemed to be received ? All sums deducted by way of taxes at source (Section 198). Incomes of dependent persons which are included in the income of the assessee under Sections 60 to 64. unexplained or unrecorded investments (Section 69). unexplained or unrecorded moneys. (Section 69A)
Where does income acrue – at your registered office or at the place of contract ? Income accrues at the place where the source of the income is situated, which may or may not be the same as the place from which the business activities are carried on. Normally, income accrues at the place where the contract yielding the income is entered into and for this purpose the contract should be taken to have been entered into at the place where the offer is accepted
What part of income of business of which all the operations are not carried out in India, will be deemed as income arising out in India in the case of a business of which all the operations are not carried out in India, only such part of the income as is reasonably attributable to the operations carried out in India is deemed to have arised in India
What is relation between business connection and income ? Income arising through or from business connection to any assessee is deemed to accrue or arise in India where a business connection actually exists
What is business connection? a branch office, factory, agency, receivership, management or other establishment for the purchase or sale of goods or for transacting any other business a factory where goods are made for export outside India agent or agents in India for the systematic and regular purchase of raw materials or for the sale of the non-residents' goods a close financial association between a resident and a non-resident company a subsidiary company to sell or otherwise deal with the products of the non-resident parent company a continuing licence to a non-resident
What are the cases when income is assessed in the same year when it accrues ? Assessment of non-residents in respect of their income from shipping business (Section 172). Assessment of persons leaving India (Section 174). artificial juridical person formed for a particular event or purpose (section 174A). persons trying to alienate their assets with the object of avoiding liability to tax (Section 175). Assessment of the income from discontinued business (Section 176).
Can tax be levied when it appears to the Assessing Officer that an individual may leave India during the current assessment year without any intention of returning to India Yes
Suppose your employer reimburses your expenses (incurred for office work) is it taxable ? No Mere relief or reimbursement of expenses is not treated as income.
If an employer gives goods instead of salary, how can its value be identified for tax purpose ? If income is received in kind, its valuation will be made in accordance with the rules prescribed in the Income-tax Rules, 1962. Where there is no prescribed value in the rules, valuation thereof is made on the basis of its market value.
If a person buys and sells a crop, is it agricultural income ? If a person purchases a standing crop, and makes a profit out of it, the income is not agricultural income to the buyer of the standing crop. The income to the seller of standing crop, who has put in labour and skill to make the crop sprout out of the land, is agricultural income.
What are the cases when operations on agricultural produce is also treated as agricultural income ? The operation must be one which is ordinarily employed by the cultivator to make the produce fit for market, i.e., threshing, winnowing, cleaning, drying, etc. There is no market for the produce as received from the farm. The process to make it marketable has been performed either by the cultivator or receiver of rent-in-kind. The produce must not change its original character.
Can income tax assessment be postponed in the event of dispute regarding income ? No Income-tax assessment cannot be held up or postponed merely because of existence of a dispute regarding the title of income.
What is ‘carry-over’ concession in the case of LTC ? If travel concession or assistance is not availed during any of the four year block period, exemption can be claimed provided he avails the concession or assistance in the calendar year immediately following that block
Can a person claim taxi fare for visit on LTC ? No air -economy class or AC rail first class or first class by public transport is permitted
Is tiffin allowance taxable ? Yes It is given for lunch and refreshments to the employees. It is taxable.
Is servant allowance taxable ? Yes It is fully taxable even if it is given to a low paid employee, not being an officer, i.e., it is taxable for all categories of employees.
Is non practicing allowance taxable ? Yes It is generally given to those medical doctors who are in government service and they are banned from doing private practice. It is to compensate them for this ban. It is fully taxable.
Is hill allowance taxable ? Yes It is given to employees working in hilly areas on account of high cost of living in hilly areas as compared to plains. It is fully taxable, if the place is located at less than 1,000 metres height from sea level.
Is overtime allowance taxable ? When an employee works for extra hours over and above his normal hours of duty he is given overtime allowance as extra wages. It is fully taxable.
Is deputation allowance taxable ? Yes When an employee is sent from his permanent place of service to some other place or institution or organisation on deputation for a temporary period, he is given this allowance. It is fully taxable.
Is warden allowance taxable ? Yes These allowances are given in educational institutions for working as Warden of the hostel and/or working as Proctor in the institution. These allowances are fully taxable.
Vehicle provided to travel from place of work to home is taxable or not ? No use of any vehicle provided by a company or an employer for journey by the assessee from his residence to his office or other place of work, or from such office or place to his residence, is not be regarded as a benefit or amenity granted or provided to him free of cost or at concessional rate for the purpose of computation of perquisite.
How is an asset valued under wealth tax ? Value of an immovable property i.e. a building or land apartment thereto or a part thereof is to be determined according to Part B of schedule III of wealth tax act. Calculate GMR
How is GMR [Gross Maintainable Rent] calculated for a property which is let out ? GMR is higher of the annual rent whether received or receivable by owner or annual value assessed by the local authority.
What is GMR if property is not let out ? It is the amount of annual rent assessed by the local authority or if property is not situated within local limits of a local authority then GMR is the amount which the owner can reasonably be expected to receive as an annual rent.
What adjustments are required in actual rent to calculate GMR? i) Municipal taxes borne by tenant ii) 1/9 of actual rent if tenant bear the repair expenses iii) Interest @15% p.a. on the amount of deposit (calculate outstanding amount on monthly basis) made by tenant provided deposit in not in nature of advance rent for 3 months or less iv) Amount received as premium or otherwise for leasing the property as divided by the period of lease
How is NMR calculated ? We deduct following deductions from GMR : a) Taxes levied by local authority whether paid or not b) 15% GMR to cover other expenses
WHAT ARE THE DUE DATES FOR FILING THE RETURN UNDER WEALTH TAX? 31 July (for individuals) and 31 October (for companies and all those who have to get accounts audited)
Who must compulsorily file wealth tax return ? It is a statutory obligation of every person if his net wealth on the valuation date exceeds Rs. 15 Lacs to furnish a return in the prescribed form (Form BA) with the Wealth Tax offices on or before the due date.
When will an assessing office (AO) refer the valuation to valuation officer (V.O. AO is of the opinion that the fair value of the asset exceeds the value of the asset returned by 1/3rd the value of the asset as returned or more than Rs 50000. OR having regard to the nature of the asset and other circumstances, it is necessary once reference is made to V.O.
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