INdian Fiscal Federalism

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Chapter: 10The Fiscal Federalism:

Definition of the Fiscal Federalism Principles of fiscal federalism Financial relationship between Centre and States1. Sharing of the taxation power

2. Sharing of non tax revenue Financial relationship between State and Local Bodies. Grants in Aid

a) Statutory Grantb) Discretionary Grant

Role of Finance Commission (FC) Special focus on 13thFinance Commission Alternate Devolution Scheme Gadgil-Mukherjee Formula

Role of Planning commission ( PC) Comparision of FC and PC. An assessment of the Indian Fiscal Federalism

1. Problems associated with Financial Federalism2. Solutions for it

Definition of the Fiscal Federalism Fiscal federalism is a general normative framework for

assignment of functions to the different levels of governmentand appropriate fiscal instruments for carrying out thesefunctions.

Principles of fiscal federalism The principles upon which fiscal federalism is based upon are:

1. Independence and responsibility2. Efficiency and economy3. Integration and coordination4. Equalisation transfer5. Transparency

Financial relationship between Centre and States Article 264 to 293 explains the fiscal relation between Centre

and the states. The fiscal relationship between Centre and theStates are divided in the following ways:a) Allocation of the taxation powerb) Distribution of the Tax Revenuec) Distribution of the Non Tax Revenued) Grants in aid to the statese) Role of the Finance Commissionf) Protection of the Interest of the statesg) Borrowing of the Centre and the Statesh) Inter-Governmental tax immunities


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i) Effect of emergencies

a) The taxation powers between centre and the states are divided in theconstitution itself.

b) The seventh schedule provided for 3 lists .c) On the basis on the power to levy tax the seventh Schedule of our

constitution has divided the power in three lists. These are Central list// State list // Concurrent list

List I (15) List II (20)List III(3)

1.Tax on Income other than

1.Tax on Agriculture

incomeAgriculture. Land revenue2.Tax on sales and purchase ofnewspaper and

2.Tax on sales andpurchase of goods

On Advertisements therein. except newspaper3.Excise duties except onAlcoholic liquior

3. Excise in alcoholicliquior

and narcotics not contained inmedical orToilet preparation.4.Corporate tax,

Distribution of the Tax Revenue : 80thConstitutional amendment act 2000 88thconstitutional amendment act 2003

ArticleTaxLevied

TaxCollected

Taxappropriation Examples

268 C S S

Stamp duties on bills ofexchange, cheque , Excise

duties on medicalpreparation containingalcohol and narcotics.

269 C C S

Sale and purchase ofgoods, tax on railwaysfright, terminal tax ongoods and passengers,Succession tax, EstateDuty and interstate tradeor commerce.

270 C C C-SAll in list 1 except( 1+2,Surcharge + Cess )

271 C C CSurcharge on duties on 2and 3


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272 S S S State list entries.

Distribution of the Non tax revenue:Non-tax revenue of Centre Non tax revenue of the states1. Post and Telegraph 1. Irrigation

2. Railways 2. Forest

3. Banking 3. Fisheries

4. Broadcasting 4. State public Sector Enterprises

5. Coinage and currency 5. Escheat and Post

6. Central Public Sector Undertaking

7. Escheat and Post

Financial relationship between State and Local Bodies. Grants in Aid : Besides sharing the taxes between centre and the states, the

constitution has provided for grantin aid to the states fromthe central resources. There are two types of grant in aid.1. Statutory grant2. Discretionary grant

Statutory grant Discretionary grant

1. Article 275 of Indian Constitution empowers 1. Article 282 of Indian constitution empo

the parliament to make grants to the states which both the centre and states to make any gr

are in need of financial assistance and not to for public purpose.

every state.

2. These sums are charged on the consolidated

fund of India.

3. The statutory grants under article 275 to the 2. Under this provision centre makes gran

states are given on the recommendation of the states on the recommendation of the

Finance Commission. Planning Commission.

The discretionary grants have two fold purposes. These are:1. To help the state financially to fulfil the plan targets.2. To give some leverage the centre to influence and coordinate

state action to effectuate the national plan.

Role of Finance Commission (FC) Special focus on 13thFinance Commission :

1. Tax revenue 32% of the net sharable central tax to be transferred to the

states in each financial year

2. Public Debt 68% of GDP for combined debt of the centre and states

should be achieved by 2014-15.

3. Fiscalconsolidation RD=0% and FD= 3% of GDP by 2014-2015.

4.Grants underarticle 275 1. Non plan RD grantElementary Ed Environment


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Outcome improvementMaintenance ofR&B

Statespecificgrant

5. Local Bodies Basic GrantsPerformancegrants

6. Disaster relief Merger of NCCF into NDRF at national level

Merger of CRF into SDRF.

Alternate Devolution Scheme Gadgil-Mukherjee Formula Role of Planning commission ( PC) Comparision of FC and PC.

FinanceCommission Planning commission

Politicalaspects Article 280

Through executiveresolution

FunctionsDistribution of thenet

Making of the five yearplan

proceedings

Principle for grantin aid

Augument the CFI

275 Statutory grant 282 Discretionary grant

Philosophy Fiscal FederalismSocio economicdevelopment

13th FC ( 2010-15) 12th FYP ( 2012-2017)

An assessment of the Indian Fiscal Federalism Problems associated with Financial Federalism

1. Constitutional bias2. Finance Commission process3. FC vs. PC4. Centrally Sponsored Schemes5. Issues Related to Borrowing power :


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Article 292 and Article 293 are instrumental regardingthe Market borrowing power of the Centre and thestates.A state government cannot raise any loan without theconsent of the centre if there is still any outstanding

any part of a loan made to the state by the centre or inrespect of which a guarantee has been given by thecentre.The central government can make loans to any state orgive guarantees in respect of loans raised by any state.Any sums required for the purpose of making such loansare to be charged on the Consolidated Fund of India.

6. Non tax revenue7. Tax revenue8. Calamity relief9. Increasing dependence of states on the centre10.Inadequate payment of royalty of minerals to the state11.Centres monopoly of the control over industries, trade,

commerce and production and distribution.12.Fiscal consolidation at the state level is more coercive than

voluntary. Solutions for it

1. Rationalising the non development expenditure2. Exploit the tax base fully3. Comprehensive review of the incomplete projects to weed

out low priority projects.4. Centrally sponsored schemes should be reduced5. Reduce the discretion in fund transfer from the centre to

the states.

Planning Commission and Centres assistanceto the States:The Gadgil formulais due to D.R. Gadgil, the social scientist and the first critic ofIndianPlanning.It was evolved in 1969 for determining the allocation of centralassistance for state plans inIndia.Gadgil formula was adopted for distribution ofplan assistance duringFourthandFifth Five Year Plans.[1]Gadgil Formula

The Gadgil formula was formulated with the formulation of thefourth five year plan for the distribution of plan transfersamongst the states. It was named after the then deputy

chairman of the Planning Commission, Dr. D.R.Gadgil. The central assistance provided for in the first three plans and

annual plans of 1966-1969 lacked objectivity in its formulationand did not lead to equal and balanced growthin the states.

TheNational development council(NDC) approved the followingformula: 1. Special Category states likeAssam,Jammu andKashmirandNagalandwere given preference. Their needsshould first be met out of the total pool of Central assistance.2. The remaining balance of the Central assistance should bedistributed among the remaining States on the basis of thefollowing criteria: (i) 60 per cent on the basis ofpopulation;(ii)

10 per cent on the basis of tax effort, determined on the basisof individual State's per capita tax receipts as percentage of theState's per capita income; (iii) 10 per cent on the basis of per
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capita State income, assistance going only to States whose percapita incomes are below the national average; (iv) 10 per centon the basis of spill-over into the Fourth Planof majorcontinuing irrigation and power projects; (v) 10 per cent forspecial problems of individual States.

Reasoning behind the given weights:1. Population

In a country like India population acts as an apt measure to represent therequirements of the people because a major portion of the population lives belowthe poverty line. This proposition was also supported by the empirical data whichshowed a negative correlation between population of states and their per capitaincome.

2. Tax effortThis is an important factor to measure the potential of the state as far as its ownresources are concerned. This relative measure incentivizes the states to undertakemeasures to increase their own potential through various tax measures.

3. State per capita incomeA problem regarding unequal development amongst the states was faced in theearlier plans because of larger states with their large plans were able to get a largershare of resources from the centre. This led to increased inequalities amongst thestates. Therefore, to make the distribution fairer to the smaller states with a lesserthan national per capita average income were given extra share in the resources.

4. Special ProblemsThis factor was introduced so as to provide enough resources to states to overcomeproblems like droughts, famines etc. In the absence of this share, such stateswould have suffered huge losses because of these problems and theimplementation of their plans could have been hindered. This was a discretionary

element in the formula which required proper scrutiny of the states situation by theFinance Commission.5. Irrigation and power projects

These projects have been in the process of implementation before the fourth planwas formulated. They needed extra resources for the successful completion of theseprojects.

BackgroundThe offer of financial assistance from the centre to the states for implementingplanned development has been an extremely important matter right from thebeginning of the Indian Planning process. The constitution divides theresponsibilities between the Union government and the state governments. There

was an imbalance between responsibilities assigned to the states and the revenueresources possessed by them to carry out those responsibilities. The transfer ofresources for development purposes under the Plans came to be made underArticle 282of theConstitution.The states were highly dependent on the Uniongovernment for financing their development plans because the extra resources onwhich states could bank on were largely concentrated with the Union government.

There was a need for a separate body to look into the division of resources.Therefore the finance commission was appointed in 1951 for the allocation ofresources of revenue between the central and the state governments. It washeld responsible for examining their liabilities, the resources of the states, theirbudgeted promises and the effort undertaken to fulfil their commitment. Each five

year, the finance commission puts in its recommendations on the proportion of thetotal collections to be allocated to each of the states. The Planning Commissionwhich was formed soon after the framing of the constitution of India looked into the
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problems of financing development, which had added to the old problem offinancial relations. It came into being because the issue of formulating developmentplans and implement them efficiently for the development of the economy was notonly a very important but also a necessary one. This commission provides for asettlement between the Centre and the states in two categories

1.

Division of revenues2. Grants in special casesThe centre adds to state resources by conferring fixed percentage of revenue fromtaxationand from other sources to the states. However, this does not ensure aproper balance in distribution. There are states which are poorer or more backwardthan the others and therefore require central finances on a much larger scale thanthe others. This is why recommendations for special grants were introduced.Hence in this manner, the extra resources controlled by the centre were sharedwith the states to finance the state plans. However, this system in turn induced thestates to undertake those schemes in which they got a higher share of the centralfinances and therefore a steady central assistance was given to the states for aplanned period. Thegrantswere supposed to be given to the states which did not

have enough capital assets that would have earned them enough money to pay forloans taken from the centre. They were provided to the states outright according totheir needs. But in reality, no correlation was found between grants and the needfor them.

The first Five Year Plan had provision of only a marginal central assistance whichdid not play an important part. Due to this, in the second five year plan,substantial importance was given to it. And in the third five year plan, the stateshad laid more stress on planning and had become critical. In fact, they were given achoice set of various schemes with various proportions of grants and loansattached. This led to an obvious result. The states with larger resources and powercould choose schemes with a greater share of grants in them. On the other hand,

poor states had to finance almost all their plans by the loans given by the centralgovernment. Consequently, there were huge variations in the averages of grantsand loans received by the states. A developed state which had resources got 40% asgrants; an under-developed state which had no resources got 12% as grants whilethe average was 22% . The commissions did not have a distinct criteria which wasused while allocation of resources. As a result, the states were dissatisfied whenthey realised that the larger states were getting a bigger share in the pie.

Therefore, in 1965 when the fourth plan was being thought of,the states demanded for a set of firm objective criteria for thedistribution of central assistance. The planning commission leftit on the states to decide on the criteria. But no agreement wasreached in the National Development Council (NDC).

Thus, the planning commission thought of an award system,where the finance commission had the discretion to awardstates in times of need after a proper scrutiny of their situation.In 1968, Planning Commission induced the state governmentsto come to an agreement. The system of varying proportionsof grants and loans from scheme to scheme was abolished.Central assistance to states was now given uniformly in blocks.Each state got 70% loans and 30% grants. There was nospecial manoeuvrability and therefore no special advantage onthe part of the bigger states. This type of settlement also facedproblems because of the artificial division between the plan

and the non-plan expenditures.The former type ofexpenditure was to be looked after by the finance commissionawards and the latter by central assistance given by either NDC
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or the Planning Commission. The loan part which was given tothe state had gotten accumulated and for some of the statesthe loan obligation and repayments were bigger than theassistance they got. In 1969, after the draft the fourth five yearplan was presented, the Planning Commission officially

discussed with the statesthe impact of the FinanceCommission Awards on their finances. Great variations inthe provision of these awards were witnessed amongst thestates. Some states had a substantial surplus and other statescould not even meet their budgetary responsibilities.

Another problem was of the ways and means advances. Toovercome the temporary difficulties faced by the stategovernments, the Reserve Bank of India provided this facility sothat the states could balance their balance sheet and remainsolvent. This was the extra debt that was to be cleared quickly.After the droughts and famines hit India, states had hugeoverdrafts year after year. Therefore it was recommended by

the Planning commission that resources must first be set asidefor meeting the deficits of the states and then help in enablingstates to put the new resources into their plans. This was aneffort towards bringing non plan and plan expenditurestogether. This has partially helped in solving the problem ofartificial division of expenditures into plan and non-planexpenditures.

The other problem was that the total division of resources didnot lead to equality in the development in the states. The largerstates with their own resources could have a larger plan andthe states with less of own resources at their disposal could

only have smaller plans. This led to unequal patterns ofdevelopment in the country. This problem was partly solved byproviding 10% of the total resources to states with lesser percapita income than the national average in the formula. Thissolution led to two other problems:

1.The states at the margin suffered a loss due to this as the state, evenmarginally upper than the national average could not avail of its rightfulshare

2. Even after giving no central assistance to certain states, their per capita planexpenditure was larger than those states which entirely depended on centralassistance for the finance of their plans. And it was inevitable for thegovernment not to give any central assistance to these states

The Gadgil Formula, though well intentioned, did not achieve much success inreducing inter State disparities. For instance, Andhra Pradesh and Tamil Nadu,which came under the low income category at the time, received below average Planassistance and Bihar and Uttar Pradesh, just managed to get Plan assistance equalto all the States average. Therefore, there was an increasing clamour formodification of the formula, especially from the economically backward states.

Modified Gadgil Formula The formula was modified on the eve of the formulation of the

Sixth Plan. The 10 percent indicator for ongoing power andirrigation projects was dropped and the share of per capitaincome was increased to 20 percent, to be distributed to those

states whose per capita incomes were below the nationalaverage. The modified Gadgil formula continued for the Sixthand the Seventh Plans. Compared to the allocations in the


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Fourth and Fifth Plans, the allocations during the Sixth andthe Seventh Plans show a definite shift in favour of the poorerstates. All the low income states, except Tamil Nadu, receivedPlan assistance higher than the average income of the 14 statestaken into consideration at the time. This can certainly be

attributed to the higher weightage given to per capita income asper the modification.Per capita incomeserves as a suitableproxy for changes in the economy. If the states are rankedaccording to their per capita income as well as their per capitaPlan assistance and the rank correlation coefficient is workedout, it should give a fair idea of the effectiveness of the modifiedGadgil Formula in terms of progressivity. Therank correlationcoefficients worked out for the four Plan periods are as follows:

Plan Period Rank Correlation Coefficient

IV (-)0.17

V (-)0.04

VI (-)0.66*VII (-)0.72**

Notes: *Significant at 5 percent levelo Significant at 1 percent level

The low income states received better allocations during all the four Plan periods,as there is a negative correlation. However, for the Fourth and the Fifth Plans, thecorrelation coefficients are not significant, which shows that allocations in theseperiods were only marginally progressive. In the Sixth and the Seventh Planperiods, there was a marked improvement in the progressivity of Plan allocations,as can be deduced from the statistically significant correlation coefficients.

Therefore, the modified Gadgil formula resulted in a more progressive distributionof Central Plan assistance. In the period spanning the beginning of the Fourth Planto the Seventh Plan, the dependence of the states on Central Plan Assistance forfinancing their Plan outlays has been declining for all states. Despite this trend, thelow income states depended heavily on Central Plan assistance for funding theiroutlays, despite this assistance increasing considerably after the modification madeto the Gadgil formula. Also, it has been seen that the states with a higher percapita outlay are usually the high income states. Therefore, unless the distributionof the Central Plan assistance is made sharply progressive, narrowing down of interState differentials in per capita outlays will be impossible. While Plan outlays haveincreased by over nine times, Central Plan assistance has increased only by halfthe amount from the Fourth to the Seventh Plan period. This is the reason forpersistent inter state inequality. The Centre has resorted to funding states for theimplementation of Centrally Sponsored Schemes, which form 80 percent of PlanAssistance. This has led to the sidelining of the states own Plan outlays. Due to theproblem of increasing gaps between the assistance provided and outlay of thestates, calls for further revision of the Gadgil Formula increased, which resulted inthe next revision of the formula in 1990.Gadgil-Mukherjee Formula

The National Development Council (NDC) meeting held in October 11, 1990;discussed and approved a New Revised formula. The new revised formula ispopularly known as Gadgil-Mukherjee formula after the name of then deputychairman of Planning commission Dr. Pranab Mukherjee. The new revised formula

as approved by NDC is given in the following table. Criteria for inter-state allocationof Plan Assistance
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CRITERIA WEIGHTAGE (%)

POPULATION 55

PER CAPITA INCOME 25

FISCAL MANAGEMENT 5

SPECIAL PROBLEMS 15TOTAL 100

Under the new revised formula, Population was given maximum weightage byconsidering it as most important factor for the allocation of central assistance, butin comparison with old Gadgil formula the weightage has been reduced by 5%. Theshare of Per Capita Income has increased from 20% to 25%. Out of 25%, 20% willcontinue to be allocated on the principle of TheDeviation method(The per capitastate domestic product is calculated by taking an average of per capita statedomestic product whose actual data are available, for the latest three years.) tothose states whose per capita income is below the average national per capitaincome and the rest 5% will be allocated to all states on the principle of The

Distance method (The distance of per capita income of each state from the statewhich has the highest per capita income is calculated, then these values aremultiplied with the respective value of the population of each state. This was doneto meet the objections like, less developed states were allocated less and given lowweightage, also the states whose per capita income were slightly higher than theaverage national per capita income, were deprived of share under this particularcriterion. Fiscal management, as a new criterion has been introduced with 5%weightage by discarding the earlier Tax effort criterion which was given 10%weightage in old Gadgil formula. Fiscal management criterion is to be assessed onthe basis of a states actual resource mobilization for its plan in comparison withthe target agreed upon the Planning Commission. Therefore this criterion isconsidered to be more comprehensive for fiscal efficiency than The Tax effort

criterion. TheFiscal Managementwas given only 5% weightage due to the dangerarises from the manner in which it is defined. It can develop an unhealthycompetition among the states to show their resources less at the time of preparinginitial resource estimates. The remaining 5% weightage of Tax effort has been givento The Special problems criterion due to which its weightage increased from 10% to15%. The NDC has defined special problems under these seven heads: i.Coastalareasii. Flood and drought prone areas iii. Desert problems iv. Specialenvironmental issues v. Exceptionally sparse and densely populated areas vi.Problem of slums in urban areas vii. Special financial difficulties for achievingminimum reasonable plan size. By comparing the new revised Gadgil formula withthe old Gadgil formula as a whole, only 85% of the total central assistance has

been distributed on the basis of four well defined criteria, whereas, in the oldGadgil formula these criteria were given 90% weightage.The Gadgil Formula in 2000At the advent of the 21st century the formula was reviewed and the component ofperformance by the respective states was adopted. The allocation accruing to thestates under this head was 7.5 percent. Within this, 2.5 percent of the allocationwas based on tax efforts of the states, 2 percent for fiscal management at state leveland 1 percent for undertaking population control measures. Special attention wasalso paid to the sluggish improvements in female literacy and 1 percent allocationwas set aside taking female literacy into account. Timely completion of externallyfunded projects and land reforms undertaken accounted for the remainder of the7.5 percent figure.
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a) Gadgil formula (4 th Plan ) : Transfer of financial assistance to the

states(1969 to 1974)b) This formula is used for 4thand 5thFYP ( 1974 to 1979)c) First modification in 1990d)

Modified version is used for 6

th

, 7th

and 1990-1991 Annual planse) In 1990 again remodified by NDCf) The modification isg) Used for 1991-92 Annual plans ,h) In 1991 , Mukherjee Gadgil Formula : NDC is adopting the same

Modification 2 Mukherjee -Gadgil formula

Population =55% Population =60%

Per capita Income =25% Per capita income = 25%

Financial Arrangement =5%Financial Performance =7.5

a)Special development Problems =15%

Special developmentProblems=7.5

Special category states are usually those with, according to the thirteenth Finance

Commission, hilly terrain, sparsely populated habitation and high transport costs

leading to high delivery cost of public services. For such states, in the past, 90 per

cent of Central assistance was treated as a grant, the remaining 10 per cent as a

loan. Unsurprisingly, these include the states of the Northeast, Sikkim and

Uttarakhand.International Institutions:

Income tax in India

From Wikipedia, the free encyclopediaThe government ofIndiaimposes anincome taxon taxable income ofindividuals,Hindu Undivided Families(HUFs), companies, firms, co-operativesocieties and trusts (identified as body of individuals and association of persons)and any other artificial person. Levy of tax is separate on each of the persons. Thelevy is governed by theIndian Income Tax Act, 1961.TheIndian Income TaxDepartmentis governed by theCentral Board for Direct Taxes(CBDT) and is part ofthe Department of Revenue under theMinistry of Finance,Govt. of India.There areclose to 35 million income tax payers in India.[1].

[edit]OverviewCharge to Income-tax

Everyone exceeds the maximum amountwhich is not chargeable to the income taxis an assesse, and shall be chargeable to the income tax at the rate or ratesprescribed under the finance act for the relevant assessment year, shall be

determined on basis of his residential status.
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Income tax is a tax payable, at the rate enacted by the Union Budget (Finance Act)for every Assessment Year, on the Total Income earned in the Previous Year byevery Person.

The chargeability is based on nature of income, i.e., whether it is revenue orcapital. The rates of taxation of income are-:

Income Tax Rates/Slabs Rate (%)for men: Up to 1,80,000 = 0, 1,80,001 5,00,000 = 10%, 5,00,001 8,00,000 = 20%, 8,00,001 upwards = 30%,Up to 1,90,000 (for resident women)=0%Up to 2,50,000 (for resident individual of 60 years or above)= 0,Up to 5,00,000 (for very senior citizen of 80 years or above)= 0.Education cess is applicable @ 3 per cent on income tax, surcharge = NA[edit]Residential Status

The three residential status, viz.,

Resident Ordinarily Residents Under this category ,person must be living in India

at least 182 days during previous year Or musthave been in India 365 days during 4 yearspreceding previous year and 60 days in previous

year. Ordinary residents are always taxable ontheir income earned both in India and Abroad.

Resident but not Ordinarily Residents Must have been a non-resident in India 9 out of 10

years preceding previous year or have been inIndia in total 729 or less days out of last 7 years

preceding the previous year. Not Ordinarilyresidents are taxable in relation to income receivedin India or income accrued or deemed to be accrueor arise in India and income from business orprofession controlled from India.

Non Residents Non Residents are exempt from tax if accrue or

arise or deemed to be accrue or arise outside India.Taxable if income is earned from business orprofession setting in India or having their headoffice in India.[2][3][edit]Heads of Income

The total income of a person is divided into fiveheads, viz., taxable[4]:[edit]Individual Heads of Income[edit]Income from SalaryAll income received as salary under Employer-Employee relationship is taxed under this head.Employers must withhold tax compulsorily, ifincome exceeds minimum exemption limit, asTaxDeducted at Source(TDS), and provide theiremployees with a Form 16which shows the taxdeductions and net paid income. In addition, the

Form 16 will contain any other deductionsprovided from salary such as:
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1. Medical reimbursement: Up to Rs. 15,000per year is tax free if supported by bills.

2.Transport allowance: Up to Rs. 800 permonth (Rs. 9,600 per year) is tax free ifprovided as transport allowance. No bills

are required for this amount.3. Conveyance allowance:is tax exempt.4. Professional taxes: Most states tax

employment on a per-professional basis,usually a slabbed amount based on grossincome. Such taxes paid are deductiblefrom income tax.

5. House rent allowance: the least of thefollowing is available as deduction

1. Actual HRA received2. 50%/40%(metro/non-metro) of

basic 'salary'

3. Rent paid minus 10% of 'salary'.basic Salary for this purpose isbasic+DA forming part+commissionon sale on fixed rate.

Income from salary is the least of all the abovedeductions.[edit]Income from House propertyIncome from House property is computed bytaking into account what is called Annual Value ofthe property. The annual value (in the case of a letout property) is the maximum of the following:

Rent received Municipal Valuation Fair Rent (as determined by the I-T

department)If a house is not let out and not self-occupied,annual value is assumed to have accrued to theowner. Annual value in case of a self occupiedhouse is to be taken as NIL. (However if there ismore than one self occupied house then theannual value of the other house/s is taxable.)From this, deduct Municipal Tax paid and you getthe Net Annual Value. From this Net Annual

Value, deduct : 30% of Net value as repair cost (This is a

mandatory deduction) No any other deduction avaliable Interest paid or payable on a housing loan

against this houseIn the case of a self occupied house interest paidor payable is subject to a maximum limit ofRs,1,50,000 (if loan is taken on or after 1 April1999 and construction is completed within 3

years) and Rs.30,000 (if the loan is taken before 1

April 1999). For all non self-occupied homes, allinterest is deductible, with no upper limits.The balance is added to taxable income.
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[edit]Income from Business or ProfessionAn example .. An architect works out of home andco-ordinates work for his clients. All the followingexpenses would be deductible from hisprofessional fees.

he uses a computer, he travels to sites in his car, he has a peon to help him collect payments He has a maid who comes in daily part of the society maintenance bills entertainment expenses incurred.. books and magazines for his professional

practice.

The income referred to in section 28, i.e., theincomes chargeable as "Income from Business orProfession" shall be computed in accordance with

the provisions contained in sections 30 to 43D.However, there are few more sections under thisChapter, viz., Sections 44 to 44DA (except sections44AA, 44AB & 44C), which contain thecomputation completely within itself. Section 44Cis a disallowance provision in the case non-residents. Section 44AA deals with maintenance ofbooks and section 44AB deals with audit ofaccounts.In summary, the sections relating to computationof business income can be grouped as under: -

1.

Deductible Expenses - Sections 30 to 38[except 37(2)].2. Inadmissible Expenses - Sections 37(2), 40,

40A, 43B & 44-C.3. Deemed Incomes - Sections 33AB, 33ABA,

33AC, 35A, 35ABB & 41.4. Special Provisions - Sections 42 & 43D5. Self-Coded Computations - Sections 44,

44A, 44AD, 44AE, 44AF, 44B, 44BB,44BBA, 44BBB, 44-D & 44-DA.

The computation of income under the head"Profits and Gains of Business or Profession"

depends on the particulars and informationavailable.[5]If regular books of accounts are not maintained,then the computation would be as under: -Income (including Deemed Incomes) chargeable asincome under this head xxx Less: Expensesdeductible (net of disallowances) under thishead xxx Profits and Gains of Business orProfession xxxHowever, if regular books of accounts have beenmaintained and Profit and Loss Account has been

prepared, then the computation would be asunder: -
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indexation rates are released by the I-Tdepartment each year.

3. In case of all other long term capital gains,indexation benefit is available and tax rateis 20%.

All capital gains that are not long term are shortterm capital gains, which are taxed as such: Under section 111A, for shares or mutual

funds where STT is paid, tax rate is 10% FromAsst Yr 2005-06 as per Finance Act 2004. ForAsst Yr 2009-10 the tax rate is 15%.

In all other cases, it is part of gross totalincome and normal tax rate is applicable.

For companies abroad, the tax liability is 20% ofsuch gains suitably indexed (since STT is notpaid).[edit]Income from Other Sources

This is a residual head, under this head incomewhich does not meet criteria to go to other headsis taxed. There are also some specific incomeswhich are to be taxed under this head.

1. Income by way of Dividends2. Income from horse races3. Income from winning bull races4. Any amount received from key man

insurance policy as donation.5. Income from shares (dividend otherthan

Indian company)

[edit]DeductionWhile exemptions is on income some deduction incalculation of taxable income is allowed for certainpayments.[edit]Section 80C DeductionsSection 80C of the Income Tax Act[1]allowscertain investments and expenditure to bededucted from total income up to the maximum of1 lac. The total limit under this section is Rs.100,000 ) which can be any combination of thebelow: Contribution toProvident FundorPublic

Provident Fund.PPF provides 8.6%[6]returncompounded annually. Maximum limit tocontribute in it is 100,000 for each year. It is along term investment with completewithdrawal not possible till 15 years thoughpartial withdrawal is possible after 5 years.Besides, there is employee providend fundwhich is deducted from the salary of theperson. This is about 10% to 12% of the BASICsalary component. Recent changes are beingdiscussed regarding reducing the instances of

withdrawal from EPF especially when onechanges the job. EPF has the option of full
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settlement on leaving the job, taking VRS,retirement after 58. It also has options ofwithdrawal for certain expenses related tohome, marriage or medical. EPF contributionincludes 12% of basic salary from employee

and employer. It is distributed in ratio of8.33:3.67 in Pension fund and Providend fund Payment oflife insurancepremium Investment inpensionPlans. National Pension

Scheme is meant to save money for the postretirement which invests money in differentcombination of equity and debt. dependingupon age up to 50% can go in equity. Annuitypayable after retirement is dependent uponage. NPS has six fund managers. Individualcan make minimum contribution of Rs6000/- .It has 22 point of purchase (banks).

Investment in Equity Linked Savings schemes(ELSS) of mutual funds. Among otherinvestment opportunities, ELSS has the leastlock-in period of 3 years. However, one shouldnote that after the Direct Tax Code is in place,ELSS will no longer be an investment for 80Cdeduction.

Investment in National Savings Certificates(interest of past NSCs is reinvested every yearand can be added to the Section 80 limit)

Tax saving Fixed Deposits provided by banksfor a tenure of 5 years. Interest is also taxable. Payments towards principal repayment ofhousing loans. Also any registration fee orstamp duty paid.

Payments towards tuition fees for children toany school or college or university or similarinstitution (Only for 2 children).

Post office investmentsThe investment can be from any source and notnecessarily from income chargeable to tax.[edit]Section 80CCF: Investment inInfrastructure Bonds

From April, 1 2011, a maximum of Rs. 20,000 isdeductible under section 80CCF provided thatamount is invested in infrastructure bonds. Thisis in addition to the 100,000 deduction allowedunder Section 80C.[edit]Section 80D: Medical Insurance PremiumsHealth insurance, popularly known as MediclaimPolicies, provides a deduction of up to Rs.35,000.00 (Rs. 15,000.00 for premium paymentstowards policies on self, spouse and children and(read as in addition to) Rs. 15,000.00 for premium

payment towards non-senior citizen dependentparents or Rs. 20,000.00 for premium paymenttowards senior citizen dependent). This deduction
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is in addition to Rs. 1,00,000 savings under ITdeductions clause 80C. For consideration under asenior citizen category, the incumbent's ageshould be 65 years during any part of the currentfiscal, e.g. for the fiscal year 2010-11, the

incumbent should already be 65 as on March 31,2011), This deduction is also applicable to thecheques paid by proprietor firm..[edit]Interest on Housing Loans SectionFor self occupied properties, interest paid on ahousing loan up to Rs 150,000 per year is exemptfrom tax. This deduction is in addition to thedeductions under sections 80C, 80CCF and 80D.However, this is only applicable for a residenceconstructed within three financial years after theloan is taken and also the loan if taken after April1, 1999.

If the house is not occupied due to employment,the house will be considered self occupied.For let out properties, the entire interest paid isdeductible under section 24 of the Income Tax act.However, the rent is to be shown as income fromsuch properties. 30% of rent received andmunicipal taxes paid are available for deduction oftax.

The losses from all properties shall be allowed tobe adjusted against salary income at the sourceitself. Therefore, refund claims of T.D.S. deducted

in excess, on this count, will no more benecessary.[7][edit]Use of Deductions

While the use of the above sections helps one tomake savings for the long-term, one should look atthis more as an investment-return opportunity.One should still file income tax return, even if onedoesn't fall into the bracket of paying tax, if thereare sources of income as defined by Income Taxrules. Except ELSS (Equity Linked SavingsScheme) and the NPS (National Pension Scheme),other schemes under 80C typically offer a

relatively risk-free investment and guaranteedreturns.[edit]Tax Rates

InIndia,Individual income tax is aprogressivetaxwith three slabs. About 10 per cent of thepopulation meets the minimum threshold oftaxable income[8][9]From April 1, 2011 new tax slabs apply, which areas follows: No income tax is applicable on all income up to

Rs. 1,80,000 per year. (Rs. 1,90,000 for

women, Rs. 2,50,000 for senior citizens of 60till 80 yrs (excluding 80) and Rs. 5,00,000 for
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very senior citizens of 80 yrs and above andmust be resident of India)

From 1,80,001 to 5,00,000 : 10% of amountgreater than Rs. 1,80,000 (Lower limit changesappropriately for women and senior citizens)

From 5,00,001 to 8,00,000 : 20% of amountgreater than Rs. 5,00,000 + 32,000 ( Rs.31,000 for women and Rs. 25,000 for seniorcitizens)

Above 8,00,000 : 30% of amount greater thanRs. 8,00,000 + 92,000 ( Rs. 91,000 for womenand Rs. 85,000 for senior citizens)

[edit]SurchargeSurcharge has been abolished for personal incometax in the financial year 2009-10.A 7.5% surcharge (tax on tax) is applicable if thetaxable income (taking into consideration all the

deductions) is above Rs. 10 lakh (Rs. 1 million).The limit of 10 lacs was increased to Rs. 1 crore(Rs. 10 million) with effect from 1 June 2009All taxes in India are subject to an education cess,which is 3% of the total tax payable. With effectfrom assessment year 2009-10, Secondary andHigher Secondary Education Cess of 1% isapplicable on the subtotal of income tax. Theeducation cess is mainly applicable on excise dutyand service taxFrom income tax year 2010-11, education cess

would be 3% and no surcharge would be levied.[edit]Tax Rate for non-IndividualsThere are special rates prescribed for Firms,Corporates, Local Authorities & Co-operativeSocieties.[10][edit]Refund Status for Salaried tax payers

The Income Tax Department has put on itswebsite the list of income tax refunds of all salarytax payers which could not be sent to theconcerned persons for want of correct address.(link to check refund)Salary taxpayers who have not received refunds

for assessment years 2003-04 to 2006-07 canclick on the link below and query using the PANnumber and assessment year whether any refunddue to them has been returned undelivered..[11]123[edit]Corporate Income tax

For companies, income is taxed at a flat rate of30% for Indian companies, with a 5% surchargeapplied on the tax paid by companies with grossturnover over Rs. 1 crore (10 million). Foreigncompanies pay 40%.[12]An education cess of 3%

(on both the tax and the surcharge) are payable,yielding effective tax rates of 32.5% for domestic
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companies and 41.2% for foreigncompanies.[13]From 2005-06, electronic filing ofcompany returns is mandatory.[14][edit]Tax Penalties

The major number of penalties initiated every year

as a ritual by I T Authorities is under section271(1)(c)[15]which is for either concealment ofincome or for furnishing inaccurate particulars ofincome."If the Assessing Officer or the Commissioner(Appeals) or the Commissioner in the course ofany proceedings under this Act, is satisfied thatany person-(b) has failed to comply with a notice under sub-section (1) of section 142 or sub-section (2) ofsection 143 or fails to comply with a directionissued under sub-section (2A) of section 142, or

(c) has concealed the particulars of his income orfurnished inaccurate particulars of such income,he may direct that such person shall pay by wayof penalty,-(ii) in the cases referred to in clause (b), inaddition to any tax payable by him, a sum of tenthousand rupees for each such failure;(iii) in the cases referred to in clause (c), inaddition to any tax payable by him, a sum whichshall not be less than, but which shall not exceedthree times, the amount of tax sought to be

evaded by reason of the concealment ofparticulars of his income or the furnishing ofinaccurate particulars of such income.

WTO aspects1. Agreement on Agriculturea) Market Accessb) Domestic supportc) Export Competition2. Non Agriculture Market Access (NAMA): The products covered under NAMA

are: Marine products, chemicals, rubber products, wool products, textileproducts, ceramics, glassware, engineering products, electronics,

automobiles etc. Two more thing Bound tariff lines and unbound tariff lines.a) Discriminatory Swiss formula :b) Special and differential treatmentc) Service : Mode 4d) Sectoral Initiative:e) Non tariff measures: NTB are the barriers other than the tariff barriers to

protect the domestic industries. . SPS+ othersf) Preference Erosion :

3. Service: For service the modalities have been decided.The GATS (General Agreement on Trade on Services) agreement covers four modes

of supply for the delivery of services in cross-border trade:Criteria Supplier Presence
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Mode 1: Cross-border supply

Service delivered within the territory ofthe Member, from the territory ofanother Member Service supplier not

present within theterritory of the

member

Mode 2:

Consumptionabroad

Service delivered outside the territory ofthe Member, in the territory of another

Member, to a service consumer of theMember

Mode 3:Commercialpresence

Service delivered within the territory ofthe Member, through the commercialpresence of the supplier

Service supplierpresent within theterritory of theMemberMode 4: Presence

of a natural person

Service delivered within the territory ofthe Member, with supplier present asanatural person

Regarding service the modalities have been decided. Indias core area ofInterest are : Mode 1 and Mode 4

Recently both India and China have put forward the demand to bring servicenegotiations on par with the negotiation on NAMA and agricultural goods.

4. Rules negotiation:5. Anti Dumping Agreement :6.TRIPS Related Agreement:7. Geographical Indication :8.Trade and Environment:9. Dispute Settlement Understanding: DSU is based on the f
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INdian Fiscal Federalism

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