CORPORATE TAX PLANNING

UNIT I

BASIC CONCEPTS OF INCOME TAX

(2016-17 Assessment Year)

Dr. THULASI KRISHNA. K, Ph.D.

Dept. of Management Studies

MITS - Madanapalle

"It was only for the good of his subjects that he collected taxes from

them, just as the Sun draws moisture from the Earth to give it back a

thousand fold"

– Kalidas in Raghuvansh praising KING DALIP.

History of Tax

• Income tax today is an important source of revenue for government

in all the countries.

• More than 3,000 years ago, the inhabitants of ancient Egypt and

Greece used to pay income tax, consumption taxes and custom

duties.

• The origin of the word "Tax" is from "Taxation" which means an

estimate. These were levied either on the sale and purchase of

merchandise or livestock and were collected in a haphazard manner

from time to time.

• In Greece, Germany and Roman Empires, taxes were also levied sometime on the

basis of turnover and sometimes on occupations.

• In Northern England, taxes were levied on land and on moveable property such

as the Saladin title in 1188. Later on, these were supplemented by introduction of

poll taxes, and indirect taxes known as "Ancient Customs" which were duties on

wool, leather and hides.

• In India, the system of direct taxation as it is known today, has been in force in one form or another

even from ancient times.

• There are references both in Manu Smriti and Arthasastra to a variety of tax measures.

• Manu, the ancient sage and law-giver stated that the king could levy taxes, according to Sastras.

The wise sage advised that taxes should be related to the income and expenditure of the subject.

• According to him, the king should arrange the collection of taxes in such a manner that the subjects

did not feel the pinch of paying taxes.

• He laid down that traders and artisans should pay 1/5th of their profits in silver and gold, while the

agriculturists were to pay 1/6th, 1/8th and 1/10th of their produce depending upon their circumstances.

• Kautilya's Arthasastra, deals with the system of taxation in a real elaborate and planned

manner.

• The land revenue was fixed at 1/6th share of the produce and import and export duties

were determined on advalorem basis (according to value).

• The import duties on foreign goods were roughly 20 per cent of their value. Similarly, tolls,

road cess, ferry charges (merchant vehicle) and other levies were all fixed.

• Kautilya's concept of taxation is more or less akin to the modern system of taxation. His

overall emphasis was on equity and justice in taxation.

• Income-tax was first introduced in India in 1860 by James Wilson who become

Indian’s first Finance Member in order to meet heavy expenses and losses

suffered by the rulers due to India’s first freedom movement of 1857.

• The Act came into force on 24th July 1860.

• The Act lapsed in 1865 and was reintroduced in 1867.

• There was need for more revenue to fight Anglo-Russian war and hence

General Lord Dufferin introduced a comprehensive Income Tax Act 1886.

• The Act was replaced in 1922.

• Again the Act was replaced in 1961 (w.e.f 01.04.1962)

Direct Taxes Indirect Taxes

Meaning It is a tax where incidence as well asimpact of tax is on one and the sameperson. In other words, it is borne by theassessee and cannot be passed on to thecustomer.

It is a tax where the incidence is on one personbut the impact is on the customer. In otherwords, the person on whom tax is levied passeson the tax burden to the customer.

Example a) Income Taxb) Wealth Tax

a) Sales taxb) VATc) Excise dutyd) Customs dutye) Service tax

Burden Burden not felt by all persons Burden shouldered by all persons

Classification of Taxes

Important Definitions

1. Person [Sec 2(31)] :The income tax is charged in respect of total income of the previous year of everyperson. Here ‘person’ means,

a. Individual

b. Hindu Undivided Family [ HUF ]

c. Association of Persons [ AoP ] or Body of Individuals [BoI] whether incorporated or not

d. Company

e. Firm

f. Local Authority

g. Every Artificial Judicial Person [ AJP ] not falling in any of the preceeding categories

2. Assessee [ Sec 2(7) ] :

Income Tax Act,1961 defines ‘assesse’ as a person by whom any tax or any other sum of money is

payable under this Act, and includes,

* Every person in respect of whom any proceeding under this Act has been taken for the

assessment of his income or income of any other person in respect of which he is assessable,

or of the loss sustained by him or such other person, or the amount of refund due to him or to

such other person.

* Any Person who is deemed to be an assessee under any provisions of this Act.

* Any Person who is deemed to be an assessee in default under any provisions of the Act.

3. Assessment Year [Sec 2 (9)] :

• `Assessment Year’ means the period starting from April 1 and ending on March 31,

next year.

• Assessment year is the year immediately following the financial year wherein the

income of the Financial Year is assessed at the rates prescribed by relevant Finance

Act.

• In simple words, it is the year in which tax is payable on the income earned in

previous year. Ex: Current Assessment Year – 2016-17

4. Previous Year [Sec 3] :

“The year in which income is earned is known as Previous Year. Previous

Year is the Financial Year immediately preceding the Assessment Year.”

Ex: Previous Year - 2015-16

Notes : * All assessees are required to follow financial year ( i.e. Apr To Mar ) as

previous year.

* This previous year has to be followed for all sources of income

uniformly .

5. Income [Sec 2 (24)] :Under Sec.2(24), the term “income” specifically include the following :

1. Profit & Gains

2. Dividend

3. Voluntary Contributions received by Trust

4. Perquisites in the hands of employees.

5. Any Special Allowance or benefit

6. City Compensatory Allowance/Dearness Allowance

7. Any benefit or perquisites to a director

8. Any benefit or perquisites to a representative assessee.

9. Any sum chargeable under section 28, 41 & 59.

10. Capital Gains

11. Insurance Profit

12.Banking income of a Co-operative Society

13.Winning from Lottery.

14. Employees Contributions towards provident fund

15. Amount received under Keyman Insurance Policy.

16.Amount exceeding Rs.50000/- by way of Gift received by an individual or HUF.

Therefore, following points must be kept in mind while assessing income :

1. Income can be in any form i.e. in Cash or in kind.

2. Income will also include illegal income, if any.

3. Disputed title to income does not make any difference.

4. Income must come from Outside. One cannot earn profit from oneself.

5. Income should be real & not fictional. (E.g. : H.O. & Branch transactions)

6. Receipt in lump sum or in instalment does not make any difference.

7. There is difference between Capital Receipts & Revenue Receipts.

All Revenue receipts are taxable unless specifically exempt, while all capital receipts are exempt unless specifically

taxed.

8. Income includes loss.

9. Same income cannot be taxed twice.

6. Gross Total Income [Sec. 14] :

As per Section 14, income of a person is computed under the following heads,

1. Salaries

2. Income from House Properties

3. Profits & Gains of Business or Profession

4. Capital Gains

5. Income from other Sources.

The aggregate income under these heads is termed as “ Gross Total Income”.

7. Total Income [ Sec 2 (45) ] :

“` Total Income ’ means the total amount of income referred to in Section 5,

computed in the manner laid down in the Act.”

In other words, it is the income after allowing the deductions u/s 80 C to 80 U.

Particulars Amount

1 Income from Salaries xxx

2 Income from House Properties xxx

3 Profits & Gains of Business & Prof. xxx

4 Capital Gains xxx

5 Income from other Sources xxx

Less : Set off & carry forward of Losses xxx

Gross total Income XXX

Less : Deductions u/s 80 C to 80 U xxx

Total Income XXX

Computation of Total Income

•Thank You