TAXATION LAW
Meaning of Taxes
Taxes are enforced proportional contributions from persons and property levied by the lawmaking body of the state by virtue of its sovereignty for the support of the government and all public needs.
Tax in a general sense, is any contribution imposed by the government upon individuals for the use and service of the state, whether under the name of toll, tribute, impost, duty, custom, excise, subsidy, aid, supply or other name. Tax, in its essential characteristics, is not a debt.
Essential characteristics of tax
1. It is an enforced contribution
2. It is generally payable in money.
3. It is proportionate in character, usually based on the ability to pay
4. It is levied on persons and property within the jurisdiction of the state
5. It is levied pursuant to legislative authority; the power to tax can only be exercised by the law making body or congress.
6. It is levied for public purpose
7. It is commonly required to be paid regular intervals.
DIRECT AND INDIRECT TAXES
A tax may be defined as a "pecuniary burden laid upon individuals or property owners to support the government, a payment exacted by legislative authority. A tax "is not a voluntary payment or donation, but an enforced contribution, exacted pursuant to legislative authority". Taxes consist of direct tax or indirect tax, and may be paid in money or as its labour equivalent. India has a well developed taxation structure. The tax system in India is mainly a three tier system which is based between the Central, State Governments and the local government organizations. In most cases, these local bodies include the local councils and the municipalities. According to the Constitution of India, the government has the right to levy taxes on individuals and organizations. However, the constitution states that no one has the right to levy or charge taxes except the authority of law. Whatever tax is being charged has to be backed by the law passed by the legislature or the parliament. Article 246 of the Indian Constitution, distributes legislative powers including taxation, between the Parliament and the State Legislature. Schedule VII enumerates these subject matters with the use of three lists;
. List - I entailing the areas on which only the parliament is competent to makes laws,
. List - II entailing the areas on which only the state legislature can make laws, and
. List - III listing the areas on which both the Parliament and the State Legislature can make laws upon concurrently.
Separate heads of taxation are provided under lists I and II of Seventh Schedule of Indian Constitution. There is no head of taxation in the Concurrent List (Union and the States have no concurrent power of taxation). Any tax levied by the government which is not backed by law or is beyond the powers of the legislating authority may be struck down as unconstitutional. The thirteen heads List-I of Seventh Schedule of Constitution of India covered under Union taxation, on which Parliament enacts the taxation law, are as under:
. Taxes on income other than agricultural income;
. Duties of customs including export duties;
. Duties of excise on tobacco and other goods manufactured or produced in India except (i) alcoholic liquor for human consumption, and (ii) opium, Indian hemp and other narcotic drugs and narcotics, but including medicinal and toilet preparations containing alcohol or any substance included in (ii);
. Corporation Tax;
. Taxes on capital value of assets, exclusive of agricultural land, of individuals and companies, taxes on capital of companies;
. Estate duty in respect of property other than agricultural land;
. Duties in respect of succession to property other than agricultural land;
. Terminal taxes on goods or passengers, carried by railway, sea or air; taxes on railway fares and freight;
. Taxes other than stamp duties on transactions in stock exchanges and futures markets;
. Taxes on the sale or purchase of newspapers and on advertisements published therein;
. Taxes on sale or purchase of goods other than newspapers, where such sale or purchase takes place in the course of inter-State trade or commerce;
. Taxes on the consignment of goods in the course of inter-State trade or commerce.
. All residuary types of taxes not listed in any of the three lists of Seventh Schedule of Indian Constitution.
. Land revenue, including the assessment and collection of revenue, the maintenance of land records, survey for revenue purposes and records of rights, and alienation of revenues;
. Taxes on agricultural income;
. Duties in respect of succession to agricultural income;
. Estate Duty in respect of agricultural income;
. Taxes on lands and buildings;
. Taxes on mineral rights;
. Duties of excise for following goods manufactured or produced within the State (i) alcoholic liquors for human consumption, and (ii) opium, Indian hemp and other narcotic drugs and narcotics;
. Taxes on entry of goods into a local area for consumption, use or sale therein;
. Taxes on the consumption or sale of electricity;
. Taxes on the sale or purchase of goods other than newspapers;
. Taxes on advertisements other than advertisements published in newspapers and advertisements broadcast by radio or television;
. Taxes on goods and passengers carried by roads or on inland waterways;
. Taxes on vehicles suitable for use on roads;
. Taxes on animals and boats;
. Tolls;
. Taxes on profession, trades, callings and employments;
. Capitation taxes;
. Taxes on luxuries, including taxes on entertainments, amusements, betting and gambling;
. Stamp duty.
Direct Taxes
A Direct tax is a kind of charge, which is imposed directly on the taxpayer and paid directly to the government by the persons (juristic or natural) on whom it is imposed. A direct tax is one that cannot be shifted by the taxpayer to someone else. The some important direct taxes imposed in India are as under:
Income Tax:
Income Tax Act, 1961 imposes tax on the income of the individuals or Hindu undivided families or firms or co-operative societies (other tan companies) and trusts (identified as bodies of individuals associations of persons) or every artificial juridical person. The inclusion of a particular income in the total incomes of a person for income-tax in India is based on his residential status. There are three residential status, viz., (i) Resident & Ordinarily Residents (Residents) (ii) Resident but not Ordinarily Residents.
Corporation Tax:
The companies and business organizations in India are taxed on the income from their worldwide transactions under the provision of Income Tax Act, 1961. A corporation is deemed to be resident in India if it is incorporated in India or if it's control and management is situated entirely in India. In case of non resident corporations, tax is levied on the income which is earned from their business transactions in India or any other Indian sources depending on bilateral agreement of that country.
Property Tax:
Property tax or 'house tax' is a local tax on buildings, along with appurtenant land, and imposed on owners. The tax power is vested in the states and it is delegated by law to the local bodies, specifying the valuation method, rate band, and collection procedures. The tax base is the annual ratable value (ARV) or area-based rating. Owner-occupied and other properties not producing rent are assessed on cost and then converted into ARV by applying a percentage of cost, usually six percent. Vacant land is generally exempted from the assessment. The properties lying under control of Central are exempted from the taxation. Instead a 'service charge' is permissible under executive order. Properties of foreign missions also enjoy tax exemption without an insistence for reciprocity.
Inheritance (Estate) Tax:
An inheritance tax (also known as an estate tax or death duty) is a tax which arises on the death of an individual. It is a tax on the estate, or total value of the money and property, of a person who has died. India enforced estate duty from 1953 to 1985. Estate Duty Act, 1953 came into existence w.e.f. 15th October, 1953. Estate Duty on agricultural land was discontinued under the Estate Duty (Amendment) Act, 1984. The levy of Estate Duty in respect of property (other than agricultural land) passing on death occurring on or after 16th March, 1985, has also been abolished under the Estate Duty (Amendment) Act, 1985.
Gift Tax:
Gift tax in India is regulated by the Gift Tax Act which was constituted on 1st April, 1958. It came into effect in all parts of the country except Jammu and Kashmir. As per the Gift Act 1958, all gifts in excess of Rs. 25,000, in the form of cash, draft, check or others, received from one who doesn't have blood relations with the recipient, were taxable. However, with effect from 1st October, 1998, gift tax got demolished and all the gifts made on or after the date were free from tax. But in 2004, the act was again revived partially. A new provision was introduced in the Income Tax Act 1961 under section 56 (2). According to it, the gifts received by any individual or Hindu Undivided Family (HUF) in excess of Rs. 50,000 in a year would be taxable.
Indirect Tax
An indirect tax is a tax collected by an intermediary (such as a retail store) from the person who bears the ultimate economic burden of the tax (such as the customer). An indirect tax is one that can be shifted by the taxpayer to someone else. An indirect tax may increase the price of a good so that consumers are actually paying the tax by paying more for the products. The some important indirect taxes imposed in India are as under:
Customs Duty:
The Customs Act was formulated in 1962 to prevent illegal imports and exports of goods. Besides, all imports are sought to be subject to a duty with a view to affording protection to indigenous industries as well as to keep the imports to the minimum in the interests of securing the exchange rate of Indian currency. Duties of customs are levied on goods imported or exported from India at the rate specified under the customs Tariff Act, 1975 as amended from time to time or any other law for the time being in force. Under the custom laws, the various types of duties are leviable. (1) Basic Duty: This duty is levied on imported goods under the Customs Act, 1962. (2) Additional Duty (Countervailing Duty) (CVD): This is levied under section 3 (1) of the Custom Tariff Act and is equal to excise duty levied on a like product manufactured or produced in India. If a like product is not manufactured or produced in India, the excise duty that would be leviable on that product had it been manufactured or produced in India is the duty payable. If the product is leviable at different rates, the highest rate among those rates is the rate applicable. Such duty is leviable on the value of goods plus basic custom duty payable. (3) Additional Duty to compensate duty on inputs used by Indian manufacturers: This is levied under section 3(3) of the Customs Act. (4) Anti-dumping Duty: Sometimes, foreign sellers abroad may export into India goods at prices below the amounts charged by them in their domestic markets in order to capture Indian markets to the detriment of Indian industry. This is known as dumping. In order to prevent dumping, the Central Government may levy additional duty equal to the margin of dumping on such articles. There are however certain restrictions on imposing dumping duties in case of countries which are signatories to the GATT or on countries given "Most Favoured Nation Status" under agreement. (5) Protective Duty: If the Tariff Commission set up by law recommends that in order to protect the interests of Indian industry, the Central Government may levy protective anti-dumping duties at the rate recommended on specified goods. (6) Duty on
Bounty Fed Articles: In case a foreign country subsidises its exporters for exporting goods to India, the Central Government may impose additional import duty equal to the amount of such subsidy or bounty. If the amount of subsidy or bounty cannot be clearly deter mined immediately, additional duty may be collected on a provisional basis and after final determination, difference may be collected or refunded, as the case may be. (7) Export Duty: Such duty is levied on export of goods. At present very few articles such as skins and leather are subject to export duty. The main purpose of this duty is to restrict exports of certain goods. (8) Cess on Export: Under sub-section (1) of section 3 of the Agricultural & Processed Food Products Export Cess Act, 1985 (3 of 1986), 0.5% ad valorem as the rate of duty of customs be levied and collected as cess on export of all scheduled products. (9) National Calamity Contingent Duty: This duty was imposed under Section 134 of the Finance Act, 2003 on imported petroleum crude oil. This tax was also leviable on motor cars, imported multi-utility vehicles, two wheelers and mobile phones. (10) Education Cess: Education Cess is leviable @ 2% on the aggregate of duties of Customs (except safeguard duty under Section 8B and 8C, CVD under Section 9 and anti-dumping duty under Section 9A of the Customs Tariff Act, 1985). Items attracting Customs Duty at bound rates under international commitments are exempted from this Cess. (11) Secondary and Higher Education Cess: Leviable @1% on the aggregate of duties of Customs. (12) Road Cess: Additional Duty of Customs on Motor Spirit is leviable and Additional Duty of Customs on High Speed Diesel Oil is leviable by the Finance Act (No.2), 1998. and the Finance Act, 1999 respectively. (13) Surcharge on Motor Spirit: Special Additional Duty of Customs (Surcharge) on Motor Spirit is leviable by the Finance Act, 2002.
Central Excise Duty:
The Central Government levies excise duty under the Central Excise Act, 1944 and the Central Excise Tariff Act, 1985. Central excise duty is tax which is charged on such excisable goods that are manufactured in India and are meant for domestic consumption. The term "excisable goods" means the goods which are specified in the First Schedule and the Second Schedule to the Central Excise Tariff Act 1985. It is mandatory to pay Central Excise duty payable on the goods manufactured, unless exempted.
Eg: duty is not payable on the goods exported out of India. Further various other exemptions are also notified by the Government from the payment of duty by the manufacturers. Various Central Excise are:
(1) Basis Excise Duty:
(2) Special Excise Duty:
(3) Additional Duty of Excise:
(5) Surcharge:
(a) Special Additional Duty of Excise on Motor Spirit.
(b) Surcharge on Pan Masala and Tobacco Products.
(6) National Calamity Contingent Duty
(7) Education Cess
(8) Cess - A cess has been imposed on certain products.
Service Tax:
The service providers in India except those in the state of Jammu and Kashmir are required to pay a Service Tax under the provisions of the Finance Act of 1994. The provisions related to Service Tax came into effect on 1st July, 1994. Under Section 67 of this Act, the Service Tax is levied on the gross or aggregate amount charged by the service provider on the receiver. However, in terms of Rule 6 of Service Tax Rules, 1994, the tax is permitted to be paid on the value received. The interesting thing about Service Tax in India is that the Government depends heavily on the voluntary compliance of the service providers for collecting Service Tax in India.
Sales Tax:
Sales Tax in India is a form of tax that is imposed by the Government on the sale or purchase of a particular commodity within the country. Sales Tax is imposed under both, Central Government (Central Sales Tax) and State Government (Sales Tax) Legislation. Generally, each State follows its own Sales Tax Act and levies tax at various rates. Apart from sales tax, certain States also imposes additional charges like works contracts tax, turnover tax and purchaser tax. Thus, Sales Tax Acts as a major revenue-generator for the various State Governments. From 10th April, 2005, most of the States in India have supplemented sales tax with a new Value Added Tax (VAT).
Tax evasion is the general term for efforts by individuals, corporations, trusts and other entities to evade taxes by illegal means. Tax evasion usually entails taxpayers deliberately misrepresenting or concealing the true state of their affairs to the tax authorities to reduce their tax liability, and includes, in particular, dishonest tax reporting (such as declaring less income, profits or gains than actually earned; or overstating deductions). Tax evasion is an activity commonly associated with the underground economy and one measure of the extent of tax evasion the amount of unreported income, namely the difference between the amount of income that should legally be reported to the tax authorities and the actual amount reported. In the 1970's and 80's, The IRS undertook the Taxpayer Compliance Measurement Program (TCMP) in an attempt to measure unreported income and the tax gap. The tax gap is the difference between the amount of tax legally owed and the amount actually collected by the government. The TCMP program was believed to produce the most reliable information about noncompliance, but these "audits from hell" were deemed to be overly intrusive and were discontinued in 1988. The National Research Program was undertaken in the 1990's as a less intrusive means of measuring noncompliance and was described as "the most careful and comprehensive estimates of the extent and nature of tax noncompliance anywhere in the world" However, critics point out numerous problems with the tax gap measure. The IRS direct audit measures of noncompliance are augmented by indirect measurement methods, most prominently currency ratio models Tax avoidance, on the other hand, is the legal utilization of the tax regime to one's own advantage, to reduce the amount of tax that is payable by means that are within the law. Both tax evasion and avoidance can be viewed as forms of tax noncompliance, as they describe a range of activities that are unfavorable to a state's tax system.
During the later half of the twentieth century, value added tax has emerged as a modern form of consumption tax through the world, with the notable exception of the United States. Producers who collect VAT from the consumers may evade tax by under-reporting the amount of sales. The US has no broad-based consumption tax at the federal level, and no state currently collects VAT; the overwhelming majority of states instead collect sales taxes. Canada uses both a VAT at the federal level (the Goods and Services Tax) and sales taxes at the provincial level; some provinces have a single tax combining both forms.
In addition, most jurisdictions which levy a VAT or sales tax also legally require their residents to report and pay the tax on items purchased in another jurisdiction. This means that those consumers who purchase something in a lower-taxed or untaxed jurisdiction with the intention of avoiding VAT or sales tax in their home jurisdiction are in fact breaking the law in most cases. Such evasion is, especially, prevalent in federal states like the Nigeria, US and Canada where sub-national jurisdictions have the constitutional power to charge varying rates of VAT or sales tax. In Nigeria for example, some local states enforce VAT on each goods sold by trader. The price must be clearly stated and the VAT distinct from the price of the good purchased. Any act by the trader contrary to this (like including VAT in the price of the goods) is punishable as attempting to siphoning the VAT.
Borders between tax districts in the same nation usually lack the resources to enforce tax collection on goods carried in private vehicles from one district to another, so states only pursue sales and use tax collection on high-value items such as cars.
Tax Avoidance
It means the tax regime's legal use for one's own personal advantage so as to lessen the tax amount that is payable to the government by ways that are legal. The Avoidance of Tax is usually done by the people who desire to keep their money with themselves and not give it to the government.
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Avoidance Tax includes situations when people eliminate or reduce tax by following a transaction or many transactions that are legal. The income tax department provides many provisions through which the people can go for Tax Avoidance such as refunds, credits, benefits, and many other kinds of entitlements. The various methods of Tax Avoidance are:
Legal entities are a method that people follow when they want to go for Tax Avoidance. Under this method of Avoidance Tax, people legally defer paying personal taxes by creating a legal separate entity to which they donate their property. The legal separate entity that is set up is often a foundation, company, or trust. The properties are transferred to the trust or company, as a result of which the income that is earned belongs to this entity and not by the owner. Usually, people are taxed personally on earnings and property that they own and thus by transferring property to a legal separate entity, individuals can avoid personal taxation although certain taxes such as corporate taxes are still applicable. In order to go for Tax Avoidance, the foundation, company, or trust can also avoid corporate taxes if the entity is set up in a jurisdiction that considered offshore.
Country of residence is another method that people adopt when they
go for Avoidance of Tax. Under this method of Tax Avoidance, the company or
person changes the tax residence to a place that is a tax haven in order to
lower the amount of taxes that they pay. Under this method, the person may also
become a regular traveler so that taxation can be avoided. Double taxation
means that many countries charge taxes on the income that has been earned
inside that country without taking into consideration, the resident country of
the firm or person. So that people do not have to pay double taxes, once in the
country where the income has been earned and then again in the resident
country, many countries have gone for bilateral treaties of double taxation
with other countries. This helps tax-payers as they are able to avoid paying
double taxes.
Tax Avoidance reduces the revenue of the government and also brings
into disrepute, the tax system. Ideally, Avoidance of Tax should not be
encouraged and the government should also take measures in order to prevent it.
Power of taxation and constitutional limitations
Power is a measure of a person's ability to control the environment around, including the behavior of other persons. The term authority is often used for power perceived as legitimate by the social structure. Power manifests itself in a rational manner: one cannot meaningfully say that a particular social actor "has power" without also specifying the role of other parties in the social relationship.
Political power is a type of power held by a person or group in a society. There are many ways to hold such power. Officially, political power is held by the holders of sovereignty. Political powers are not limited to heads of states, however, and the extent to which a person or group holds such power is related to the amount of societal influence they can wield, formally or informally. In many cases this influence is not contained within a single State and it refers to international power. Political scientists have frequently defined power as "the ability to influence the behaviour of others" with or without resistance.
Sovereignty is the most important constituent element of the State and there can be no State without a Sovereign power. The sovereignty of the State is unlimited internally as well as externally. It is original and absolute power and it cannot be divided. Division of sovereignty means destruction of sovereignty. Sovereignty represents the unity of the State, and the sovereign State is one which is externally free and internally supreme.
All governmental organs and institutions owe their origin to the constitution and derive their powers from its provisions. These organs and institutions enjoy only such powers as are conferred on them and function within limits demarcated by the constitution. Parliament is no exception and unlike British Parliament, cannot claim unlimited powers. It must function within its limits and its actions are subjected to judicial scrutiny. It is given the power to amend the constitution, but the power to amend must be exercised within the bounds of the constitution. Besides conforming to the procedure laid down for this purpose, the power to amend should not be exercised so as to destroy or abrogate the basic structure or framework of the constitution.
In a sense the constitution may appear to be sovereign as it is the supreme law of the land. However a document cannot be the sovereign. The people of India, according to the Preamble, have given to themselves this constitution. The source of the constitution is the people of India will continue to be governed under the constitution so long as it is acceptable to them and its provisions promote their aims and aspirations. It is true that the constitution was adopted by the constituent assembly which was not directly elected by the people. But that does not necessarily mean that the constituent assembly as it came to be constituted, did not project the feelings of the people. The fact that the constitution has been in operation for about sixty years with a number of general elections from time to time is an evidence of the people having accepted the constitution in its present form. Following the course of Indian history and the pattern of Indian politics, it may be said that, unlike the Western society, it is the elite of the Indian society rather than the people themselves who have set the tone for the reformation of the society. Besides the fact that the Preamble provided that the people of India have enacted and given to themselves the constitution and its continued acceptance by the people over the years leads to no other conclusion that the binding force of the constitution is the sovereign will of the people of India. If at any stage of history, the people find the constitution is not serving the needs of the Indian Society, the people of India may, if necessary, set in motion machinery which provides for a system suited to the aims and aspirations of the people. It may therefore, be rightly observed that the sovereignty lies with the people of India.
Taxing Power
Taxation is the legal capacity of the sovereignty or one of its governmental agents to exact or impose a charge upon persons or their property for the support of government and for the payment for any other public purposes which it may constitutionally carry out. The power of taxation differs from the power of eminent domain, and where as the government under taxation, is required to make and enforce contribution of money or property by the citizen as his share of the burden of support of the government.
A government cannot exist without raising and spending money. Parliament controls public finance which includes granting of money to the administration for expenses on public services, imposition of taxes and authorization of loans. This is a very important function of Parliament. Through this means Parliament exercise control over the executive because whenever Parliament discusses financial matters, government's broad policies are invariably brought into focus. The Indian Constitution devises elaborate machinery for securing parliamentary control over finances which is based on the following four principles.
1. The first principle regulates the constitutional relation between the Government and Parliament in matters of finance. The executive cannot raise money by taxation, borrowing or otherwise, or spend money, without the authority of Parliament.
2. The second principle regulates the relation between the two Houses of Parliament in financial matters. The powers of raising money by tax or loan and authorizing expenditure belongs exclusively to the popular House, viz., Lok Sabha. Rajya Sabha merely assents to it. It cannot revise, alter or initiate a grant. In financial matters, Rajya Sabha does not have co-ordinate authority with Lok-Sabha and Rajya Sabha plays only a subsidiary role in this respect.
3. The third principle imposes a restriction on the power of Parliament to authorize expenditure. Parliament cannot vote for raising money by tax for any purpose whatsoever except on demand by ministers.
4. The fourth principle imposes a similar restriction on the power of Parliament to impose taxation. Parliament cannot impose any tax except upon the recommendation of the Executive.
The legislature having the power to impose a tax has also the power to prescribe the means by which the tax shall be collected and to designate officers by whom it shall be enforced; the obligation and indemnity of those officers; the means to ensure proper realization of the tax. The method and manner of collection of tax is no criterion for judging the vires of the tax law.
The following powers flow from the power to tax as ancillary powers:
1) To provide for refund of a tax illegally or improperly collected and to impose restriction upon the right to claim such refund.
2) To provide for the prevention of evasion of the tax imposed.
3) To levy a penalty for the proper enforcement of the taxing statute, or collecting any amount wrongly under colour of that statute, whether by way of fine or forfeiture.
Article 265 of Constitution of India
Article 265 of the Constitution lays down that no tax shall be levied or collected except by the authority of law. Schedule VII divides this subject into three categories:
1) Union list (Article 246(1) of the Constitution specifies that Parliament has exclusive powers to make laws with respect of any of the matters enumerated in List I in the Seventh Schedule to Constitution)
2) State list (As per Article 246(3) State Government has exclusive powers to make laws with respect to matters enumerated in List II)
3) Concurrent list (both Parliament and State Government can pass legislation with respect to items specified in this list).
Constitutional Limitations
Apart from the limitation by the division of the taxing power between the Union and State Legislature by the relevant Entries in the legislative Lists, the taxing power of either Legislature is particularly subject to the following limitations imposed by particular provisions of our Constitution:
1) It must not contravene Art.13.
2) It must not deny equal protection of the laws, must not be discriminatory or arbitrary. (Art.14)
3) It must not constitute an unreasonable restriction upon the right to business.(19(1)(g))
4) No tax shall be levied on the proceeds of which are specially appropriated in payment of expenses for the promotion or maintenance of any particular religion or religious denomination (Art.27).
5) A State Legislature or any authority within the State cannot tax the property of the Union.(Art.285)
6) The Union cannot tax the property and income of a State (Art.289).
7) The power of a State to levy tax on sale or purchase of goods is subject to Art.286.
8) Save in so far as Parliament may, by law, otherwise provide, a State shall not tax the consumption or sale of electricity in the cases specified in Art.287.
The evolution of parliament's power of the purse
Introduction
The finance of the country is ultimately associated with the liberties of the country. If the House of Commons by any possibility lose the power of the control of the grants of public money, depend upon it, your very liberty will be worth very little in comparison. That powerful leverage has been what is commonly known as the power of the purse - the control of the House of Commons over public expenditure. William Ewart Gladstone, 1891 How did parliaments come to exercise the budgetary roles they have today? Why do they participate in the budget process in the first place? To answer these questions, and as a background to the subsequent units, this unit provides a brief overview of some key stages in the evolution of the role of parliament in budgeting. The following sections look at the struggle to ensure parliamentary consent to taxation, how the rise of modern budgeting helped parliament to control expenditures, and more recent developments relating to the role of legislatures in budgeting.
The struggle for parliamentary control of taxation
The struggle to ensure consent to taxation was a central battlefield in the evolution of parliament in medieval England. To guard against despotic royal rule, parliament soughtto limit the kings' powers to impose taxes so as to curtail their ability to maintain a standing army beyond times of war and immediate external threat (Harriss 1975). The principle of parliamentary consent to taxation gained constitutional recognition when it was enshrined in the Magna Carta - a list of concessions to the barons that King John signed at Runnymede in 1215. But this agreement did not resolve the conflict over the power to impose taxes, which continued to simmer throughout the following centuries. Bitter contests between kings and parliaments in the seventeenth century precipitated procedural innovations that advanced parliamentary control of state finance. In particular parliament's increasing use of a committee of the whole House brought several advantages, due to the fact that the procedures of committees applied for such deliberations, rather than the standard rules. This allowed the Commons to appoint their own chairperson, which reduced the influence of the Speaker, who at the time was generally regarded as aligned with the monarch. The committee procedure also allowed each member to speak more than once and thus facilitated much freer debate. It became easier for the Commons to delay passing the bill to grant subsidies to the crown until the end of a session, a tactic that afforded time to extract concessions from the monarch. But clever procedural devices were not enough to establish parliamentary supremacy over taxation. A crucial shortcoming of parliamentary control was that it did not extend to royal borrowing on the monarch's personal credit. After Charles II claimed the throne in 1660 parliament started to demand estimations of cost before voting money to be granted to the king, who claimed to get short shrift. To evade expenditure control, a popular royal tactic was to resort to borrowing and hope that parliament would later consent to the raising of funds to repay such loans. But this practice was not sustainable when parliament refused to oblige. In 1672 the government in effect declared the only state bankruptcy in British history when payments on loans from City bankers were suspended initially for twelve months, which was later renewed repeatedly. Only after 1688 was executive borrowing tied to parliamentary consent, which restored trust with lenders and ensured large-scale access to finance over the following centuries. The Glorious Revolution of 1688 brought a decisive victory for parliament, and it is a landmark in the evolution of its financial role. The 1689 Bill of Rights captures the outcome of the struggle. Most importantly, it firmly established the principle that only parliament could authorize taxation by proclaiming 'That levying money for or to the use of the Crown by pretence of prerogative, without grant of Parliament, for longer time, or in other manner than the same is or shall be granted, is illegal.' Still, at this stage there was still no such thing as an annual budget, and there was no comprehensive control of expenditures. Before the revolution the royals freely mingled public and private income.
Following the revolution parliament made a life-long grant to the king to cover expenditures on the civil list and the monarch in turn relinquished control over most of his hereditary revenues. Originally, the list was intended to cover the financial requirements of the king and his household as well as the expenditure of the central civil government excluding debt charges. Expenditure items for civil administration were gradually transferred from the list to the supply services and, later, the consolidated fund, in a process that lasted until 1830. The creation of this list was the first step towards the separation of public and royal expenditures. Paradoxically, in these early days of growing financial control by the Commons one can also find the origin of limitations on parliament's budgetary powers. Given the political dynamics of the time, it made little sense for parliament to volunteer money to the crown. The Commons proceeded to resolve in 1706 'That this House will receive no Petition for any sum of Money relating to public Service, but what is recommended from the Crown.' The financial initiative of the crown has been enshrined in the standing orders since 1713 and this limitation on parliament's power of the purse is considered an essential constitutional principle to this day. Therefore, while the British Parliament was at the forefront of claiming budgetary rights, it was also the first parliament to voluntarily restrict its powers to introduce and amend financial legislation (Inter- Parliamentary Union 1986, p. 1093): Parliament still respects this long-standing custom and practice and, as a result, it may not vote sums in excess of the Government's estimates. Consequently, the only amendments that are in order are those which aim to reduce the sums requested and have as their purpose the chance for Members to raise explanations before the sums in question are approved. After the Glorious Revolution, it was not long before parliamentary control over taxation spread beyond Britain. Parliament proved to have a short memory for the passions that could be incited by unilateral imposition of fiscal measures. As imperial finances were exceedingly stretched by the task of protecting vast colonial territories, parliament sought to force the inhabitants of the empire's North American possessions to contribute towards the defense of the territory. In 1765 it ordered the imposition of a tax on a stamp affixed to a range of documents including newspapers and playing cards. This gave rise to great discontent in the colonies, and led to a boycott of British goods by the colonialists. Despite a partial retreat by parliament, which abolished the 'stamp tax' and several other duties, the continued imposition of a duty on tea was sufficient to provoke unrest and ultimately led to the war of independence. At the First Continental Congress in 1774 delegates from the colonies rejected 'every idea of taxation, internal or external, for raising revenue on the subjects in America, without their consent.'
The rise of modern budgeting
Parliamentary control remained incomplete as long as governments continued to enjoy wide discretion in expending public revenues. Without detailed knowledge of expenditure needs, requests for funds could not be properly evaluated. Following the Glorious Revolution, it took the Commons two further centuries to put in place a comprehensive system of expenditure control. There were some interim achievements, notably the creation of the consolidated fund in 1787. But the development of modern budgeting practices in the United Kingdom had to wait until the Gladstonian reforms in the second half of the nineteenth century. By the beginning of the nineteenth century, the United States Congress already constrained executive discretion through detailed line item appropriations that prescribed the exact use of authorized expenditures, for instance by setting strict limits on specific expenses such as firewood and candles in particular offices. This tradition has its origins in colonial times, when legislatures were distrustful of British rule and invested much effort in scrutinizing administrative expenditures. The colonialists were suspicious of governors they did not appoint and who were regarded as agents of the king in distant Britain. They thus devised stringent and humiliating control mechanisms including the annual voting of salaries, detailed specification of the object of spending and the amount to be spent, and the reversion of unspent funds to the treasury at the end of the fiscal period. This advanced level of congressional scrutiny of expenditures was exceptional compared with other countries at the time. In Europe, France was first in developing modern expenditure control mechanisms based on reforms of state audit during the first half of the nineteenth century. Napoleon put in place the institutional fundamentals of modern public audit when he created the cour des comptes in 1807. In the initial years following the creation of the court the benefits of the new audit system for the French National Assembly were marginal. To ensure effective reporting to the assembly, the publication and distribution of audit reports was made a legal requirement in 1832. The assembly also gradually broadened its control over the approval of expenditures until the specification of detailed items of expenditure for each ministry became a legal requirement in 1831. By the middle of the nineteenth century, France had put in place many of the elements that are associated with modern budgeting, notably a comprehensive budget encompassing all of the activities of government, a standard fiscal year, the principle of annual authorization, and a developed system of accounting and audit control. Control of expenditures evolved differently in the United Kingdom. Parliament appropriated money many centuries before the use of budgets became common. A first known instance of parliamentary appropriation dates back to the fourteenth century, when a grant to the Edward III was explicitly earmarked for 'the Maintenance and Safeguard of our said Realm of England, and on Wars in Scotland, France and Gascoign, and in no places elsewhere during the said Wars' (Einzig 1959, p. 79). Particular sources of revenue were also frequently tied to specific expenses in order to exercise some control over royal spending. However, parliamentary oversight of expenditures remained patchy and incomplete. An important improvement was the creation of the consolidated fund in 1787 for the purposes of collecting revenues and disbursing all monies for the supply of public services, which 'broke the disorder caused by assigning particular taxes to special purposes and it provided the means of infinite expenditure control through comprehensive appropriation schedules' (Reid 1966, p. 57). But full expenditure control had to wait until the rise of modern budgeting. The decisive steps towards modernization of public finances in the United Kingdom are inextricably linked to William Ewart Gladstone, who first became Chancellor of the Exchequer in 1852. Gladstone was determined to force greater economy in public finance and introduced reforms in the 1860s that made annual and comprehensive estimates central to legislative oversight. In 1861 the Commons, based on the initiative of Gladstone, resolved to establish a public accounts committee to examine the accounts showing the appropriation of the sums granted by parliament for public expenditure. The Exchequer and Audit Departments Act of 1866 required all government departments to produce appropriation accounts for audit purposes. The act also created the comptroller and auditor general by merging the ex ante function of authorizing the issue of money to departments with a new ex post function of examining every appropriation account and reporting the results to parliament. The committee developed a high standard of scrutiny and contributed significantly to rapid improvements in the disclosure of financial information in the following decades (Chubb 1952). In the United Kingdom a final step towards the democratization of the budget was taken when the hereditary chamber, the House of Lords, was stripped of its veto power over financial legislation. The elected House of Commons considered the Lords unable to amend tax and spending bills by the end of the seventeenth century. The formal removal of remaining veto power was triggered by the dramatic struggle over the 1909 budget of Chancellor Lloyd George, who sought increased tax revenues in order to pay for pensions and defense expenditures (Porritt 1910). When the Lords rejected the entire Finance Bill, this prompted the passing of the Parliament Act of 1911, the purpose of which was to debar the Lords from rejecting money bills - legislation strictly related to taxation, borrowing or appropriations. Since then, the supremacy of the elected chamber has been firmly established. Budgetary bicameralism of various forms continues in countries where second chambers of parliament have democratic credentials.
More recent developments in legislative budgeting
Parliamentary fiscal power in the United Kingdom was at its peak in the second half of the nineteenth century, when the Commons frequently amended spending and revenue proposals (Einzig 1959). The spread of parliamentary democracy since the nineteenth century ensured that the principle of parliamentary authorization of taxation and public expenditure became a constitutional fundamental across democratic countries. However, from a long term perspective the influence of national legislatures on budget policy making has declined in most industrialized countries (Coombes 1976). The budgetary decline of parliament is perhaps most evident in the United Kingdom, where the House of Commons ceased to amend estimates almost a century ago. Several developments contributed to reducing the budgetary activism of parliaments (Schick 2002). The emergence of disciplined political parties has reigned in legislative independence. Devolution of spending, and to a lesser extent of revenues, has chipped away at the comprehensive control of public funds by national legislatures. In addition, the massive expansion of entitlement spend in the twentieth century has substantially rigidified budgets and commensurately decreased the remaining margin for active legislative engagement in annual budgets. With the growth of public spending and the increasing complexity of public finances, the executive budget proposal became the standard against which legislative action was measured. But the decline of parliamentary power over budgets is not universal. There are signs that some parliaments are attempting a budgetary comeback. In France, for instance, the National Assembly recently initiated a wide-ranging set of budget reforms. The resulting changes include a reclassification of the budget in order to support parliamentary oversight and an expansion of powers to amend expenditures (Chabert 2001). In developing and transition countries, a substantial number of legislatures are moving towards budgetary activism. Perhaps the primary reason for this development is that democratization and constitutional change have opened up possibilities for legislature participation in many previously closed systems. A good example is the Brazilian Congress, which historically played no significant role in the budget process. Democratization in the 1980s led to constitutional changes that gave Congress powers to modify the budget and have resulted in substantial levels of activism
In addition, there has been a recent shift in international financial institutions and donor agencies towards participation in setting development goals and strategies. Developing countries are now asked to access international finance on the basis of comprehensive poverty reduction strategies that are meant to be compiled through an in-country participative process. This shift is linked to renewed interest by the international donor community in the quality of the budget process and the governance of the budget for a variety of reasons, in particular the realization of the failure of conditionality in development lending and evidence on the effectiveness of aid. This provides an opportunity for legislatures in poor countries to reengage with development policy and budgets.
Taxing Power of State Legislature
During the last one and a half decades, there has been severe deterioration in the fiscal health at the States' level. Although the decline in the fiscal position of the States has been mainly due to uncontrolled expenditure growth, an important factor has also been the marked decline in the tax productivity. Indian States derive approximately 65 percent of revenue from own sources, the remaining 35 percent being the transfers from the Centre. Over the years, Central transfers to States as ratio to GDP stagnated and consequently, in view of the growing expenditure needs the dependency on own revenues increased. However, the growth of own tax revenues of almost all the States has been on the decline which has aggravated the pressure on the fiscal balances, and in course of time, became responsible for the decline in the quality of expenditure. There is also a need to adjust the taxation to suit the needs of growing market orientation of the economy which calls for reducing the tax differentials across the States, broadening the tax base with minimal exemptions and incentives and bringing about the much needed transparency for better tax compliance.
In this paper, an attempt is made to review the performance of major taxes at the State level during the last two decades with a view to identify the major sources and factors that led to the decline in the revenue performance. Since sales tax is dealt separately, it is excluded from our analysis. Section I examines the constitutional provisions and limitations pertaining to the State taxation, Section II reviews the composition and growth performance of the State level taxes, Section III examines the major causes of decline in the tax productivity and finally, Section IV attempts to indicate the necessary policy corrections.
The State Tax System: Constitutional provisions
The Seventh Schedule of the Constitution of India demarcates the taxing powers of Union and State Governments and entries 46 through 63 in the State List specify the items on which States can levy taxes (Appendix 2). Accordingly, the major taxes levied by the States are sales tax, State excise duties, stamp duties and registration fees, motor vehicles tax, land revenue, agricultural income tax, entertainment tax, profession tax, electricity duty, and other minor taxes. In India the tax bases of the Centre and States are by and large separate and very few tax bases are common and shared. For example, while the non-agricultural income is subject to Union taxation, the power to tax agricultural income is entrusted to the States. Similarly, while taxation of manufacturing activity is in the hands of the Central government, taxation of trading activity is in the hands of the States. The broad principle applied for the demarcation of the tax powers between the Central and State governments seems to be that tax bases arising out of activities that are of local nature are kept within the purview of State taxation and the rest are left to the Central government. This led to myriad number of taxes and consequently growing complexity for the tax payers4. There are several other Constitutional provisions that have a bearing on the State level tax system. Important among them are as follows.
(1) There are certain taxes (under article 268) whose rates and provisions are determined by the Union Government while collection and use of the revenue is done by State Governments5. Prominent among these are the Central sales tax, and stamp duties and registration fees in respect of certain financial instruments. State excise duties levied on certain medicines and toilet preparation also come in this category. Consequently, States' freedom to raise revenue from these sources is restricted.
(2) Until recently, certain taxes were levied and collected by the Union Government but the revenues were completely assigned to State Governments. For example, additional excise duties on textiles, tobacco and sugar were levied by the Union Government6 but the proceeds were reassigned to the State Governments under article 269. Following the Eleventh Finance Commission recommendations, the Constitution (Eightieth) Amendment, 2000, stipulates that the proceeds of the additional excise duties are combined with all other tax revenues of the Union government, to be shared among the States on the basis of a unified formula7. It means that instead of all the revenue from such taxes, only a portion is devolved to the States. However, if any State levied and collected sales tax on sugar, textile and tobacco, it would not be entitled to any share from this 1.5 percent.
(3) Article 276 restricts the power of States to raise the rate of profession tax beyond Rs 2,5008.
(4) There are certain constraints imposed on taxation of services by the Constitution (Eighty Eighth Amendment) Act, 2003. The Article 268A inserted by the act seeks to 4 Although, the Constitution clearly demarcates the division of the tax powers between Union and the State Governments such clear demarcation does not exist as regards the distribution of tax powers between State and local Governments. Consequently, the taxing powers of the local bodies are not uniform across the States. Local bodies derive their tax revenue from octroi or entry tax, property tax, entertainment tax, local market levies and other minor levies. In some States, these taxes are collected by the State Governments and revenues are assigned to the local bodies. The portion of tax revenue assignments to the local bodies is also not uniform across the States. 5 Artilce 268: Duties levied by the Union but collected and appropriated by the States.- (1) Such stamp duties and such duties of excise on medicinal and toilet preparations as are mentioned in the Union List shall be levied by the Government of India but shall be collected- (a) in the case where such duties are leviable within any[Union territory], by the Government of India, and (b) in other cases, by the States within which such duties are respectively leviable. (2) The proceeds in any financial year of any such duty leviable within any State shall not form part of the Consolidated Fund of India, but shall be assigned to that State. [Constitution of India, Article 268, under the Additional Excise Duties (Goods of Special Importance) Act 1957 7 Article 270:
(1) All taxes and duties referred to in the Union List, except the duties and taxes referred to in articles 268 and 269, respectively, surcharge on taxes and duties referred to in article 271 and any cess levied for specific purposes under any law made by Parliament shall be levied and collected by the Government of India and shall be distributed between the Union and the States in the manner provided in clause (2). Further, Article 269 has been recast by the Amendment Act. The new article includes only taxes on sale and purchase of goods and taxes on the consignment of goods. All other taxes that were listed under article 269 prior to the amendment have been deleted from this article. Prior to the Eightieth Amendment, Article 269 required the Finance Commission to suggest the principles governing the distribution of additional excise duties in lieu of sales tax on sugar, textiles and tobacco, and the grant in lieu of the tax under the repealed Railway Passenger Fares Tax Act, 1957. 8 Article 276: Taxes on professions, trades, callings and employments.- (1) Notwithstanding anything in article 246, no law of the Legislature of a State relating to taxes for the benefit of the State or of a municipality, district board, local board or other local authority therein in respect of professions, trades, callings or employments shall be invalid on the ground that it relates to a tax on income. (2) The total amount payable in respect of any one person to the State or to any one municipality, district board, local board or other local authority in the State by way of taxes on professions, trades, callings and employments shall not exceed two thousand and five hundred rupees per annum. (3) The power of the Legislature of a State to make laws as aforesaid with respect to taxes on professions, trades, callings and employments shall not be construed as limiting in any way the power of Parliament to make laws with respect to taxes on income accruing from or arising out of professions, trades, callings and employments. Amend the Seventh Schedule to confine the service tax powers to the Union government only. Thus, even with the distinct tax bases and powers, States are not entirely free to design their tax systems.
Issues and scope for reform
An important structural phenomenon that caused the revenue growth deterioration has been the complex rate structures of the major taxes of the States. The roots of the complexity lie in their historical evolution. Nevertheless, the highly differentiated rate structure has led to wide spread evasion.
Exercise duties
The system of levying a duty on liquors began with the advent of British and the present Excise laws were modeled on the British liquor laws. The power to impose State excise on 10Alcoholic liquors, opium and narcotics emanates from the entry 51 of list II of Seventh Schedule to the Constitution11. The major component sources of State excise revenue are:
1) Duties on country spirit, Indian made foreign liquor 12, wines and beer;
2) Export duty on country liquor, IMFL and beer
3) Licence fee or consideration money determined for the grant of exclusive privilege of Selling country spirit, IMFL, wines and beer
4) Wholesale/retail licence fee on denatured spirit
5) Duties and licence fee on hemp and drugs
6) Permit fee on IMFL and beer
7) Other miscellaneous fees and taxes, for example, license fee on hotels and restaurants Etc.
Movement and sale on excisable commodities, auction and rent of liquor vends, and a pure tax. By its very nature, it requires a high degree of vigilance as the scope for collusion among taxpayers and departmental staff is also large due to substantial payoffs from evasion. This has been exacerbated by the excise policy of various States that have driven out small dealers by bundling together a number of excise circles for sale and production permits. While this makes the administration of excise easier, it robs the system of a built-in check against the negative fallout of cartelization. The other issue relates to partial or full prohibition. The only State to have consistently adopted a prohibition policy is Gujarat. As can be noticed, the excise rate-structure widely varies and also highly complex. Often the high rates result in smuggling and adulteration. Thus there is need for rationalization of excise duties across states. Excessive consumption of liquor has been a major source of concern for the society as it adversely affects the incomes and the welfare of a significant number of families. Nevertheless, excise duty on the sale of alcoholic liquors has been an important source of tax revenue for States and its supply and distribution contributes to employment. Thus, the policy on liquor is caught between the desire to discourage the production and consumption of liquor on one side and the anxiety to raise revenue on the other side. This has naturally given rise to a policy that is internally inconsistent and therefore unsustainable.
DEFINITIONS
I. Definitions of Income.
The term 'income' in section 2(24) of Income Tax Act, 1961 includes the following:-
(i) Profits and gains;
(ii) Dividend;
(iia) Voluntary contributions received by a trust created wholly or partly for charitable or religious purposes or by an institution established wholly or partly for such purposes or by an association.
(iii) The value of any perquisite or profit in lieu of salary taxable under clauses 92) and (3) of section 17;
(iiia) any special allowance or benefit, other than perquisite included under sub- clause (iii) specifically granted to the assessee to meet expenses wholly, necessarily and exclusively for the performance of the duties of an office or employment of profit;
(iiib) any allowance granted to the assessee either to meet his personal expenses at the place where the duties of his office or employment of profit are ordinarily performed by him or at a place where he ordinarily resides or to compensate him for the increased cost of living;
(iv) The value of any benefit or perquisite, whether convertible into money or not obtained from a company either by a director.
II. Agricultural income
a) Definition of Agricultural Income.
According to the section 2(1A) of Income Tax Act, 1961, 'agricultural income' means :-
(1) any rent or revenue derived from land which is situated in India and is used for agricultural purposes;
(2) any income derived from such land by-
i. agriculture; or
ii. the performance by a cultivator or receiver of rent-in-kind of any process ordinarily employed by a cultivator or receiver of rent-in-kind to render the produce raised or received by him fit to be taken to market; or
iii. the sale by a cultivator or receiver of rent-in-kind of the produce raised or received by him, in respect of which no process has been performed other than a process of the nature described in paragraph (ii) of the sub-clause;
(3) any income derived from any building owned and occupied by the receiver of rent.
b) Instances of Agricultural Income.
The following are held as agricultural income based on judicial decisions:
i) Income from growing flowers and creepers in cultivated gatdens.
ii) Rent for agricultural land received from sub-tenants by mortgagee in possession. (Mustafa Ali Khan v. Cit, [(1948) 16 ITR 330 (PC)].
iii) The fees collected from owners of cattle normally used for agricultural purposes for allowing them to graze on forest lands covered b jungle and grass grown spontaneously. (CIT v. R.B. Rai Shamsherjang Bahadur, (1953) 24 ITR 1 (All).
iV) Where denuded parts of the forest are replaced and subsequent operations in forestry are carried out, the income arising from the sale of replanted trees. (CIT v. Benoy Kumar Sahas Roy, [(1957) 32 ITR 466 (SC)].
v) Interest on capital received by a partner from the firm engaged in agricultural operation. [CIT v. M.I. Mahindra, (1978) 112 ITR 323 (Gauhati)].
c) Non - Agricultural Income.
The following are not agricultural income based on judicial decisions:-
i) Income from fisheries.
ii) Royalty income of mines.
iii) Income from butter and cheese-making.
iv) Income from poultry farming.
v) Dividend paid by a company out of its agricultural income.
vi) Interest received by a money-lender in the form of agricultural produce.
vii) Income of salt produced by flooding the land with sea water, as it is not derived from land used for agricultural income.
viii) Income from sale of forest trees, fruits and flowers growing on land naturally and spontaneously and without the intervention of human agency.
ix) Interest on arrears of rent payable in respect of agricultural land as it is neither rent nor revenue derived from land.
x) Profit accruing from the purchase of a standing crop and resale of it after harvest by a merchant having no interest in land except a mere licence to enter upon the land and gather, upon the product, since land is not the direct, immediate or effective source of income.
III. Definition of Assessee (Sec. 2(7)) and person (Sec. 2(31))
Assessee.
According to the section 2(7), 'assessee' means a person by whom any tax or any other sum of money is payable under this Act, and includes:-
a) Every person in respect of whom any proceeding under this Act has been taken for the assessment of his income or of the income of any other person in respect of which he is assessable, or of the loss sustained by him or by such other person, or of the amount of refund due to him or to such other person;
b) Every person who is deemed to be an assessee under any provision of this Act;
c) Every person who is deemed to be an assessee in default under any provision of this Act.
PERSON :-
According to the section 2(31). 'person' includes :
1) an individual,
2) a Hindu undivided family,
3) a company,
4) a firm
5) an association of persons or a body of individuals, whether incorporated or not,
6) a local authority, and
7) every artificial juridical person, not falling within any of the preceding sub-clauses.
(i) An individual.- Under the present Act, the word 'individual' means only a natural person, i.e., a human being. Deities and statutory corporations are assessable as 'judicial persons'. 'Individual' includes a minor or a person of unsound mind.
(ii) A Hindu Undivided Family.- A Hindu undivided family consists of all persons lineally descended from a common ancestor and includes their wives and unmarried daughters. Profits made by a joint Hindu family are chargeable to tax as income of the Hindu undivided family as a distinct entity or unit of assessment.
(iii) A Company.- Under section 2(17), the expression 'company' is defined to mean the following: (a) any India company; or (b) any body corporate incorporated under the laws of a foreign country; or (c) any institution, association or a body which is assessed or was assessable/assessed as a company for any assessment year commencing on a before April 1, 1970.
(iv) A Firm.- Persons who have entered into partnership with one another are called individually partners and collectively a firm and the name under which their business is carried on is called the firm name.
(v) An Association of Person or a Body of individuals.- The words 'association of persons' means an association in which two or more persons join in a common purpose or common action.
(vi) Local Authority.- As per section 3(31) of the General Clauses Act, 1897, a local authority means a municipal committee, district board, body of port commissioners, or other authority legally entitled to or entrusted by the Government with the control and management of a municipal or local fund.
(vii) Every Artificial Juridical Person.- It covers not only deities but also all artificial persons with a judicial personality such as a Corporation Bar Council.
I. Residential Status of an individual.
An individual may be (a) resident and ordinarily resident, (b) resident but not ordinary resident, or (c) non-resident.
(i) Resident and Ordinarily Resident [Sec. 6(1) and 6(6)(a)].
To find out whether an individual is 'resident and ordinarily resident' in India, one has to proceed as follows:-
(i) First find out whether such individual is 'resident' in India and (ii) If such individual is 'resident' in India, then find out whether he is 'ordinarily resident' in India.
Resident in India.- Under section 6(1), an individual is said to be resident in India in any previous year, if he satisfies at least one of the following basic conditions-
a) He is an Indian in the previous year for a period of 182 days or more; or
b) He is in India for a period of 60 days or more during the previous years and 365 days or more during the 4 years immediately preceding the previous years.
Exceptions : This aforesaid rule of residence is subject to the following exceptions:
(1) By virtue of Explanation (a) to section 6(1), the period of '60 days' referred to in (b) above has been extended as follows:
For an Indian citizen who leaves India during the previous year for the purpose of employment outside India citizen who leaves India during the previous years as a member of the crew of an Indian ship extended to 182 days.
(2) By virtue of Explanation (b), the period of '60 days' referred to in (b) above has been extended as follows in the case of a person who comes on a visit to India, for Indian citizen or a person of Indian origin extended to 182 days.
A person is deemed to be of Indian origin if he, or either of his parents or any of his grand-parents, was born in undivided India.
Resident and Ordinarily Resident in India.- Under section 6(6), a resident individual is treated as 'resident and ordinarily resident' in India if he satisfies the following two additional conditions:-
(i) He has been resident in India in at least 9 out of 10 precious years according to basic conditions noted above immediately preceding the relevant previous year; and
(ii) He has been in India for a period of 730 days or more during 7 years immediately preceding the relevant previous year.
Thus, an individual becomes resident and ordinary resident in India if he satisfies at least one of the basic conditions and the two additional conditions.
(ii) Resident but not Ordinary Resident [Sec. 6(1), 6(6)(a)].
An individual who satisfies at least one of the residential basic conditions mentioned above but does not satisfy the two additional conditions is treated as a resident but not ordinarily resident in India. In other words, an individual becomes resident but not ordinarily resident in India in any of the following circumstances:
1. If he satisfies at least one of the basic conditions and none of the additional conditions,
2. If he satisfies at least one of the basic conditions and one of the two additional conditions.
(iii) Non- resident.
An individual is a non-resident in India if he satisfies none of the basic conditions. In the case of non-resident, the additional conditions are not relevant.
II. Residential Status of a Hindu Undivided Family (Sec. 6(2)).
According to the section 6(2), a Hindu undivided family is said to be resident in India if control and management of its affairs is wholly or partly situated in India. A Hindu undivided family is non-resident in India if control and management of its affairs is wholly situated outside India.
III. Residential Status of the Firm and Association of Persons (Sec. 6(4)).
A partnership firm and an association of persons are said to be resident in India if control and management of their affairs are wholly or partly situated within India during the relevant previous year.
IV. Residential Status of a Company (Sec. 6(3)).
An Indian company is always resident in Indian. A foreign company is resident in India only if, during the previous year, control and management of its affairs is situated wholly in India.
V. Residential Status of Every Other Person (Sec. 6(4)).
Every other person is resident in India if control and management of his affairs is wholly or partly situated within India during the relevant previous year.
Statutory Exceptions to Income Tax
Income exempt from Tax under Section 10.
In computing the total income of a previous year of any person, any income falling within any of the following previous of section 10 shall not be included.
Agricultural Income [Sec. 10(1)].- Agricultural income is exempt from tax if it comes within the definition of 'agricultural income' as given in sec. 2(1A). Agricultural income is taken into consideration to find out tax on non-agricultural income.
Receipts by a Member from a HUF [Sec. 10(2)].- Any sum received by an individual, as a member of a HUF, either out of income of the family or out of income of estate belonging to the family, is exempt from tax. The exemption is based upon the principle of avoidance of double taxation. Income of HUF is taxable in its own hand.
Share of Profit from Partnership Firm [Sec. 10(2A)].- Share of profit received by partners from a firm (which is assessed as firm) is not taxable in the hands of partners.
Payment under the Bhopal Gas Leak Disaster [Sec. 10 (10BB)].- Any payments made under the Bhopal Gas Leak Disaster (Processing of Claims) Act, 1985 and any scheme framed thereunder except payment made by any assessee to the extent such assessee has been allowed a deduction under this Act on account of any loss or damage caused to him by such disaster.
Amount Paid on Life Insurances Policies [Sec. 10(10D)].- Any sum received under a life insurance policy including the sum allocated by way of bonus on such policy. This exemption does not apply to any amount received under the scheme referred to in sec. 80DDA or under a keyman insurance policy.
Interest on Securities [Sec. 10(15)].- Income by way of interest, premium on redemption or other payment on notified securities, bonds or certificates, etc, are exempted.
Educational Scholarship [Sec. 10(16)].- Scholarship granted to meet the cost of education is exempt from tax.
Income of Minor [Sec. 10 (32)].- In the case of an assessee, being the parent of a minor child referred to under section 64(1A), any income of the minor child clubbed to the extent of such income so clubbed or Rs. 1500/- in respect of each minor child, whichever is less.
INDIVIDUALS.
Income of a Foreign Government Employee under Cooperative Technical Assistance Programmes [Sec. 10(8)].
Income of an individual serving in India in connection with any cooperative technical assistance programme in accordance with an agreement entered into by the Central Government and a Foreign Government, is exempt from tax.
Income of a Family Members of an Employee Serving under a Cooperative Technical Assistance Programmes [Sec. 10(9)].
The income of any member of the family of any such individual as is referred to in clause (8) or (8A) or (8B) accompanying him to India, which accrues outside India and is not deemed to accrue or arise in India, in respect of which such member becomes taxable in the respective country.
PEOPLES REPRESENTATIVES (MPs and MLAs) [Sec. 10(17)].
In the case of Members of Parliament and State Legislature, any income by way of (i) daily allowance received, (ii) any other allowance received by a member of Parliament under the Member of Parliament [Constituency Allowance Rule, 1986], and (iii) all other allowances not exceeding Rs. 2000 per month in the aggregate received by any person by reason of his membership of any State Legislature or of any committee thereof as notified by the Central Government.
Awards and Rewards.
Awards [Sec. 10(17A)]. - The following awards, whether paid in case or in kind, are exempt from tax:
(i) Any payment made in pursuance of any award instituted in the public interest by the Central Government or any State Government or instituted by any other body and approved by the Central Government.
(ii) Any payment made as reward by the Central Government or any State Government for such purposes may be approved by the Central Government in this behalf in the public interest.
Pension to Gallantry Award Winners [Section 10(18)].- To recognize the services rendered by the members of defence forces who have been awarded the Param Vir Chakra, the Maha Vir Chakra and the Vir Chakra for demonstration of exceptional courage and valour during a war, the pension and family pension of such gallantry award winners has been exempted from income tax with effect from the assessment year 2000-01.
Former rules [Sec. 10(19A)].
The annual value of any one palace in occupation of a former ruler is exempt from tax under Section 10(19A).
Income of Scientific Research Association [Sec. 10(21)].
Any income of a scientific research association, approved under section 35(i)(ii) is exempt from tax, provided the income is applied or accumulated solely for the objects of the association.
News Agency [Sec. 10(22B)].
Any income of a news agency set up in India solely for collection and distribution of news as this Central Government may specify in the Official Gazette in the behalf, is exempt provided it applies its income or accumulates it for application solely for collection and distribution of news.
SALARIES
1) Chargeability [Sec. 15].
As per section 15, the following income shall be chargeable to income tax under the head 'Salaries'.
a) Any salary due from an employer or a former employer to an assessee in the previous year, whether paid or not;
b) Any salary paid or allowed to him in the previous year by or on behalf of an employer or a former employer though not due or before it became due to him;
c) Any arrears of salary paid or allowed to him in the precious year by or on behalf of an employer or a former employer, if not charged to income-tax for any earlier previous year.
(i) Employer - Employee Relationship.
There must be employer and employee relationship, either in the present or in the past, between the person liable to pay the mount and the person entitled to receive the amount. If such a relationship does not exist, them the income falls outside the scope of the head 'salaries'.
(ii) Meaning of Salary.
The term 'salary' is not exhaustively defined but it is defined in an inclusive manner. As per section 17(1), salary includes.-
1. Wages;
2. Any annuity or pension;
3. Any gratuity;
4. Any fees, commissions, perquisites or profits in lieu of or in addition to any salary or wages;
5. Any advance of salary;
6. Any payment received by an employee in respect of any period of leave not availed of by him;
7. The annual accretion to the balance at the credit of an employee participating in a recognized provident fund, to the extent to which it is chargeable to tax under rule 6 of Part A of the Fourth Schedule.
(iii) Meaning of 'Perquisite'.
Perquisite if a gain or profit incidentally made from employment in addition to regular salary or wages.
According to section 17(2), perquisite includes.-
1. The value of rent-free accommodation provided to the assessee by his employer;
2. The value of any concession in the matter of rent respecting any accommodation provided to the assessee by his employer;
3. The value of any benefit or amenity granted or provided free of cost or at concessional rate in any of the following cases:-
a) By a company to an employee who is a director thereof;
b) By a company to an employee, being a person who has substantial interest in the company.
The above perquisites are chargeable to tax. The following perquisites are exempt from tax in all cases.
(i) Provision of medical facilities.
(ii) Refreshment provided to all employees during working hours in office premises.
(iii) Refreshment during working hours provided outside the place of work (only an amount up to Rs. 35 per day) will not be treated as perquisite provided the amount is paid by the employer directly to the caterer.
(iv) Subsidized lunch or dinner provided to an employee.
(v) Recreational facilities extended to a group of employees.
(iv) Meaning of Profit in Lieu of Salary.
According to section 17(3), profit in lieu of salary includes:-
(i) The amount of compensation due to or received by an assessee from his employer or former employer at or in connection with:-
a) The termination of employment;
b) The modification of the terms and conditions of employment;
(ii) Any payment due to or received by the assessee from his employer or former employer or from provident fund or any other fund.
2) Deductions from Salaries (Sec.16).
The income chargeable under the head 'Salaries' is computed after making the following deductions:-
(i) Standard deduction [Section 16(i)].
In the case of an assessee whose income from salary, before allowing a deduction under this clause -
a) Does not exceed five lakh rupees, a deduction of a sum equal to 40 percent of the salary or Rs. 30,000, whichever is less;
b) Exceeds five lakh rupees, a deduction of a sum of Rs. 20,000;
(ii) Entertainment Allowance [Section 16(ii)].
Entertainment allowance is not eligible for exemption but it only qualifies for deduction. Therefore, entertainment allowance is first included in gross salary and then deduction is allowed.
(iii) Professional Tax.
A deduction of any sum paid by the assessee on account of a tax on employment within the meaning of clause (2) of article 276 of the constitution, leviable by or under any law. Under the Article 276(2), the total amount payable in respect of any one person to the State or to any one municipality, district board, local board or other local authority in the State by way of taxes on professions, trades, callings the employments shall not exceed Rs. 2,500 per annum.
3) Exemptions under Section 10.
1. Value of Travel Concession or Assistance [Sec. 10(5)].
Value of travel concession or assistance received by an individual from his employer or former employer for himself and his family in connection with his proceeding.-
a) On leave to any place in India;
b) To any place in India after retirement from service or after the termination of his service shall be exempt. 'Family' for the purpose of this provision means-
a. The spouse and children; and
b. Parents, brothers and sisters of the individual wholly or mainly dependent on the individual.
2. Exemption in the Case of a Foreign National [Sec. 10(6)].
In the case of an individual who is not a citizen of India the following shall be exempt:
(i) The remuneration received by him as an official of an embassy, high commission, consulate, etc. or as a member of staff of any such official is exempt.
3. Indian Citizen Employed Abroad by Government of India [Sec. 10(7)].
Any allowance or perquisite paid or allowed outside India by the Government to a citizen of India for rendering service outside India is exempt.
4. Death-Cum- Retirement Gratuity [Sec. 10(10)].
i) Government Employee.- Any death-cum-retirement gratuity received under the revised Pension Rules by Government employees is wholly exempt for tax.
5. Commuted Pension [Sec. 10 (10A)].
Any commuted pension received by a Government employee is wholly exempt from tax.
6. Leave Salary [Sec. 10(10AA)].
Government Employee.- Any amount received as cash equivalent of leave in respect of period of earned leave to his credit at the time of retirement whether on superannuation or otherwise, is exempt from tax.
Income from House Property (Sections 22 to 27).
1) Chargeability [Sec. 22].
It is to be specifically noticed that what is taxable under the head 'Income from house property' is the annual value of a building property and not the rental income.
Rental income is taxable under the head 'Income from house property', if the following three conditions are satisfied:-
(i) The property should consist of any building or lands appurtenant thereto;
(ii) The assessee should be the owner of the property; and
(iii) The property should not be used by the owner for the purpose of any business or profession carried on by him, the profits of which are chargeable to income-tax.
2) Deemed Owner [Sec. 27].
Sec. 27 enumerates such cases which are given hereunder.
(i) An individual who transfers otherwise than for adequate consideration any house property to his or her spouse, not being a transfer in connection with an agreement to live apart, or to a minor child not being a married daughter, is deemed to be the owner of the house property so transferred.
(ii) The holder of an impartible estate is deemed to be individual owner of all the properties comprised in the estate.
(iii) A member of a cooperative society, company or other association of persons to whom building or part thereof is allotted or leased under a house building scheme of the society.
(iv) A person who is allowed to take or retain possession of any building or part thereof in part performance of a contract of the nature referred to in section 53A of the Transfer of Property Act, 1882.
3) Property Income Exempt from Tax.
Property income is exempt from tax in the following cases:-
(i) Income from farm house. [Sec. 2(1a)(c) read with Sec. 10(1)].
(ii) Annual value of any one place of an ex-reuler. [Sec. 10(19A)].
(iii) Property income of a local authority. [Sec. 10(20)].
(iv) Property income of an approved scientific research association. [Sec. 10(21)].
(v) Property income of a university or other educational institutions. [Sec. 10(23C)].
(vi) Property income of a hospital or other medical institution. [Sec. 10(23C)].
(vii) Property income of a trade union. [Sec. 10(24)].
(viii) Property income in the case of a person resident of Ladakh.[Sec.10(26B)].
4) Computation.
All the building properties are divided into the following four categories for the purpose of knowing the principles involved in computation:
(i) Let-out property;
(ii) Self-occupied property (including deemed let out property);
(iii) Partly let out and partly self-occupied property; and
(iv) Only one house owned and kept vacant.
Profits and Gains of Business or Profession (Section 28to 44D).
(1) Business.
In view of section 2(13), business includes any trade, commerce, manufacture, or concern in the nature of trade, commerce or manufacture.
(2) Profession and Vocation.
Section 2(36) defines 'Profession' to include vocation. The word 'profession' implies professed attainments in special knowledge as distinguished from mere skill; 'special knowledge' which is 'to be acquired only after patient study and application'. Many vocations may fall within the ordinary and accepted use of the word 'profession'.
(3) Chargeability (Sec. 28).
The following items of income shall be chargeable to tax under the head 'Profits and Gains of business or profession'.
(i) Profits and gains of any business or profession carried on by the assessee during the previous year.
(ii) Any compensation or other payment due to or received by a person in connection with :
a) Termination or modification of contract relating to management of affairs of an Indian Company.
b) Managing or termination or modification of the affairs in India of any other company.
c) Termination or modification of a contract relating to agency for business activity in India.
d) Vesting of the management of any business and property in favour of Government or any corporation owned by Government under any law in force.
In the case of an assessee carrying on export business, the following export incentives :-
(iiia) Profit on sale of import-entitlements or EXIM scrip.
(iiib) Case assistance (cash compensatory support CCS).
(iiic) Excise or customs duty repaid. (Duty drawback).
(4) Computation (Sec. 29).
The provisions of sec. 29 make it clear that the income referred to in sec. 28 shall be computed in accordance with the provisions contained in secs. 30 to 43D.
(5) Method of Accounting (Sec. 145).
According to sec. 145, the income chargeable under the head 'Profits and Gains of Business or Profession' shall be computed in accordance with either cash or mercantile system of accounting regularly followed by the assessee.
(6) Scheme of Deductions and Allowances [Sections 30 37)].
1) Expenses relating to building (Sec. 30). - Under section 30, the following dedications are allowed in respect of rent, rates, repairs and insurance for premises used for the purpose of business or profession:-
a) the rent of premises, if the assessee has occupied the premises as tenant and the amount of repairs (whether it is current or capital repair), if he has undertaken to bear the cost of repairs;
b) the amount of current repairs, if the assessee has occupied the premises otherwise than as a tenant;
c) any sum on account of land revenue, local rates or municipal taxes; and
d) amount of any premium in respect of insurance against risk of damage or destruction of the premises.
2) Expenses Relating to Machinery, Plant and Furniture (Sec. 31).- Under section 31, the following expenditures are allowed as deduction in respect of machinery, plant or furnitures used for the purpose of the business or profession.
3) Depreciation (Sec. 32).- 'Depreciation' usually means loss or decline in value which occurs gradually over useful life of a material thing, due to physical wear, tear and decay, and is generally limited to losses or decline in value which cannot be restored by current repairs and maintenance.
In respect of depreciation of -
i) Buildings, machinery, plant or furniture, being tangible assets;
ii) Know-how, patents, copyright, trade marks, licences, franchises or any other business or commercial rights of similar nature, being intangible assets acquired on or after the 1st day of April, 1998.
4) Tea Development Account (Sec. 33AB).- An assessee can claim deduction under section 33AB if certain conditions are satisfied.
(1) Conditions.- The assessee must satisfy the following conditions:
1) It must be engaged in the business of growing and manufacturing tea in India.
2) It must - deposit with NABARD [National Bank for Agriculture and Rural Development.
5) Site Restoration Fund (Sec. 33ABA).- An assessee can claim deduction under section 33ABA, if certain conditions are satisfied:-
Conditions.- The assessee must satisfy the following conditions:-
1. The taxpayer is engaged in the business of the prospecting for, or extraction or production of, petroleum or natural gas or both in India.
2. The Central Government has entered into an agreement with taxpayer for such business.
Capital gains (Secs. 45 to 55A and Section 112).
1) Capital Asset [Sec. 2(14)].
The expression 'capital asset' means "property of any kind held by an assessee, whether or not connected with his business or profession" [Sec. 2(J4)]. The definition is so wide as to include properties of all kinds, whether fixed or circulating, movable or immovable, tangible or intangible. The following assets are excluded from the definition of 'capital assets' :
1. Any stock-in-trade, consumable stores or raw material held for the purpose of business or profession;
2. Personal effects of the assessee, that is to say, movable property including wearing apparel and furniture held for his personal use or for the use of any member of his family dependent upon him. However, jewellery is treated as a capital asset though it is meant for the personal use of the assessee;
3. Agricultural land in India situated outside the territorial jurisdiction of a municipality or cantonment board having a population of 10,000 or more and agricultural land not situated in area notified by Government;
4. Special Bearer Boards, 1991; and
5. Gold Deposit Bonds issued under the Gold Deposit Scheme, 1999.
2) Short-term and Long-term Capital Assets [Sec. 2(29A), Sec. 2(42A)].
Capital assets are divided into (i) short-term capital assets and (ii) long-term capital assets. A short-term capital asset is one which is held by the assessee for not more than 36 months immediately preceding the date of its transfer. Assets held by the assessee for a period exceeding 36 months from the date of sale or transfer are treated as long-term capital assets.
3) Long-term and Short-term Capital Gains.
According to sec. 2(29B), 'Long term capital gains' means capital gain arising from the transfer of a long term capital asset. According to sec. 2(42B), 'Short term capital gains' means capital gain arising on the transfer of short term capital asset.
4) Chargeability [sec. 45(1)].
In other words, capital gain's tax liability arises only when the following conditions are satisfied:-
1) There should be a capital asset;
2) The capital asset is transferred by the assessee;
3) Such transfer takes place during the previous year;
4) Any profit or gain arises as a result of transfer;
5) Such profit or gain is not exempt from tax under relevant sections.
Income from other sources (Section 56-59).
(1) Chargeable Income.
The head 'Income from other sources' is a residuary head of income. A source of income which does not specifically fall under anyone of the other four heads or income, i.e., salaries, income from house property, profits and gains of business or profession or capital gains is to be computed and brought to charge under the head "Income from other sources". [Sec. 56(1)].
As per section 56(2), the following incomes are always chargeable to tax under the head 'Income from other sources' :-
a) Dividends;
b) Any winnings from lotteries, crossword puzzles, races including horse-races, card games and other games of any sort or form, gambling or betting of any form or nature whatsoever;
c) Any sum received from employees as contribution to a fund for the welfare of employees if such income is not chargeable to tax under the head 'profit and gains of business or profession';
d) Income by way of interest on securities if the income is not chargeable to tax under the head;
e) Income from machinery, plant or furniture let on hire (if it is not chargeable to tax under the head 'profit and gains of business or profession');
f) Income from letting of plant, machinery or furniture alongwith building and letting of building is inseparable from the letting or plant, machinery or building (if not chargeable to tax under the head 'profit and gains of business or profession'; and
g) Any um received under a keyman insurance policy including bonus (if not taxable under section 15 or 28).
Besides the above, the following incomes are also chargeable to tax under the head 'Income from other sources'. [Sec. 56(1)].
1) Income from sub-letting;
2) Interest on bank deposits and loans;
3) Income from royalty;
4) Director's fee;
5) Ground rent;
6) Agricultural income from a place outside India;
7) Examination fees received by teachers;
8) Insurance commission;
9) Casual income in excess of Rs. 5,000;
10) Salaries payable to members of Parliament;
(2) Deductions Permissible in the Computation of Income from Other Sources (Sec. 57).
The income chargeable under the head 'Income from other sources' shall be computed after making the following deductions, namely :-
(i) In the case of dividends, or interest on securities, any reasonable sum paid by way of commission or remuneration to a banker or any other person for the purpose of realizing such dividend or interest on behalf of the assessee;
(ii) In respect of any sum collected from employees towards the welfare Fund Contribution, deduction shall be allowed to the extent the amount is remitted within the relevant due date is deductible;
(iii) In respect of family pension of sum equal to 33.33 percent of the pension of Rs. 15,000 whichever is less, shall be allowed as deduction [Sec. 57(iia)].
(3) Inadmissible Expenses (Sec. 58).
The following expenses are expressly disallowed in computing income under the head 'Income from other sources':
(i) Any personal expense of the assessee;
(ii) Any interest chargeable under the Act, which is payable outside India on which tax has not been paid or deducted at source;
(iii) Any amount chargeable under the head 'Salaries' if it is payable outside India, unless tax has paid thereon or deducted at source;
(iv) Payments made to relatives or associate concerns for goods supplied or services rendered, which in the opinion of the income-tax officer are excessive and unreasonable;
(v) Expenditure exceeding Rs. 20,000, payment of which is made otherwise than by a crossed cheque on a bank or by a crossed demand draft is not deductible to the extent of 20% of such expenditure;
(4) Method of Accounting (Sec. 145).
Income chargeable under the head 'Income from other sources' shall be computed in accordance with cash system of accounting or mercantile system of accounting regularly employed by the assessee.
UNIT - II
Income-Tax Authorities
Appointment of income tax authorities
There shall be the following classes of income-tax authorities for the purposes of the Act 116, namely:-
(a) |
the Central Board of Direct Taxes constituted under the Central Boards of Revenue Act, 1963 (54 of 1963), |
(b) |
Directors-General of Income-tax or Chief Commissioners of Income-tax, |
(c) |
Directors of Income-tax or Commissioners of Income-tax or Commissioners of Income-tax (Appeals), |
(cc) |
Additional Directors of Income-tax or Additional Commissioners of Income-tax or Additional Commissioners of Income-tax (Appeals), |
(cca) |
Joint Directors of Income-tax or Joint Commissioners of Income-tax. |
(d) |
Deputy Directors of Income-tax or Deputy Commissioners of Income-tax or Deputy Commissioners of Income-tax (Appeals), |
(e) |
Assistant Directors of Income-tax or Assistant Commissioners of Income-tax, |
(f) |
Income-tax Officers, |
(g) |
Tax Recovery Officers, |
(h) |
Inspectors of Income-tax. |
Jurisdiction of income-tax authorities
(1) Income-tax authorities shall exercise all or any of the powers and perform all or any of the functions conferred on, or, as the case may be, assigned to such authorities by or under this Act in accordance with such directions as the Board may issue for the exercise of the powers and performance of the functions by all or any of those authorities.
(2) The directions of the Board under sub-section (1) may authorise any other income-tax authority to issue orders in writing for the exercise of the powers and performance of the functions by all or any of the other income-tax authorites who are subordinate to it.
(3) In issuing the directions or orders referred to in sub-sections (1) and (2), the Board or other income-tax authority authorised by it may have regard to any one or more of the following criteria, namely:-
(a) Territorial area;
(b) Persons or classes of persons;
(c) Incomes or classes of income; and
(d) Cases or classes of cases
(4) Without prejudice to the provisions of sub-sections (1) and (2), the Board may, by general or special order, and subject to such conditions, restrictions or limitations as may be specified therein,
a) Authorize any Director General or Director to perform such functions of any other income-tax authority as may be assigned to him by the Board;
b) empower the Director General or Chief Commissioner or Commissioner to issue orders in writing that the powers and functions conferred on, or as the case may be, assigned to, the Assessing Officer by or under this Act in respect of any specified area or persons or classes of persons or incomes or classes of income or cases or classes of cases, shall be exercised or performed by a Joint Commissioner or a Joint Director, and, where any order is made under this clause, references in any other provision of this Act, or in any rule made there under to the Assessing Officer shall be deemed to be references to such Joint Commissioner or Joint Director by whom the powers and functions are to be exercised or performed under such order, and any provision of this Act requiring approval or sanction of the Deputy Commissioner shall not apply.
(5) The directions and orders referred to in sub-sections (1) and (2) may, wherever considered necessary or appropriate for the proper management of the work, require two or more Assessing Officers (whether or not of the same class) to exercise and perform, concurrently, the powers and functions in respect of any area or persons or classes of persons or incomes or classes of income or cases or classes of cases; and, where such powers and functions are exercised and performed concurrently by the Assessing Officers of different classes, any authority lower in rank amongst them shall exercise the powers and perform the functions as any higher authority amongst them may direct, and, further, references in any other provision of this Act or in any rule made there under to the Assessing Officer shall be deemed to be references to such higher authority and any provision of this Act requiring approval or sanction of any such authority shall not apply.
(6) Notwithstanding anything contained in any direction or order issued under this section, or in section 124, the Board may, by notification in the Official Gazette, direct that for the purpose of furnishing of the return of income or the doing of any other act or thing under this Act or any rule made there under by any person or class of persons, the income-tax authority exercising and performing the powers and functions in relation to the said person or class of persons shall be such authority as may be specified in the notification.
Powers of authorities
For all purposes of the Income-tax Act, the IT authorities are vested with the various powers which are vested in a Court of Law under the Code of Civil Procedure while trying a suit in respect of any case. More particularly, the provisions of the Code of Civil procedure and the powers granted to the tax authorities under the code would be in respect of:
1. Discovery and inspection
2. enforcing the attendance, including any officer of a bank and examining him on oath
3. compelling the production of books of account and the documents
4. collection certain information [section 133B-inserted by the finance act, 1986]
5. Issuing commissions and summons
It shall be duty of every person who has been allotted permanent account number to quote such number in all his returns or correspondence with income tax authorities, in all challans for the payment of any sum, in all documents prescribed by the board in the interest of revenue.
COLLECTION AND RECOVERY OF TAX
221. Penalty payable when tax in default
(1) When an assessee is in default or is deemed to be in default in making a payment of tax, he shall, in addition to the amount of the arrears and the amount of interest payable under sub-section (2) of section 220, be liable, by way of penalty, to pay such amount as the Assessing Officer may direct, and in the case of a continuing default, such further amount or amounts as the Assessing Officer may, from time to time, direct, so, however, that the total amount of penalty does not exceed the amount of tax in arrears :
Provided that before levying any such penalty, the assessee shall be given a reasonable opportunity of being heard:
Provided further that where the assessee proves to the satisfaction of the Assessing Officer that the default was for good and sufficient reasons, no penalty shall be levied under this section.
For the removal of doubt, it is hereby declared that an assessee shall not cease to be liable to any penalty under this sub-section merely by reason of the fact that before the levy of such penalty he has paid the tax.
(2) Where as a result of any final order the amount of tax, with respect to the default in the payment of which the penalty was levied, has been wholly reduced, the penalty levied shall be cancelled and the amount of penalty paid shall be refunded.
222. Certificate to Tax Recovery Officer
(1) When an assessee is in default or is deemed to be in default in making a payment of tax, the Tax Recovery Officer may draw up under his signature a statement in the prescribed form specifying the amount of arrears due from the assessee (such statement being hereafter in this Chapter and in the Second Schedule referred to as certificate) and shall proceed to recover from such assessee the amount specified in the certificate by one or more of the modes mentioned below, in accordance with the rules laid down in the Second Schedule
a) Attachment and sale of the assessees movable property;
b) Attachment and sale of the assessees immovable property;
c) Arrest of the assessee and his detention in prison;
d) Appointing a receiver for the management of the assessees movable and immovable properties.
For the purposes of this sub-section, the assessees movable or immovable property shall include any property which has been transferred, directly or indirectly on or after the 1st day of June, 1973, by the assessee to his spouse or minor child or sons wife or sons minor child, otherwise than for adequate consideration, and which is held by, or stands in the name of, any of the persons aforesaid; and so far as the movable or immovable property so transferred to his minor child or his sons minor child is concerned, it shall, even after the date of attainment of majority by such minor child or sons minor child, as the case may be, continue to be included in the assessees movable or immovable property for recovering any arrears due from the assessee in respect of any period prior to such date.
(2) The Tax Recovery Officer may take action under sub-section (1), notwithstanding that proceedings for recovery of the arrears by any other mode have been taken.
223. Tax Recovery Officer by whom recovery is to be effected
(1) The Tax Recovery Officer competent to take action under section 222 shall be
a) the Tax Recovery Officer within whose jurisdiction the assessee carries on his business or profession or within whose jurisdiction the principal place of his business or profession is situate,
b) the Tax Recovery Officer within whose jurisdiction the assessee resides or any movable or immovable property of the assessee is situate, the jurisdiction for this purpose being the jurisdiction assigned to the Tax Recovery Officer under the orders or directions issued by the Board, or by the Chief Commissioner or Commissioner who is authorised in this behalf by the Board in pursuance of section 120.
(2) Where an assessee has property within the jurisdiction of more than one Tax Recovery Officer and the Tax Recovery Officer by whom the certificate is drawn up
a) is not able to recover the entire amount by sale of the property, movable or immovable, within his jurisdiction, or
b) is of the opinion that, for the purpose of expediting or securing the recovery of the whole or any part of the amount under this Chapter, it is necessary so to do, he may send the certificate or, where only a part of the amount is to be recovered, a copy of the certificate certified in the prescribed manner and specifying the amount to be recovered to a Tax Recovery Officer within whose jurisdiction the assessee resides or has property and, thereupon, that Tax Recovery Officer shall also proceed to recover the amount under this Chapter as if the certificate or copy thereof had been drawn up by him.
224. Validity of certificate and cancellation or amendment thereof
It shall not be open to the assessee to dispute the correctness of any certificate drawn up by the Tax Recovery Officer on any ground whatsoever, but it shall be lawful for the Tax Recovery Officer to cancel the certificate if, for any reason, he thinks it necessary so to do, or to correct any clerical or arithmetical mistake therein.
225. Stay of proceedings in pursuance of certificate and amendment or cancellation thereof
(1) It shall be lawful for the Tax Recovery Officer to grant time for the payment of any tax and when he does so, he shall stay the proceedings for the recovery of such tax until the expiry of the time so granted.
(2) Where the order giving rise to a demand of tax for which a certificate has been drawn up is modified in appeal or other proceeding under this Act, and, as a consequence thereof, the demand is reduced but the order is the subject-matter of further proceeding under this Act, the Tax Recovery Officer shall stay the recovery of such part of the amount specified in the certificate as pertains to the said reduction for the period for which the appeal or other proceeding remains pending.
(3) Where a certificate has been drawn up and subsequently the amount of the outstanding demand is reduced as a result of an appeal or other proceeding under this Act, the Tax Recovery Officer shall, when the order which was the subject-matter of such appeal or other proceeding has become final and conclusive, amend the certificate, or cancel it, as the case may be.
226. Other modes of recovery
(1) Where no certificate has been drawn up under section 222, the Assessing Officer may recover the tax by any one or more of the modes provided in this section.
(1A) where a certificate has been drawn up under section 222, the Tax Recovery Officer may, without prejudice to the modes of recovery specified in that section, recover the tax by any one or more of the modes provided in this section.
(2) If any assessee is in receipt of any income chargeable under the head Salaries, the Assessing Officer or Tax Recovery Officer may require any person paying the same to deduct from any payment subsequent to the date of such requisition any arrears of tax due from such assessee, and such person shall comply with any such requisition and shall pay the sum so deducted to the credit of the Central Government or as the Board directs :
Provided that any part of the salary exempt from attachment in execution of a decree of a civil court under section 60 of the Code of Civil Procedure, 1908 (5 of 1908), shall be exempt from any requisition made under this sub-section.
(3) (i) The Assessing Officer or Tax Recovery Officer may, at any time or from time to time, by notice in writing require any person from whom money is due or may become due to the assessee or any person who holds or may subsequently hold money for or on account of the assessee to pay to the Assessing Officer or Tax Recovery Officer either forthwith upon the money becoming due or being held or at or within the time specified in the notice (not being before the money becomes due or is held) so much of the money as is sufficient to pay the amount due by the assessee in respect of arrears or the whole of the money when it is equal to or less than that amount.
(ii) A notice under this sub-section may be issued to any person who holds or may subsequently hold any money for or on account of the assessee jointly with any other person and for the purposes of this sub-section, the shares of the joint holders in such account shall be presumed, until the contrary is proved, to be equal.
(iii) A copy of the notice shall be forwarded to the assessee at his last address known to the Assessing Officer or Tax Recovery Officer, and in the case of a joint account to all the joint holders at their last addresses known to the Assessing Officer or Tax Recovery Officer.
(iv) Save as otherwise provided in this sub-section, every person to whom a notice is issued under this sub-section shall be bound to comply with such notice, and, in particular, where any such notice is issued to a post office, banking company or an insurer, it shall not be necessary for any pass book, deposit receipt, policy or any other document to be produced for the purpose of any entry, endorsement or the like being made before payment is made, notwithstanding any rule, practice or requirement to the contrary.
(v) Any claim respecting any property in relation to which a notice under this sub-section has been issued arising after the date of the notice shall be void as against any demand contained in the notice.
(vi) Where a person to whom a notice under this sub-section is sent objects to it by a statement on oath that the sum demanded or any part thereof is not due to the assessee or that he does not hold any money for or on account of the assessee, then nothing contained in this sub-section shall be deemed to require such person to pay any such sum or part thereof, as the case may be, but if it is discovered that such statement was false in any material particular, such person shall be personally liable to the Assessing Officer or Tax Recovery Officer to the extent of his own liability to the assessee on the date of the notice, or to the extent of the assessees liability for any sum due under this Act, whichever is less.
(vii) The Assessing Officer or Tax Recovery Officer may, at any time or from time to time, amend or revoke any notice issued under this sub-section or extend the time for making any payment in pursuance of such notice.
(viii) The Assessing Officer or Tax Recovery Officer shall grant a receipt for any amount paid in compliance with a notice issued under this sub-section, and the person so paying shall be fully discharged from his liability to the assessee to the extent of the amount so paid.
(ix) Any person discharging any liability to the assessee after receipt of a notice under this sub-section shall be personally liable to the Assessing Officer or Tax Recovery Officer to the extent of his own liability to the assessee so discharged or to the extent of the assessees liability for any sum due under this Act, whichever is less.
(x) If the person to whom a notice under this sub-section is sent fails to make payment in pursuance thereof to the Assessing Officer or Tax Recovery Officer, he shall be deemed to be an assessee in default in respect of the amount specified in the notice and further proceedings may be taken against him for the realisation of the amount as if it were an arrear of tax due from him, in the manner provided in sections 222 to 225 and the notice shall have the same effect as an attachment of a debt by the Tax Recovery Officer in exercise of his powers under section 222.
(4) The Assessing Officer or Tax Recovery Officer may apply to the court in whose custody there is money belonging to the assessee for payment to him of the entire amount of such money, or, if it is more than the tax due, an amount sufficient to discharge the tax.
(5) The Assessing Officer or Tax Recovery Officer may, if so authorised by the Chief Commissioner or Commissioner by general or special order, recover any arrears of tax due from an assessee by distraint and sale of his movable property in the manner laid down in the Third Schedule.
227. Recovery through State Government
If the recovery of tax in any area has been entrusted to a State Government under clause (1) of article 258 of the Constitution, the State Government may direct, with respect to that area or any part thereof; that tax shall be recovered therein with, and as an addition to, any municipal tax or local rate, by the same person and in the same manner as the municipal tax or local rate is recovered.
228A. Recovery of tax in pursuance of agreements with foreign countries
(1) Where an agreement is entered into by the Central Government with the Government of any country outside India for recovery of income-tax under this Act and the corresponding law in force in that country and the Government of that country or any authority under that Government which is specified in this behalf in such agreement sends to the Board a certificate for the recovery of any tax due under such corresponding law from a person having any property in India, the Board may forward such certificate to any Tax Recovery Officer within whose jurisdiction such property is situated and thereupon such Tax Recovery Officer shall
(a) proceed to recover the amount specified in the certificate in the manner in which he would proceed to recover the amount specified in a certificate drawn up by him under section 222; and
(b) Remit any sum so recovered by him to the Board after deducting his expenses in connection with the recovery proceedings.
(2) Where an assessee is in default or is deemed to be in default in making a payment of tax, the Tax Recovery Officer may, if the assessee has property in a country outside India (being a country with which the Central Government has entered into an agreement for the recovery of income-tax under this Act and the corresponding law in force in that country), forward to the Board a certificate drawn up by him under section 222 and the Board may take such action thereon as it may deem appropriate having regard to the terms of the agreement with such country.
229. Recovery of penalties, fine, interest and other sums
Any sum imposed by way of interest, fine, penalty, or any other sum payable under the provisions of this Act, shall be recoverable in the manner provided in this Chapter for the recovery of arrears of tax.
230. Tax clearance certificate
(1) Subject to such exceptions as the Central Government may, by notification in the Official Gazette, specify in this behalf, no person,
(A) Who is not domiciled in India;
(b) Who has come to India in connection with business, profession or employment; and
(c) Who has income derived from any source in India,
shall leave the territory of India by land, sea or air unless he furnishes to such authority as may be prescribed
(i) An undertaking in the prescribed form from his employer; or
(ii) Through whom such person is in receipt of the income,
to the effect that tax payable by such person who is not domiciled in India shall be paid by the employer referred to in clause (i) or the person referred to in clause (ii), and the prescribed authority shall, on receipt of the undertaking, immediately give to such person a no objection certificate, for leaving India:
Provided that nothing contained in sub-section (1) shall apply to a person who is not domiciled in India but visits India as a foreign tourist or for any other purpose not connected with business, profession or employment.
(1A) Subject to such exceptions as the Central Government may, by notification in the Official Gazette, specify in this behalf, every person, who is domiciled in India at the time of his departure from India, shall furnish, in the prescribed form to the income-tax authority or such other authority as may be prescribed
(a) The permanent account number allotted to him under section 139A:
Provided that in case no such permanent account number has been allotted to him, or his total income is not chargeable to income-tax or he is not required to obtain a permanent account number under this Act, such person shall furnish a certificate in the prescribed form;
(b) The purpose of his visit outside India;
(c) The estimated period of his stay outside India: Provided that no person:
(i) Who is domiciled in India at the time of his departure; and
(ii) In respect of whom circumstances exist which, in the opinion of an income-tax authority render it necessary for such person to obtain a certificate under this section,
shall leave the territory of India by land, sea or air unless he obtains a certificate from the income-tax authority stating that he has no liabilities under this Act, or the Wealth-tax Act, 1957 (27 of 1957), or the Gift-tax Act, 1958 (18 of 1958), or the Expenditure-tax Act, 1987 (35 of 1987), or that satisfactory arrangements have been made for the payment of all or any of such taxes which are or may become payable by that person :
Provided that no income-tax authority shall make it necessary for any person who is domiciled in India to obtain a certificate under this section unless he records the reasons therefore and obtains the prior approval of the Chief Commissioner of Income-tax.
(2) If the owner or charterer of any ship or aircraft carrying persons from any place in the territory of India to any place outside India allows any person to whom sub-section (1) or the first proviso to sub-section (1A) applies to travel by such ship or aircraft without first satisfying himself that such person is in possession of a certificate as required by that sub-section, he shall be personally liable to pay the whole or any part of the amount of tax, if any, payable by such person as the Assessing Officer may, having regard to the circumstances of the case, determine.
(3) In respect of any sum payable by the owner or charterer of any ship or aircraft under sub-section (2), the owner or charterer, as the case may be, shall be deemed to be an assessee in default for such sum, and such sum shall be recoverable from him in the manner provided in this Chapter as if it were an arrear of tax.
(4) The Board may make rules for regulating any matter necessary for, or incidental to, the purpose of carrying out the provisions of this section. For the purposes of this section, the expressions owner and charterer include any representative, agent or employee empowered by the owner or charterer to allow persons to travel by the ship or aircraft.
Wealth Tax Act
Subject to the other provisions (including provisions for the levy of additional wealth-tax contained in this Act, there shall be charged for every assessment year commencing on and from the first day of April, 1957 but before the 1st day of April, 1993 a tax hereinafter referred to as wealth-tax in respect of the net wealth on the corresponding valuation date of every individual, Hindu undivided family and company at the rate or rates specified in Schedule I.
Subject to the other provisions contained in this Act, there shall be charged for every assessment year commencing on and from the 1st day of April, 1993, wealth-tax in respect of the net wealth on the corresponding valuation date of every individual, Hindu undivided family and company, at the rate of one per cent. of the amount by which the net wealth exceeds fifteen lakh rupees.
(1) In computing the net wealth
(a) Of an individual, there shall be included, as belonging to that individual, the value of assets which on the valuation date are held
1. By the spouse of such individual to whom such assets have been transferred by the individual, directly or indirectly, otherwise than for adequate consideration or in connection with an agreement to live apart, or
2. By a minor child, not being a minor child suffering from any disability of the nature specified in section 80U of the Income-tax Act or a married daughter, of such individual,
3. A person or association of persons to whom such assets have been transferred by the individual directly or indirectly, otherwise than for adequate consideration for the immediate or deferred benefit of the individual, his or her spouse.
4. by a person or association of persons to whom such assets have been transferred by the individual otherwise than under an irrevocable transfer.
5. by the son's wife, of such individual, to whom such assets have been transferred by the individual, directly or indirectly, on or after the 1st day of June, 1973, otherwise than for adequate consideration.
6. by a person or association of persons to whom such assets have been transferred by the individual, directly or indirectly, on or after the 1st day of June, 1973, otherwise than for adequate consideration for the immediate or deferred benefit of the son's wife, of such individual or both, whether the assets referred to in any of the sub-clauses aforesaid are held in the form in which they were transferred or otherwise:
7. Provided that where the transfer of such assets or any part thereof is either chargeable to gift-tax under the Gift-tax Act, 1958 (18 of 1958), or is not chargeable under section 5 of that Act, for any assessment year commencing after the 31st day of March, 1964, but before the 1st day of April, 1972, the value of such assets or part thereof, as the case may be, shall not be included in computing the net wealth of the individual.
8. Provided further that nothing contained in sub-clause (ii) shall apply in respect of such assets as have been acquired by the minor child out of his income referred to in the proviso to sub-section (1A) of section 64 of the Income-tax Act and which are held by him on the valuation date:
Provided also that where the assets held by a minor child are to be included in computing the net wealth of an individual, such assets shall be included,
(a) where the marriage of his parents subsists, in the net wealth of that parent whose net wealth excluding the assets of the minor child so includible under this sub-section is greater; or
(b) where the marriage of his parents does not subsist, in the net wealth of that parent who maintains the minor child in the previous year as defined in section 3 of the Income-tax Act, and where any such assets are once included in the net wealth of either parent, any such assets shall not be included in the net wealth of the other parent in any succeeding year unless the Assessing Officer is satisfied, after giving that parent an opportunity of being heard, that it is necessary so to do.
(b) of an assessee who is a partner in a firm or a member of an association of persons not being a co-operative housing society), there shall be included, as belonging to that assessee, the value of his interest in the assets of the firm or association determined in the manner laid down in Schedule III:
Provided that where a minor is admitted to the benefits of partnership in a firm, the value of the interest of such minor in the firm, determined in the manner specified above, shall be included in the net wealth of the parent of the minor, so far as may be, in accordance with the provisions of the third proviso to clause (a).
Where, in the case of an individual being a member of a Hindu undivided family, any property having been the separate property of the individual has, at any time after the 31st day of December, 1969, been converted by the individual into property belonging to the family through the act of impressing such separate property with the character of property belonging to the family or throwing it into the common stock of the family or been transferred by the individual, directly or indirectly, to the family otherwise than for adequate consideration the property so converted or transferred being hereinafter referred to as the converted property, then, notwithstanding anything contained in any other provision of this Act or in any other law for the time being in force, for the purpose of computing the net wealth of the individual under this Act for any assessment year commencing on or after the 1st day of April, 1972,
(a) The individual shall be deemed to have transferred the converted property, through the family, to the members of the family for being held by them jointly;
(b) The converted property or any part thereof shall be deemed to be assets belonging to the individual and not to the family;
(c) where the converted property has been the subject-matter of a partition whether partial or total amongst the members of the family, the converted property or any part thereof which is received by the spouse of the individual on such partition shall be deemed to be assets transferred indirectly by the individual to the spouse and the provisions of sub-section (1) shall, so far as may be, apply accordingly:
Provided that the property referred to in clause (b) or clause (c) shall, on being included in the net wealth of the individual be excluded from the net wealth of the family or, as the case may be the spouse of the individual.
(4) Nothing contained in clause (a) of sub-section (1) shall apply to any such transfer as is referred to therein make by an individual before the 1st day of April, 1956, and the value of any assets so transferred shall not be included in the computation of his net wealth.
(4A) Notwithstanding anything in sub-section (4), nothing contained in clause (a) of sub-section (1) shall apply to any such transfer as is referred to therein made before the 1st day of April, 1963, by an individual who but for the extension of this Act to the Union territories of Dadra and Nagar Haveli, Goa, Daman and Diu, and Pondicherry, would not have been an assesses, and the value of any assets so transferred shall not be included in the computation of his net wealth.
(5) The value of any assets transferred under an irrevocable transfer shall be liable to be included in computing the net wealth of the transferor as and when the power to revoke arises to him.
(5A) Where a gift of money from one person to another is made by means of entries in the books of account maintained by the person making the gift or by an individual or a Hindu undivided family or a firm or an association of persons or body of individuals with whom or which he has business or other relationship, the value of such gift shall be liable to be included in computing the net wealth of the person making the gift unless he proves to the satisfaction of the Assessing Officer that the money has actually been delivered to the other person at the time the entries were made.
(6) For the purposes of this Act, the holder of an impartibly estate shall be deemed to be the individual owner of all the properties comprised in the estate.
(7) Where the assessee is a member of a co-operative society, company or other association of persons and a building or part thereof is allotted or leased to him under a house building scheme of the society, company or association, as the case may be, the assessee shall, notwithstanding anything contained in this Act or any other law for the time being in force, be deemed to be the owner of such building or part and the value of such building or part shall be included in computing the net wealth of the assessee; and, in determining the value of such building or part, the value of any outstanding instalments of the amount payable under such scheme by the assessee to the society, company or association towards the cost of such building or part and the land appurtenant thereto shall, whether the amount so payable is described as such or in any other manner is such scheme, be deducted as a debt owed by him in relation to such building or part.
(8) A person:
(a) Who is allowed to take or retain possession of any building or part thereof in part performance of a contract of the nature referred to in section 53A of the Transfer of Property Act, 1882.
(b) who acquires any rights excluding any rights by way of a lease from month to month or for a period not exceeding one year in or with respect to any building or part thereof by virtue of any such transaction as is referred to in clause (f) of section 269UA of the Income-tax Act, shall be deemed to be the owner of that building or part thereof and the value of such building or part shall be included in computing the net wealth of such person.
For the purposes of this section:
(a) The expression "transfer" includes any disposition settlement, trust, covenant, agreement or arrangement.
(b) the expression "irrevocable transfer" includes a transfer of assets which, by the terms of the instrument effecting it, is not revocable for a period exceeding six years or during the lifetime of the transferee, and under which the transferor derives no direct or indirect benefit, but does not include a transfer of assets if such instrument.
(i) Contains any provision for the re-transfer, directly or indirectly, of the whole or any part of the assets or income there from to the transferor.
(ii) in any way gives the transferor a right to re-assume power, directly or indirectly, over the whole or any part of the assets or income there from.
(c) The expression "property" includes any interest in any property, movable or immovable, the proceeds of sale thereof and any money or investment for the time being representing the proceeds of sale thereof and where the property is converted into any other property by any method, such other property.
Wealth-tax shall not be payable by an assessee in respect of the following assets]; and such assets shall not be included in the net wealth of the assessee:
(i) any property held by him under trust or other legal obligation for any public purpose of a charitable or religious nature in India :
Provided that nothing contained in this clause shall apply to any property forming part of any business, not being a business referred to in clause (a) or clause (b) of sub-section (4A) of section 11 of the Income-tax Act in respect of which separate books of account are maintained or a business carried on by an institution fund or trust referred to in clause (23B) or clause (23C) of section 10 of the Act.
(ii) The interest of the assessee in the coparcenary property of any Hindu undivided family of which he is a member;
(iii) any one building in the occupation of a Ruler, being a building which immediately before the commencement of the Constitution (Twenty-sixth Amendment) Act, 1971, was his official residence by virtue of a declaration by the Central Government] under paragraph 13 of the Merged States (Taxation Concessions) Order, 1949, or paragraph 15 of the Part B States (Taxation Concessions) Order, 1950;
(iv) Jewellery in the possession of any Ruler, not being his personal property, which has been recognized before the commencement of this Act by the Central Government as his heirloom or, where no such recognition exists, which the Board may, subject to any rules that may be made by the Central Government in this behalf, recognise as his heirloom at the time of his first assessment to wealth-tax under this Act:
Exclusion of assets and debts outside India
In computing the net wealth of an individual who is not a citizen of India or of an individual] or a Hindu undivided family not resident in India or resident but not ordinarily resident in India, or of a company not resident in India during the year ending on the valuation date:
(i) The value of the assets and debts located outside India; and
(ii) the value of the assets in India represented by any loans or debts owing to the assessee in any case where the interest, if any, payable on such loans or debts is not to be included in the total income of the assessee under section 10]of the Income-tax Act; shall not be taken into account.
1. An individual or a Hindu undivided family shall be deemed to be not resident in India or resident but not ordinarily resident in India during the year ending on the valuation date if in respect of that year the individual or the Hindu undivided family, as the case may be, is not resident in India or resident but not ordinarily resident in India within the meaning of the Income-tax Act.
2. Where in the case of an individual the value of an asset in India is represented by any debt owing to him, being any moneys to his credit in a Non-resident External Account, the interest payable on which is not to be included in his total income under of section 10 of the Income-tax Act, the provisions of this section shall, in relation to such asset, apply subject to the modification that the reference in this section to an individual not resident in India shall be construed as a reference to a person resident outside India as defined in clause (q) of section 2 of the Foreign Exchange Regulation Act, 1973.
3. A company shall be deemed to be resident in India during the year ending on the valuation date, if:
(a) It is a company formed and registered under the Companies Act, 1956 (1 of 1956), or is an existing company within the meaning of that Act; or
(b) During that year the control and management of its affairs is situated wholly in India
Value of assets how to be determined.
(1) Subject to the provisions of sub-section (2), the value of any asset, other than cash, for the purposes of this Act shall be its value as on the valuation date determined in the manner laid down in Schedule III.
(2) The value of a house belonging to the assessee and exclusively used by him for residential purposes throughout the period of twelve months immediately preceding the valuation date, may, at the option of the assessee, be taken to be the value determined in the manner laid down in Schedule III as on the valuation date next following the date on which he became the owner of the house or the valuation date relevant to the assessment year commencing on the 1st day of April, 1971, whichever valuation date is later.
For the purposes of this sub-section:
i. Where the house has been constructed by the assessee, he shall be deemed to have become the owner thereof on the date on which the construction of such house was completed.
ii. "House" includes a part of a house being an independent residential unit.
The final decision, in valuation of shares, by the valuer appointed on basis of settlement arrived at before Court is to be final and binding. But the Court can intervene if the valuation is made on a fundamentally erroneous basis or a patent mistake has been committed by the valuer. The probable estate duty payable on the death of the life interest-holder is deductible in assessing the value of remainder men's interest in the trust property during the life of the life interest-holder. On the death of the holder of the life interest, the provisions of the Estate Duty Act would be applicable.
Wealth Tax Authorities
Wealth-tax authorities and their jurisdiction .The income-tax authorities specified in section 116 of the Income-tax Act shall be the wealth-tax authorities for the purposes of this Act and every such authority shall exercise the powers and perform the functions of a wealth-tax authority under this Act in respect of any individual, Hindu undivided family or company, and for this purpose his jurisdiction under this Act shall be the same as he has under the Income-tax Act by virtue of orders or directions issued under section 120 of that Act including orders or directions assigning concurrent jurisdiction or under any other provision of that Act.
For the purposes of this section, the wealth-tax authority having jurisdiction in relation to a person who is not an assessee within the meaning of the Income-tax Act shall be the wealth-tax authority having jurisdiction in respect of the area in which that person resides.
1) The Board may, from time to time, issue such orders, instructions and directions to other wealth-tax authorities as it may deem fit for the proper administration of this Act, and such authorities and all other persons employed in the execution of this Act shall observe and follow such orders, instructions and directions of the Board:
Provided that no such orders, instructions or directions shall be issued
(a) So as to require any wealth-tax authority to make a particular assessment or to dispose of a particular case in a particular manner.
(b) so as to interfere with the discretion of the Deputy Commissioner Appeals or Commissioner (Appeals) in the exercise of his appellate functions.
(2) Without prejudice to the generality of the foregoing power:
(a) the Board may, if it considers it necessary or expedient so to do, for the purpose of proper and efficient management of the work of assessment and collection of revenue, issue, from time to time (whether by way of relaxation of any of the provisions of sections 18 and 35 or otherwise), general or special orders in respect of any class of cases, setting forth directions or instructions (not being prejudicial to assessees) as to the guidelines, principles or procedures to be followed by other wealth-tax authorities in the work relating to assessment or collection of revenue or the initiation of proceedings for the imposition of penalties and any such order may, if the Board is of opinion that it is necessary in the public interest so to do, be published and circulated in the prescribed manner for general information;
(b) the Board may, if it considers it desirable or expedient so to do for avoiding genuine hardship in any case or class of cases, by general or special order, authorize any wealth-tax authority not being a Deputy Commissioner (Appeals) or Commissioner (Appeals), to admit an application or claim for any exemption, deduction, refund or any other relief under this Act after the expiry of the period specified by or under this Act for making such application or claim and deal with the same on merits in accordance with law.
(1) The provisions of sections 124 and 127 of the Income-tax Act shall, so far as may be, apply for the purposes of this Act as they apply for the purposes of the Income-tax Act, subject to the modifications specified in sub-section (2).
(2) The modifications referred to in sub-section (1) shall be the following, namely:
(a) In section 124 of the Income-tax Act:
(i) In sub-section (3), references to the provisions of the Income-tax Act shall be construed as references to the corresponding provisions of the Wealth-tax Act;
(ii) Sub-section (5) shall be omitted:
(b) In section 127 of the Income-tax Act, in the Explanation below sub-section 2(4) references to proceedings under the Income-tax Act shall be construed as including references to proceedings under the Wealth-tax Act.
12A. Appointment of Valuation Officers:
(1) The Central Government may appoint as many Valuation Officers as it thinks fit.
(2) Subject to the rules and orders of the Central Government regulating the conditions of service of persons in public services and posts, a wealth-tax authority may appoint as many overseers, surveyors and assessors as may be necessary to assist the Valuation Officers in the performance of their functions.
Powers of Director-General or Director, Chief Commissioner or Commissioner and Joint Commissioner] to make enquiries, The Director-General or Director, the Chief Commissioner or Commissioner and the Joint Commissioner shall be competent to make any enquiry under this Act, and for this purpose shall have all the powers that an Assessing Officer] has under this Act in relation to the making of enquiries.
UNIT - III
Concept of manufacture and manufacturer
Manufacture not only includes any process incidental or ancillary to the completion of manufactured product but also what is stated to be amounting to manufacture as per section notes or chapter notes of the Central Excise Tariff Act, 1985.
The following four aspects must exist to attract the definition of manufacturing as given in central excise law a process to be carried out. The process carried out must result in the manufacture of a new product than what was originally before. The product so produced must have a marketability and commercially known and sold as such. The product must be movable in nature.
Registration
Every person who manufactures or deals in excisable goods is required to obtain Central Excise Registration as per Rule 9 of the Central Excise Rules, 2002. The following categories of persons require registration:
1. Every manufacturer of dutiable excisable goods;
2. First and second stage dealers desiring to issue cenvatable invoices;
3. Persons holding warehouses for storing non duty paid goods;
4. Persons who obtain excisable goods for availing end use based exemption;
5. Exporter - manufacturer under rebate/bond procedure; Export Oriented Units which have interaction with the domestic economy either through DTA sales or procurement of duty free inputs.
Exemption from registration
Persons manufacturing goods, fully exempted or chargeable to NIL rate of duty are not required to seek registration. However they should file the prescribed declaration in the beginning of every financial year. The following categories of persons are exempt from registration:
1. Manufacturers of goods which are goods on the basis of value of clearance made in a financial year and remain under the exemption limit (SSI). In cases where the value of clearances in the current financial year exceeds Rs. 90 lakhs the assessee has to file a declaration prescribed under Notification No. 36/2001-CE (NT), dated 26.6.2001 for getting exemption from the Central Excise registration;
2. Persons who get their goods manufactured by others, except the persons who get certain textile items manufactured on job work;
3. Persons manufacturing excisable goods under the customs warehousing procedures subject to certain conditions;
4. Wholesale traders or dealers of excisable goods (except first stage dealers, second stage dealer and depot);
5. Job works of goods under Ch. 61 & 62 and 100% EOU. Deeming EOUs/EPZ units as registered is not applicable if such units are having clearances in or procurement from Domestic Tariff Area (DTA).
Procedure
1) Before starting production of excisable goods or dealership for the purpose of issuing invoices to pass cenvat credit registration should be obtained;
2) Registration is provided at free of cost;
3) Separate registration is required in respect of separate premises (factory, depot, godowns etc.,) except where two or more premises are actually part of the same factory (where processes are inter linked) but are segregated by public road, canal or railway line;
4) in case of textiles, a single registration will be enough;
5) several manufacturers owing machinery such as power looms under a common shall shed or in common premises will be treated as a separate factory each for their respective machinery and there will be no clubbing of their productions/clearances;
6) The application form shall be submitted in duplicate to the jurisdictional Deputy/Asst. Commissioner of Central Excise. The prescribed form is as follows:
7) Form A1 - All persons except certain textile processors/cheroot manufacturers;
8) Form A2 - Power look weavers/Hand processors/dealers of yarn and fabrics and manufacturers of ready made garments;
9) Form A3 - Manufacturers of hand rolled cheroots of tobacco falling under sub-heading 2402.00 of Central Excise Tariff.
10) An attested copy of Permanent Account Number (PAN) allotted by Income Tax Department should be enclosed with the application;
11) The computer generated Registration Certificate based on 15 digit permanent account number in Form RC is handed over either immediately or within seven days;
12) Verification of the premises will be made within five working days after the issue of Registration Certificate;
13) Registration Certificate is not required to be renewed;
14) No bond or bank guarantee is required for obtaining registration.
Legislative background of the levy
Central Excise duty is an indirect tax levied on goods manufactured in India. The tax is administered by the Central Government under the authority of Entry 84 of the Union List (No. 1) under Seventh schedule read with Article 246 of the Constitution of India.
The Central Excise duty is levied in terms of Central Excise Act, 1944 and the rates of duty, ad valorem or specific, are prescribed under the Schedule I and II of the Central Excise Tariff Act, 1985. The taxable even under the Central Excise law is 'manufacture' and the liability of Central Excise duty arises as soon as the goods are manufactured. The Central Excise Officers are also entrusted to collect other types of duties levied under Additional Duties of Excise (Goods of Special Important) Act, Additional Duties of Excise (Textiles and Textile Articles) Act, Cess etc.
Till 1969, there was physical control system wherein each clearance of manufactured goods from the factory was done under the supervision of the Central Excise Officers. Introduction of Self-Removal procedure was a watershed in the excise procedures. In 1969, the assessees were allowed to quantify the duty on the basis of approved classification list and the price list and clear the goods on payment of appropriate duty.
In 1994, the gate pass system gave way to the invoice-based system, and all clearances are effected on manufacturer's own invoice. Another major change was brought about in 1996, when the Self-Assessment system was introduced. This system is continuing today also. The assessee himself assesses his Tax Return and the Department scrutinizes it or conducts audit to ascertain correctness of the duty payment. Even the classification and value of the goods were to be merely declared by the assessee instead of obtaining approval of the same from the Department.
In 2000, the fortnightly payment of duty system was introduced for all commodities, an extension of the monthly payment of duty system introduced the previous year for Small Scale Industries.
In 2001, new Central Excise (No.23) Rules, 2001 have replaced the Central Excise Rules, 1944 with effect from 1st July, 2001. Other rules have also been notified namely, CENVAT Credit Rules, 2001, Central Excise Appeals rules, 2001 etc. With the introduction of the new rules several changes have been effected in the procedures. The new procedures are simplified. There are less numbers of rules, only 33 as compared to 234 earlier. Classification declaration and Price declarations have also been dispensed with, the CENVAT declaration having been earlier dispensed with in 2000 itself.
Administration of Central Excise
The Central Excise law is administered by the Central Board of Excise and Customs (CBEC or Board) through its field offices, the Central Excise Commission rates. For this purpose, the country is divided into 23 Zones and a Chief Commissioner of Central Excise heads each Zone. There are total 92 Commission rates in these Zones headed by Commissioners of Central Excise. Divisions and Ranges are the subsequent formations, headed by Deputy/Assistant Commissioners of Central Excise and Superintendents of Central Excise, respectively.
For enforcing the Central Excise law and collection of Central Excise duty the following types of procedures are being followed by the Central Excise Department -
a) Physical Control- Applicable to cigarettes only. Here assessment precedes clearance which takes place under the supervision of Central Excise officers;
b) Self-Removal Procedure- Applicable to all other goods produced or manufactured within the country. Under this system, the assessee himself determines the duty liability on the goods and clears the goods.
What is Central Excise?
Excise as stated in the Oxford Dictionary, was originally 'acise' , a word derived from the Latin, 'accensav', meaning 'to tax', The primary and fundamental meaning of 'excise duty' or 'Duty of Excise' is tax on articles produced or manufactured in the taxing country and intended for home consumption (i.e. consumption within the same country). It is an indirect duty which the manufacturer or producer passes on to the ultimate consumer, that is, its ultimate incidence will always be on the consumer
How important is the role of Central Excise in India?
Central Excise revenue is the biggest single source of revenue for the Government of India.
The Union Government also tries to achieve different socio-economic objectives by making suitable adjustments in the scope and quantum of levy of Central Excise duty. The scheme of Central Excise levy is suitably adapted and modified to serve different purposes of price control, industrial growth, promotion of small scale industries and the like.
UNIT- IV
Appointment of Customs Officers
Section - 3 Classes of officers of customs
There shall be the following classes of officers of customs, namely:-
a) Chief Commissioners of Customs;
b) Commissioners of Customs;
c) Commissioners of Customs (Appeals);
cc) Joint Commissioners of Customs;
d) Deputy Commissioners of Customs;
e) Assistant Commissioners of Customs or Deputy Commissioner of Customs;
f) Such other class of officers of customs as may be appointed for the purposes of this Act.
Section4. Appointment of officers of customs
1) The Board may appoint such persons as it thinks fit to be officers of customs.
2) Without prejudice to the provisions of sub-section (1), Board may authorise a Chief Commissioner of Custom or a Joint or Assistant Commissioner of Customs or Deputy Commissioner of Customs to appoint officers of customs below the rank of Assistant Commissioner of Customs or Deputy Commissioner of Customs.
Section5. Powers of officers of customs
1) Subject to such conditions and limitations as the Board may impose, an officer of customs may exercise the powers and discharge the duties conferred or imposed on him under this Act.
2) An officer of customs may exercise the powers and discharge the duties conferred or imposed under this Act on any other officer of customs who is subordinate to him.
3) Notwithstanding anything contained in this section, a Commissioner shall not exercise the powers and discharge the duties conferred or imposed on an officer of customs other than those specified in Chapter XV and section 108.
Section6. Entrustment of functions of Board and customs officers on certain other officers
The Central Government may, by notification in the Official Gazette, entrust either conditionally or unconditionally to any officer of the Central or the State Government or a local authority any functions of the Board or any officer of customs under this Act.
Appointment of Customs ports
Section 7 of the Act provides that the Central Government may, by notification in the Official Gazette, appointment,-
a) the ports and airports which alone shall be customs ports or customs airports for the unloading of imported goods and the loading of export goods or any class of such goods;
aa) the places which alone shall be inland container depots for the unloading of imported goods and the loading of export goods or any class of such goods;
b) the places which alone shall be land customs stations for the clearance of goods imported or to be exported by land or inland water or any class of such goods;
c) the routes by which alone goods or any class of goods specified in the notification may pass by land or inland water into or out of India, or to or from any land customs station from or to any land frontier;
d) the ports which alone shall be coastal ports for the carrying on of trade in coastal goods or any class of such goods with all or any specified ports in India.
Warehousing
The facility of warehousing of imported goods in Customs Bonded Warehouses, without payment of Customs duty otherwise leviable on import, is permitted under the Customs Act, 1962. Apart from specific provisions in the said Act (specially under Chapter IX), certain Regulations have been also framed and provisions of Warehoused Goods (Removal) Regulations, 1963 and Manufacture and Other Operations in Warehoused Regulations, 1966 could be referred to in this regard. Basically, goods after landing are permitted to be removed to a warehouse without payment of duty and duty is collected at the time of clearance from the warehouse. The law lays down the time period upto which the goods may remain in a warehouse, without incurring any interest liability and with interest liability.
Warehousing Stations:
The warehouses are to be appointed/licensed at particular places only which have been so declared by Central Board of Excise and Customs. The Board has delegated its power for declaring places to be Warehousing Stations to the Chief Commissioners of Customs. In respect of 100% EOUs, the powers to declare places to be Warehousing Stations have been delegated to the Commissioners of Customs.
After the declaration of any place as a Warehousing Station, the Assistant/Deputy Commissioner of Customs, may appoint a Public Bonded Warehouse where imported dutiable goods may be deposited. Under section 58, the Assistant/Deputy Commissioner of Customs can licence Private Bonded Warehouses where goods imported by or on behalf of the licencee, or other imported goods where facility for Public Warehouse is not available, may be deposited. The following guidelines are generally followed for ensuring uniformity in the practice in the declaration of Warehousing Stations:-
i. the industrial development of the proposed area and the need for warehousing of imported goods should be assessed;
ii. only those places be notified as warehousing Stations where adequate facilities are available for appointing Public Bonded Warehouses;
iii. Adequate Customs/Central Excise staff should be available in the vicinity of the proposed Warehousing Stations and necessary arrangements for training etc.of the staff should be made.
Cases not fulfilling the aforesaid criteria are to be decided in the Board.
Import and Export Restrictions under Customs law
Followings are the restrictions on exports and imports of customs laws
1. Under sub-section (d) of section 111 and sub-section (d) of Section 113, any goods which are imported or attempted to be imported and exported or attempted to be exported, contrary to any prohibition imposed by or under the Customs Act or any other law for the time being in force shall be liable to confiscation. Section 112 of the Customs Act provides for penalty for improper importation and Section 114 of the Customs Act provides for penalty for attempt to export goods improperly. In respect of prohibited goods the Adjudicating Officer may impose penalty upto five times the value of the goods. It is, therefore, absolutely necessary for the trade to know what are the prohibitions or restrictions in force before they contemplate to import or export any goods.
2. The terms "Prohibited Goods" have been defined in sub-section 33 of Section 2 of the Customs Act as meaning "any goods the import or export of which is subject to any prohibition under the Customs Act or any other law for the time being in force".
3. Under section 11 of the Customs Act, the Central Government has the power to issue Notification under which export or import of any goods can be declared as prohibited. The prohibition can either be absolute or conditional. The specified purposes for which a notification under section 11 can be issued are maintenance of the security of India, prevention and shortage of goods in the country, conservation of Foreign Exchange, safeguarding balance of payments etc. The Central Govt. has issued many notifications to prohibit import of sensitive goods such as coins, obscene books, printed waste paper containing pages of any holy books, armored guard, fictitious stamps, explosives, narcotic drugs, rock salt, saccharine, etc.
4. Under Export and Import Policy, laid down by the DGFT, in the Ministry of Commerce, certain goods are placed under restricted categories for import and export. Under section 3 and 5 of the Foreign Trade (Development and Regulation) Act, 1992, the Central Government can make provisions for prohibiting, restricting or otherwise regulating the import of export of the goods. As for example, import of second hand goods and second hand capital goods is restricted. Some of the goods are absolutely prohibited for import and export whereas some goods can be imported or exported against a licence. For example export of human skeleton is absolutely prohibited whereas export of cattle is allowed against an export licence. Another example is provided by Notification No.44(RE-2000) 1997 dated 24.11.2000 in terms of which all packaged products which are subject to provisions of the Standards of Weights and Measures (Packaged Commodities) Rules, 1997, when produced/packed/sold in domestic market, shall be subject to compliance of all the provisions of the said Rules, when imported into India. All packaged commodities imported into India shall carry the name and address of the importer, net quantity in terms of standard unit of weights measures, month and year of packing and maximum retail sale price including other taxes, local or otherwise. In case any of the conditions is not fulfilled, the import of packaged products shall be held as prohibited, rendering such goods liable to confiscation.
5. Another restriction under the aforesaid Notification issued by the Ministry of Commerce is that the import of a large number of products, presently numbering 133, are required to comply with the mandatory Indian Quality Standards (IQS) and for this purpose exporters of these products to India are required to register themselves with Bureau of Indian Standards (BIS). Non-fulfillment of the above requirement shall render such goods prohibited for import.
6. Import and export of some specified goods may be restricted or prohibited under other laws such as Environment Protection Act, Wild Life Act, Indian Trade and Merchandise Marks Act, Arms Act, etc. Prohibition under those acts will also apply to the penal provisions of the Customs Act, rendering such goods liable to confiscation under section 111(d) of the Customs Act (for import) and 113 (d) of the Customs Act (for export).
7. Any Importer or Exporter for being knowingly concerned in any fraudulent evasion or attempted evasion of any prohibition under the Customs Act or any other law for the time being in force in respect to any import or export of goods, shall be liable to punishment with imprisonment for a maximum term of three years (seven years in respect of notified goods) under section 135 of the Customs Act. Any person who is reasonably believed to be guilty of an offence, punishable under section 135, may be arrested under the provisions of section 104 of the Customs Act.
8. Keeping in view the above penal provisions in the Customs Act to deal with any deliberate evasion of prohibition/restriction of import of export of specified goods, it is advisable for the Trade to be well conversant with the provisions of EXIM Policy, the Customs Act, as also other allied Acts. They must make sure that before any imports are effected or export planned, they are aware of any prohibition/restrictions and requirements subject to which alone goods can be imported/exported, so that they do not get penalized and goods do not get involved in confiscation etc. proceedings at the hands of Customs authorities.
Principles of Restriction
DGFT may, through a notification, adopt and enforce any measure necessary for:-
Terms and Conditions of a Licence or Certificate or Permission
Every licence or certificate or permission shall be valid for the period of validity specified in the licence or certificate or permission and shall contain such terms and conditions as may be specified by the licensing authority which may include:
Principles of Restriction
DGFT may, through a
notification, adopt and enforce any measure necessary for:-
Terms and Conditions of
a Licence / Certificate / Permission
Every licence/certificate/permission shall be valid for the period of validity specified in the licence/ certificate/ permission and shall contain such terms and conditions as may be specified by the licensing authority which may include:
Levy and collection of customs duty
Customs duty is the duty charged on goods on their importation into India or exportation out side India.
There are two types of rates of duty of Customs:
1. Ad valorem rate i.e., the duty is charged on the basis of value.
2. Specific rate i.e., on the basis of quantity/number/ volume/ weight.
Different kinds of duties of customs levied on imported goods are:
i. Basic Customs Duty
ii. Surcharge
iii. Additional duty of customs
iv. Special additional dutie
v. Additional levies like countervailing duty, Anti dumping duty, Safe guard duty etc., In addition, cess duty is leviable on certain goods.
Special additional duty is specified under Section 3A of the Customs Tariff Act, 1975. The amount of Special Additional duty is computed by applying this rate on value, which is equal to the total of the assessable value, the basic customs duty and the additional duty of customs described above.
Additional duty of customs equal to the, excise duty leviable on like goods produced or manufactured in India. This is levied under Section 3 of Customs Tariff Act, 1975. This is usually referred to as "countervailing duty" (CVD). However, the correct description of this duty is Additional Duty of Customs. In order to determine the applicable rate, you have to obtain the correct classification of the goods under the Central Excise Tariff Act, 1986. The duties under the Central Excise Tariff are on ad valorem basis. However, specific rates have been prescribed for some items. Importantly, the value for the purpose of computing additional duties of Customs is the total of the assessable value (generally the transaction value - roughly equal to the c.i.f. value) and the basic customs duty.
If you are a manufacturer, importing goods to be used as inputs for manufacture of other goods, you would be generally eligible for obtaining credit (called CENVAT credit) equal to the additional duty of customs paid on the imported goods. This duty amount is eligible for credit under input duty Central Excise Rules, 1944. This credit can be used for paying central excise duties on your manufacture.
Surcharge at the rate of 10% of the Basic Customs Duty is leviable on imported goods under Section 90 of the Finance Act, 2000.
Under the Custom Tariff Act, 1975 and other laws, there are various types of duties, which are leviable. As a first step, the following three types of customs duties have to compute:-
i. Duty which is specified against each Heading or Sub-Heading in the First Schedule to the Customs Tariff Act, 1975. This is usually referred to as Basic Customs Duty. There are different rates of duty for different commodities. You may find these rates in column no. 4 (labeled as "standard rates") of the tariff. There is also a 5th column specifying the "preferential rates". These are different rates of duty for goods imported from certain countries in terms of bilateral or other agreements with such countries--which are called preferential rates of duties. The duty may be a percentage of the value of the goods ( in such cases it is called ad valorem duty) or at a specific rate, which is based on unit of measurement which is specified in the tariff entry. The rate of duty in percentage (in the case of advalorem duties) has to be applied on the Cost Insurance and Freight
ii. A Surcharge at the rate of 10% of the Basic Customs Duty is leviable on imported goods under Section 90 of the Finance Act, 2000.
iii. Additional duty of customs equal to the, excise duty leviable on like goods produced or manufactured in India. This is levied under Section 3 of Customs Tariff Act, 1975. This is usually referred to as "countervailing duty" (CVD). However, the correct description of this duty is Additional Duty of Customs. In order to determine the applicable rate, you have to obtain the correct classification of the goods under the Central Excise Tariff Act, 1986. The duties under the Central Excise Tariff are on ad valorem basis. However, specific rates have been prescribed for some items. Importantly, the value for the purpose of computing additional duties of Customs is the total of the assessable value (generally the transaction value - roughly equal to the c.i.f. value) and the basic customs duty.
If you are a manufacturer, importing goods to be used as inputs for manufacture of other goods, you would be generally eligible for obtaining credit (called CENVAT credit) equal to the additional duty of customs paid on the imported goods. This duty amount is eligible for credit under input duty Central Excise Rules, 1944. This credit can be used for paying central excise duties on your manufacture.
iv. Imported goods are also liable to a Special additional duty at a rate specified in Section 3A of the Customs Tariff Act, 1975. The amount of Special Additional duty is computed by applying this rate on value which is equal to the total of the assessable value, the basic customs duty and the additional duty of customs described above.
3. Additional Levies
Having computed the above mentioned duties, you have to determine whether there are any additional levies on the particular items you intend to import. Some of the levies are commodity specific and would be applicable regardless of the time of import. These include cesses under various enactments as also Additional Duties on specified commodities. There are certain other levies which are specific to the country of origin. Please consider the following levies.
4. Exemptions:
These exemptions and concessions can be granted in a number of ways. Some of these exemptions are briefly discussed below: -
Exemption by Notification:
The Central Government may notify by publication in the Official Gazette certain exemptions and concessions. Such exemptions or concessions may be conditional or absolute. There are general exemptions given to a variety of items imported under certain conditions These include exemption of imports for promotion of exports, import by UN bodies, defence imports etc., There are also exemptions which are unconditional and are applicable across the board. There are other exemptions based on conditions of end use.
Preferential Rates
Preferential rates of customs duty have been made applicable in respect of imports from certain countries such as Sri Lanka, Mauritius, Seychelles and Tonga provided certain conditions are satisfied. The goods in question must actually be manufactured or produced in such preferential areas. Rules have been framed in order to determine whether the goods have been manufactured or produced in such areas. Determination of origin of the goods is very essential in order to avail of the benefits of such concessional rates of duty.
UNIT - V
CENTRAL SALES TAX LAWS
Introduction to value added tax (VAT)
It is a form of consumption tax. From the perspective of the buyer, it is a tax on the purchase price. From that of the seller, it is a tax only on the "value added" to a product, material or service, from an accounting point of view, by this stage of its manufacture or distribution. The manufacturer remits to the government the difference between these two amounts, and retains the rest for themselves to offset the taxes they had previously paid on the inputs.
The "value added" to a product by a business is the sale price charged to its customer, minus the cost of materials and other taxable inputs. A VAT is like a sales tax in that ultimately only the end consumer is taxed. It differs from the sales tax in that, with the latter, the tax is collected and remitted to the government only once, at the point of purchase by the end consumer. With the VAT, collections, remittances to the government, and credits for taxes already paid occur each time a business in the supply chain purchases products.
Maurice Lauré, Joint Director of the French Tax Authority, the Direction générale des impôts, was first to introduce VAT on April 10, 1954, although German industrialist Dr. Wilhelm von Siemens proposed the concept in 1918. Initially directed at large businesses, it was extended over time to include all business sectors. In France, it is the most important source of state finance, accounting for nearly 50% of state revenues.
Personal end-consumers of products and services cannot recover VAT on purchases, but businesses are able to recover VAT (input tax) on the products and services that they buy in order to produce further goods or services that will be sold to yet another business in the supply chain or directly to a final consumer. In this way, the total tax levied at each stage in the economic chain of supply is a constant fraction of the value added by a business to its products, and most of the cost of collecting the tax is borne by business, rather than by the state. Value added taxes were introduced in part because they create stronger incentives to collect than a sales tax does. Both types of consumption tax create an incentive by end consumers to avoid or evade the tax, but the sales tax offers the buyer a mechanism to avoid or evade the tax persuade the seller that he (the buyer) is not really an end consumer, and therefore the seller is not legally required to collect it. The burden of determining whether the buyer's motivation is to consume or re-sell is on the seller, but the seller has no direct economic incentive to collect it. The VAT approach gives sellers a direct financial stake in collecting the tax, and eliminates the problematic decision by the seller about whether the buyer is or is not an end consumer.
Features of services tax
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Key Features
Determination of taxable turnover
Section 8A of the Act provides that
(1) In determining the turnover of a dealer for the purpose of this Act, the following deductions shall be made from the aggregate of the sale prices, namely:-
(a) The amount arrived at by applying the following formula-
Rate of tax x aggregate of sale prices:
100 + rate of tax Provided that no deduction on the basis of the above formula shall be made if the amount by way of tax collected by a registered dealer, in accordance with the provisions of this Act, has been otherwise deducted from the aggregate of sale prices.
Explanation: Where the turnover of a dealer is taxable at different rates, the aforesaid formula shall be applied separately in respect of each part of the turnover liable to a different rate of tax;
(b) The sale price of all goods returned to the dealer by the purchasers of such goods,-
(i) Within a period of three months from the date of delivery of the goods, in the case of goods returned before the 14th day of May, 1966;
(ii) Within a period of six months from the date of delivery of the goods, in the case of goods returned on or after the 14th day of May, 1966:
Provided that satisfactory evidence of such return of goods and of refund or adjustment in accounts of the sale price thereof is produced before the authority competent to assess or, as the case may be, reassess the tax payable by the dealer under this Act; and
(c) Such other deductions as the Central Government may, have regard to the prevalent market conditions, facility of trade and interests of consumers prescribe.
(2) Save as otherwise provided in sub‑section (1), in determining the turnover of a dealer for the purposes of this Act, no deduction shall be made from the aggregate of the sale prices.
Registration of dealers
Section 10 of the Act provides that
(1) Every dealer liable to pay tax under this Act shall, within such time as maybe prescribed for the purpose, make an application for registration under this Act to such authority in the appropriate State as the Central Government may, by general or special order, specify, and every such application shall contain such particulars as may be prescribed.
(2) Any dealer liable to pay tax under the sales tax law of the appropriate State, or where there is no such law in force in the appropriate State or any part thereof, any dealer having a place of business in that State or part, as the case may be, may, notwithstanding that he is not liable to pay tax under this Act, apply for registration under this Act to the authority referred to in sub‑section (1), and every such application shall contain such particulars as may be prescribed.
For the purposes of this sub‑section, a dealer shall be deemed to be liable to pay tax under the sales tax law of the appropriate State notwithstanding that under such law a sale or purchase made by him is exempt from tax or refund or rebate of tax is admissible in respect thereof.
(2A) Where it appears necessary to the authority to whom an application is made under sub‑section (1) or sub‑section (2) so to do for the proper realization of the tax payable under this Act or for the proper custody and use of the forms referred to in clause (a) of the first proviso to sub‑section (2) of section 6 or sub‑section (1) of section 6A or clause (a) of sub‑section (4) of section 8, he may, by an order in writing and for reasons to be recorded therein, impose as a condition for the issue of a certificate of registration a requirement that the dealer shall furnish in the prescribed manner and within such time as may be specified in the order such security as may be so specified, for all or any of the aforesaid purposes.
(3) If the authority to whom an application under sub‑section (1) or sub‑section (2) is made is satisfied that the application is in conformity with the provisions of this Act and the rules made there under and the condition, if any, imposed under sub‑section (2A), has been complied with, he shall register the applicant and grant to him a certificate of registration in the prescribed form which shall specify the class or classes of goods for the purposes of sub‑section (1) of section 8.
(3A) Where it appears necessary to the authority granting a certificate of registration under this section so to do for the proper realization of tax payable under this Act or for the proper custody and use of the forms referred to in sub‑section (2A), he may, at any time while such certificate is in force, by an order in writing and for reasons to be recorded therein, require the dealer, to whom the certificate has been granted, to furnish within such time as may be specified in the order and in the prescribed manner such security, or, if the dealer has already furnished any security in pursuance of an order under this sub‑section or sub‑section (2A), such additional security, as may be specified in the order, for all or any of the aforesaid purposes.
(3B) No dealer shall be required to furnish any security under sub‑section (2A) or any security or additional security under sub‑section (3A) unless he has been given an opportunity of being heard.
(3BB) The amount of security which a dealer may be required to furnish under sub‑section (2A) or sub‑section (3A) or the aggregate of the amount of such security and the amount of additional security which he may be required to furnish under sub‑section (M), by the authority referred to therein, shall not exceed-
(a) in the case of a dealer other than a dealer who has made an application, or who has been registered in pursuance of an application, under sub‑section (2), a sum equal to the tax payable under this Act, in accordance with the estimate of such authority, on the turnover of such dealer for the year in which such security or, as the case may be, additional security is required to be furnished; and
(b) in the case of a dealer who has made an application, or who has been registered in pursuance of an application, under sub‑section (2), a sum equal to the tax leviable under this Act, in accordance with the estimate of such authority on the sales to such dealer in the course of inter‑State trade or commerce in the year in which such security or, as the case may be, additional security is required to be furnished, had such dealer been not registered under this Act.
(3C) Where the security furnished by a dealer under sub‑section (2A) or sub‑section (3A) is in the form of a surety bond and the surety becomes insolvent or dies, the dealer shall, within thirty days of the occurrence of any of the aforesaid events, inform the authority granting the certificate of registration and shall within ninety days of such occurrence furnish a fresh surety bond or furnish in the prescribed manner other security for the amount of the bond.
(3D) The authority granting the certificate of registration may by order and for good, and sufficient cause forfeit the whole or any part of the security furnished by a dealer,-
(a) For realizing any amount of tax or penalty payable by the dealer;
(b) If the dealer is found to have misused any of the forms referred to in sub‑section (2A) to have failed to keep them in proper custody:
It's Provides that no order shall be passed under this sub‑section without giving the dealer an opportunity of being heard.
(3E) where by reason of an order under sub‑section (M), the security furnished by any dealer is rendered insufficient, he shall make up the deficiency in such manner and within such time as may be prescribed.
(3F) the authority issuing the forms referred to in sub‑section (2A) may refuse to issue such forms to a dealer who has failed to comply with an order under that sub‑section or sub‑section (M), or with the provisions of sub‑section (3C) or sub‑section (3E), until the dealer has complied with such order or such provisions, as the case may be.
(3G) the authority granting a certificate of registration may, on application by the dealer to whom it has been granted, order the refund of any amount or part thereof deposited by the dealer by way of security under this section, if it is not required for the purposes of this Act.
(3H) Any person aggrieved by an order passed under sub‑section (2A), sub‑section (M), sub‑section (3D) or sub‑section (3G) may, within thirty days of the service of the order on him, but after furnishing the security, prefer, in such form and manner as may be prescribed, an appeal against such order to such authority (hereafter in this section referred to as the "appellate authority") as may be prescribed:
Provided that the appellate authority may, for sufficient cause, permit such person to present the appeal,-
(a) After the expiry of the said period of thirty days; or
(b) Without furnishing the whole or any part of such security.
(3I) the procedure to be followed in hearing any appeal under sub‑section (3H), and the fees payable in respect of such appeals shall be such as may be prescribed.
(3J) the order passed by the appellate authority in any appeal under sub‑section (3H) shall be final.
(4) A certificate of registration granted under this section may-
(a) either on the application of the dealer to whom it has been granted or, where no such application has been made, after due notice to the dealer, be amended by the authority granting it if he is satisfied that by reason of the registered dealer having changed the name, place or nature of his business or the class or classes of goods in which he carries on business or for any other reason the certificate of registration granted to him requires to be amended; or
(b)be cancelled by the authority granting it where he is satisfied, after due notice to the dealer to whom it has been granted, that he has ceased to carry on business or has ceased to exist or has failed without sufficient cause, to comply with an order under sub‑section (3A) or with the provisions of sub‑section (3C) or sub‑section (3E) or has failed to pay any tax or penalty payable under this Act, or in the case of a dealer registered under sub‑section (2) has ceased to be liable to pay tax under the sales tax law of the appropriate State or for any other sufficient reason.
(5) A registered dealer may apply in the prescribed manner not later than six months before the end of a year to the authority which granted his certificate of registration for the cancellation of such registration, and the authority shall, unless the dealer is liable to pay tax under this Act, cancel the registration accordingly, and where he does so, the cancellation shall take effect from the end of the year.
Inter state sales tax
Section 6. Liability to tax on inter‑State sales
(1) Subject to the other provisions contained in this Act, every dealer shall, with effect from such date as the Central ' Government may, by notification in the Official Gazette, appoint, not being earlier than thirty days from the date of such notification, be liable to pay tax under this Act on all sales of goods other than electrical energy effected by him in the course of inter‑State trade or commerce during any year on and from the date so notified:
Provided that a dealer shall not be liable to pay tax under this Act on any sale of goods which, in accordance with the provisions of sub‑section (3) of section 5 is a sale in the course of export of those goods out of the territory of India.
(1A) A dealer shall be liable to pay tax under this Acton a sale of any goods effected by him in the course of inter‑State trade or commerce notwithstanding that no tax would have been leviable (whether on the seller or the purchaser) under the sales tax law of the appropriate State if that sale had taken place inside that State.
(2) Notwithstanding anything contained in sub‑section (1) or sub‑section (M), where a sale of any goods in the course of inter‑State trade or commerce has either occasioned the movement of such goods from one State to another or has been effected by a transfer of documents of title to such goods during their movement from one State to another, any subsequent sale during such movement effected by a transfer of documents of title to such goods,-
(a) To the government, or
(b) To a registered dealer other than the government, if the goods are of the description referred to in sub‑section (3) of section 8,
Shall be exempt from tax under this Act
Provided that no such subsequent sale shall be exempt from tax under this sub‑section unless the dealer effecting the sale furnishes to the prescribed authority in the prescribed manner and within the prescribed time or within such further time as that authority may, for sufficient cause, permit,-
(a) a certificate duly filled and signed by the registered dealer from whom the goods were purchased containing the prescribed particulars in a prescribed form obtained from the prescribed authority; and
(b) If the subsequent sale is made-
(i) To a registered dealer, a declaration referred to in clause (a) of sub‑section (4) of section 8, or
(ii) To the government, not being a registered dealer, a certificate referred to in clause (b) of sub‑section (4) of section 8:
Provided further that it shall not be necessary to furnish the declaration or the certificate referred to in clause (b) of the preceding proviso in respect of a subsequent sale of goods if,-
(a) The sale or purchase of such goods is, under the sales tax law of the appropriate State, exempt from tax generally or is subject to tax generally at a rate which is lower than four per cent. (whether called a tax or fee or by any other name); and
(b) The dealer affecting such subsequent sale proves to the satisfaction of the authority referred to in the preceding proviso that such sale is of the nature referred to in clause (a) or clause (b) of this sub‑section.
(3) Notwithstanding anything contained in this Act, no tax under this Act shall be payable by any dealer in respect of sale of any goods made by such dealer, in the course of inter‑State trade or commerce, to any official, personnel, consular or diplomatic agent of-
(i) Any foreign diplomatic mission or consulate in India; or
(ii) the United Nations or any other similar international body, entitled to privileges under any convention or agreement to which India is a party or under any law for the time being in force, if such official, personnel, consular or diplomatic agent, as the case may be, has purchased such goods for himself or for the purposes of such mission, consulate, United Nations or other body.
(4) The provisions of sub‑section (3) shall not apply to the sale of goods made in the course of inter‑State trade or commerce unless the dealer selling such goods furnishes to the prescribed authority a certificate in the prescribed manner on the prescribed form duly filled and signed by the official, personnel, consular or diplomatic agent, as the case may be.
(1) Where any dealer claims that he is not liable to pay tax under this Act, in respect of any goods, on the ground that the movement of such goods from one State to another was occasioned by reason of transfer of such goods by him to any other place of his business or to his agent or principal, as the case may be, and not by reason of sale, the burden of proving that the movement of those goods was so occasioned shall be on that dealer and for this purpose he may furnish to the assessing authority, within the prescribed time or within such further time as that authority may, for sufficient cause, permit, a declaration, duly filled and signed by the principal officer of the other place of business, or his agent or principal, as the case may be, containing the prescribed particulars in the prescribed form obtained from the prescribed authority, along with the evidence of dispatch of such goods and if the dealer fails to furnish such declaration, then, the movement of such goods shall be deemed for all purposes of this Act to have been occasioned as a result of sale.
(2) If the assessing authority is satisfied after making such inquiry as he may deem necessary that the particulars contained in the declaration furnished by a dealer under sub‑section (1) are true, he may, at the time of, or at any time before, the assessment of the tax payable by the dealer under this Act, make an order to that effect and thereupon the movement of goods to which the declaration relates shall be deemed for the purpose of this Act to have been occasioned otherwise than as a result of sale.
Explanation: In this section, "assessing authority", in relation to a dealer, means the authority for the time being competent to assess the tax payable by the dealer under this Act.
Section 8 of the Act provides that
(1) Every dealer, who in the course of inter‑State trade or commerce,-
(a) Sells to the government any goods; or
(b) Sells to a registered dealer other than the government goods of the description referred to in sub‑section (3) shall be liable to pay tax under this Act, with effect from such date as may be notified by the Central Government in the Official Gazette for this purpose, which shall be two per cent. of his turnover or at the rate applicable to the sale or purchase of such goods inside the appropriate State under the sales tax law of that State, or, as the case may be, under any enactment of that State imposing value added tax, whichever is lower:
It's Provided that the rate of tax payable under this sub‑section by a dealer shall continue to be four per cent, of his turnover, until the rate of two per cent. takes effect under this sub‑section.
(2) The tax payable by any dealer on his turnover insofar as the turnover or any part thereof relates to the sale of goods in the course of inter‑State trade or commerce not falling within sub‑section (1)-
(a) In the case of declared goods, shall be calculated at twice the rate applicable to the sale or purchase of such goods inside the appropriate State;
(b) In the case of goods other than declared goods, shall be calculated at the rate of ten per cent or at the rate applicable to the sale or purchase of such goods inside the appropriate State, whichever is higher.
(c) in the case of goods, the sale or, as the case may be, the purchase of which is, under the sales tax law of the appropriate State, exempt from tax generally shall be nil, And for the purpose of making any such calculation under clause (a) or clause (b), any such dealer shall be deemed to be a dealer liable to pay tax under the sales tax law of the appropriate State, notwithstanding that he, in fact, may not be so liable under that law.
For the purposes of this sub‑section a sale or purchase of any goods shall not be deemed to be exempt from tax generally under the sales tax law of the appropriate State if under that law the sale or purchase of such goods is exempt only in specified circumstances or under specified conditions or the tax is levied on the sale or purchase of such goods at specified stages or otherwise than with reference to the turnover of the goods.
(3) The goods referred to in clause (b) of sub‑section (l)
(b) are goods of the class or classes specified in the certificate of registration of the registered dealer purchasing the goods as being intended for re‑sale by him or subject to any rules made by the Central Government in this behalf, for use by him in the manufacture or processing of goods for sale or 21 in the communications network or in mining or in the generation or distribution of electricity or any other form of power;
(c) Are containers or other materials specified in the certificate of registration of the registered dealer purchasing the goods, being containers or materials intended for being used for the packing of goods for sale;
(d) are containers or other materials used for the packing of any goods or classes of goods specified in the certificate of registration referred to in [* * *] clause (b) or for the packing of any containers or other materials specified in the certificate of registration referred to in clause (c).
(4) The provisions of sub‑section (1) shall not apply to any sale in the course of inter‑State trade or commerce unless the dealer selling the goods furnishes to the prescribed authority in the prescribed manner,-
(a) a declaration duly filled and signed by the registered dealer to whom the goods are sold containing the prescribed particulars in a prescribed form obtained from the prescribed authority; or
(b) if the goods are sold to the government, not being a registered dealer, a certificate in the prescribed form duly filled and signed by a duly authorised officer of the government:
Provided that the declaration referred to in clause (a) is furnished within the prescribed time or within such further time as that authority may, for sufficient cause, permit.
(5) Notwithstanding anything contained in this section, 'the State Government' may on the fulfillment of the requirements laid down in sub‑section (4) by the dealer if it is satisfied that it is necessary so to do in the public interest, by notification in the Official Gazette, and subject to such conditions as may be specified therein, direct,-
(a) that no tax under this Act shall be payable by any dealer having his place of business in the State in respect of the sales by him, in the course of inter‑State trade or commerce, to a registered dealer or the Government from any such place of business of any such goods or classes of goods as may be specified in the notification, or that the tax on such sales shall be calculated at such lower rates than those specified in sub‑section (1) or sub‑section (2) as may be mentioned in the notification;
(b) that in respect of all sales of goods or sales of such classes of goods as may be specified in the notification, which are made, in the course of inter‑State trade or commerce, to a registered dealer or the Government by any dealer having his place of business in the State or by any class of such dealers as may be specified in the notification to any person or to such class of persons as may be specified in the notification, no tax under this Act shall be payable or the tax on such sales shall be calculated at such lower rates than those specified in sub‑section (1) or sub‑section (2) as may be mentioned in the notification.
(6) Notwithstanding anything contained in this section, no tax under this Act shall be payable by any dealer in respect of sale of any goods made by such dealer, in the course of inter‑State trade or commerce to a registered dealer for the purpose of setting up, operation, maintenance, manufacture, trading, production, processing, assembling, repairing, reconditioning, re‑engineering, packaging or for use as packing material or packing accessories in an unit located in any special economic zone or for development, operation and maintenance of special economic zone by the developer of the special economic zone, if such registered dealer has been authorised to establish such unit or to develop, operate and maintain such special economic zone by the authority specified by the Central Government in this behalf.
(7) The goods referred to in sub‑section (6) shall be the goods of such class or classes of goods as specified in the certificate of registration of the registered dealer referred to in that sub‑section.
(8) The provisions of sub‑sections (6) and (7) shall not apply to any sale of goods made in the course of inter‑State trade or commerce unless the dealer selling such goods furnishes to the prescribed authority referred to in sub‑section (4) a declaration in the prescribed manner on the prescribed form obtained from the authority specified by the Central Government under sub‑section (6) duly filled in and signed by the registered dealer to whom such goods are sold.
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