Taxation Flashcards
Taxes
Taxes are involuntary fees levied on individuals or corporations and enforced by a government entity.
Changes in taxation since 1991
- Broadening of the tax base to include services, fringe benefits, security market transactions, etc.
- Reduction in custom and excise duty
- lowering of corporate tax rates
- Rationalization of personal tax slabs
- VAT
- Simplification of income tax filings
what does an increase in the share of direct tax show?
- The tax system is becoming more progressive
- growth with equity
- Income redistribution
Principles of a good tax system
Characteristics:
- Equity
- Certainty
- Economy
- Automatic stabilizer
- Convenience
- Redistribution
- Flexible
- Not discourage work or investment
Taxation systems
- Progressive
- Regressive
- Proportional
Progressive taxes
Progressive taxes is based on the ability of a taxpayer to pay. As income increases, taxes increases. Ex. Income tax
Regressive taxes
Regressive taxes is assessed as a percentage of the item being purchased. Ex. Sales tax
Proportional taxes
Proportional taxes are a flat tax system in which taxpayers pay a set percentage, regardless of their income. Ex. Income tax @ 10%
Direct taxes
Income tax, corporate tax, wealth tax, capital gains tax etc
Types of corporate tax
FBT, DDT, CTT
Fringe Benefit Tax FBT
Fringe Benefit Tax (FBT) is fundamentally a tax that an employer has to pay in lieu of the benefits that are given to his/her employees.
Introduced in Budget . and got scrapped in 2009
Dividend Distribution Tax DDT
The Dividend Distribution Tax is a tax levied on dividends that a company pays to its shareholders out of its profits.
DDT, is taxable at source, and is deducted at the time of the company distributing dividends.
However, an additional tax is imposed on the shareholder, who receives over Rs. 10 lakh in dividend income in a financial year
In Budget 2018, tax on equity-oriented mutual funds was introduced at the rate of 10 per cent.
Minimum Alternate Tax (MAT)
A company is liable to pay income tax on the profit earned by it (as calculated under the provisions of Companies Act, 2013) after making certain adjustments to the book profit as permissible under the IT Act.
However, many companies, despite showing high profits in their books of accounts and paying substantial dividends, were observed to be paying marginal or no tax.
• MAT was thus envisaged as a mechanism for levying a minimum tax on such companies, by deeming a certain percentage of their book profits, computed under the Companies Act, as taxable income.
MAT is levied at the rate of 18.5% of the book profits.
Securities Transaction Tax
Securities transaction tax (STT) is a tax levied at the time of purchase and sale of securities listed on stock exchanges in India.
Purpose: To curb short term speculative investments
Commodities transaction tax
Same as STT
Imposed on non-agricultural commodities, that are traded at commodities exchange
Wealth tax
Wealth tax is a tax levied on the value of assets someone holds.
Abolished in the budget of 2015 (effective FY 2015-16) as the cost incurred for recovering
taxes was more than the benefit is derived
To compensate, surcharge was increased on income > 50 lakhs
Capital gains tax
Any profit or gain that arises from the sale of a capital asset’ is a capital gain.
Capital Asset = Securities, Property, Land, Jewelry, patents, trademarks etc
Types: Long Term Capital Gains, Short Term Capital Gains.
LTCG are taxed at lower rates than short term gains, to discourage speculations
Google Tax
Also Known as equalisation levy, diverted profits tax/ GAFA Tax
Anti-avoidance tax provisions that have been introduced in several jurisdictions to deal with the practice of profits or royalties being diverted to other jurisdictions that have lower or zero tax rates.
In India, it was introduced as a separate levy imposed by Finance Bill 2016. Not a part of income tax. No tax credit can be claimed under DTAA
Presumptive taxes
If you are taking assumptions to calculate tax. It involves the use of indirect methods to calculate tax liability, which differ from the usual rules based on the taxpayer’s accounts.
Hence, the business entity is required to declare a given percentage of his business turnover as his income and has to pay at fixed percentage of it as tax.
TDS
The TDS is a tax deducted or paid at the site of the generation of income.
TDS is especially applicable in the case of direct taxation.
TDS is more efficient way of tax collection and reduces leakage
Withholding tax
Same as TDS, except
• Withholding tax is the amount deducted in advance i.e. before paying the amount to the payee withholding tax is deducted for paying the tax to the government.
TDS is entitled to the people of India while withholding tax is applicable for payments to non-residents i.e. foreign transactions
TCS
Tax collected at source (TCS) is the tax payable by a seller which he collects from the buyer at the time of sale.
