Introduction To Taxation

Student Guide
Introduction To Taxation /SG/18-M09-V01

NIIT Ltd. has been authorized to use this Student Guide at the designated NIIT centres for educational
purposes only.
Chapter 1
Direct Tax and Indirect Tax:

Direct taxes, as the name suggests, are taxes that are directly paid to the government by the taxpayer. It
is a tax applied on individuals and organizations directly by the government, e.g. income tax,
corporation tax, wealth tax etc. Indirect taxes are applied on the manufacture or sale of goods and
services.

Taxes can be either direct or indirect. A direct tax is one that the taxpayer pays directly to the
government. These taxes cannot be shifted to any other person or group. An indirect tax is one that can
be passed on or shifted to another person or group by the person or business that owes it.

 Every person whose total income of the previous year exceeds the maximum amount that is
not chargeable to income tax is an assessee.

 The income of an assessee is chargeable to income tax at the rate prescribed in the Finance
Act for the relevant assessment year.

 To understand the framework of the Income Tax Act, 1961, it is important to understand the
following concepts:

o Person

o Assessee

o Assessment year

o Previous year

o Rate of tax

o Charge of income tax

o Residential Status

Definition of ‘Person’ – Income Tax

As per Sec 2(31) of Income Tax Act, 1961, unless the context otherwise requires, the term “person”
includes:

(i) An individual,

(ii) A Hindu undivided family,

(iii) A company,

(iv) A firm,
(v) An association of persons or a body of individuals, whether incorporated or not,

(vi) A local authority, and

(vii) Every artificial juridical person, not falling within any of the preceding sub-clauses.

Explanation:
For the purposes of this clause, an association of persons or a body of individuals or a local authority or
an artificial juridical person shall be deemed to be a person, whether or not such person or body or
authority or juridical person was formed or established or incorporated with the object of deriving
income, profits, or gains.

An individual refers to a natural human being whether male or female or transgender, minor or major.

A Hindu undivided family (HUF) is a relationship created due to operation of Hindu Law. The head of the
HUF is Karta and the members are called Coparceners. Many state governments have abolished the
status of HUF and they are prevalent in some states of the country only. The Karta has two assessments.
One assessment is his individual assessment and the second is in the capacity of Karta of HUF.

A company is a company incorporated under Companies Act, 2013 or any earlier acts.

A firm is an entity, which comes into existence by virtue of a partnership agreement between persons to
share profits or business carried on by all or any of them. LLP is also included in the definition of a firm.

Association of Persons (AOP) are persons who combine together to form a joint enterprise but does not
constitute a partnership. There must be a common purpose and a common action to achieve the
common purpose for which the AOP is constituted. AOP can have individuals, firms, companies, or
associations as its members. Body of Individuals (BOI), as against AOP, can only have individuals as
members.

A local authority comprises of corporation, municipality, panchayat, cantonment board, et cetera.

An artificial juridical person is a body having juridical personality of its own and a public corporation
established under the Special Act of Legislature. Artificial juridical person is an entity other than a
natural person created/recognized/accredited by law and also recognized as a legal entity having
distinct identity, legal personality, and duties and rights, e.g., universities, Lord Tirupathi Balaji, and
Sabarimala Ayyappa, et cetera. Any other body that does not fall under the six categories of person
satisfying the above requirements can also be classified as an artificial juridical person.

 An assessee means any person by whom any tax or any other sum of money is payable
under the Income Tax Act, 1961.

 Assessment year means a period of 12 months commencing on the first day of April every
year. It is the period from 1st April to 31st March.

 The previous year means the financial year immediately preceding the assessment year.
  Income tax is chargeable at the rates prescribed in the Finance Act.

Income tax slabs are the ranges of taxable income, which attract different rates of income tax. These are
revised almost every year and must be used appropriately while deducting taxes.

 According to the residential status, an assessee can either be a resident of India or a non-
resident of India. However, for a resident individual and HUF, he will be either of the following:

o Resident and ordinarily resident in India

o Resident but not ordinarily resident in India

 For determining the residential status of an individual or entity for the purpose of ascertaining
the income tax, you should consider the following points:
o Citizenship or nationality is irrelevant for determining the residential status.

o Residential status is concerned with a person’s territorial connection with India.

Residential status is always determined with reference to the circumstances and conditions in the
previous year

 Residential status is determined separately for each assessment year.

 Residential status is determined for each category of people according to applicable rules.
 A person may be resident in more than one country at the same time for tax purposes.
 A person will not have different residential status for different sources of income in the same
assessment year.
 Onus is on the assessee to place all material facts before the Assessing Officer (AO) for the
determination of correct residential status.

An assessee is either a resident in India or non-resident in India. However, a resident individual or a HUF
and all other assesses are treated as:

 A resident individual or an HUF has to be resident and ordinarily resident or resident but not
ordinarily resident. Therefore, an individual and an HUF can be:
o Resident and Ordinarily Resident in India (ROR)

o Resident but Not Ordinarily Resident in India (RNOR)

o Non-resident in India

 All other assessee (a firm, an association of persons, a joint stock company, and every other
person) can either be:
o Resident in India

o Non-resident in India

An individual is said to be a resident if he/she satisfies at least one of the following conditions:

 Present in India in the previous year for a period of 182 days or more.
  Present in India for a period of 60 days or more during the previous year and 365 days or
more during the four years immediately preceding the previous year. However, the period
of 60 days is substituted by 182 days in case of:

o An individual who is a citizen of India and who leaves India in any previous year for the
purpose of employment outside India.

o An individual who is a citizen on India and who left India in any previous year as a
member of the crew of an Indian ship.

o An individual who is a citizen of India or is a Person of Indian Origin (PIO) who being
outside India, came to visit India in any previous year.

Income Tax:

• Income tax is type of direct tax levied by a government on businesses. Income tax due in a
period is calculated by applying the applicable tax percentage to the taxable income of the
business.

• Taxable income is the net income calculated in accordance with the tax laws.

• Taxable income = taxable revenues - tax - deductible expenses - tax exemptions

• It is different than accounting income, which equals revenue recognized under GAAP minus
expenses allowed under GAAP.

• Accounting income = revenues under GAAP - expenses under GAAP

Current Income Tax:

• Determining the current income tax payable is most straightforward because it represents a
business’s tax obligation related to the current period taxable income.

• Current income tax obligation = taxable income × tax rate

• Matching concept of accounting suggests that tax expense for revenue should be recognized in
the period in which the relevant revenue was recognized. Similarly, tax shield, i.e., the reduction
in tax expense due to tax deductibility of an expense should be recognized in the period in which
the relevant expense is recognized.
 Income Tax Slabs for Individual & HUF (Less Than 60 Years Old) for FY 2018-19

Income Tax Slabs Tax Rate Health and Education Cess

Income up to ₹ 2,50,000* No tax

Income from ₹ 2,50,000 – ₹ 5,00,000 5% 4% of Income Tax

Income from ₹ 5,00,000 – 10,00,000 20% 4% of Income Tax

Income more than ₹ 10,00,000 30% 4% of Income Tax

Income Tax Slabs for Senior Citizens (60 Years Old or More but Less than 80 Years Old) for FY 2018-19

Income Tax Slabs Tax Rate Health and Education Cess

Income up to ₹ 3,00,000* No tax

Income from ₹ 3,00,000 – ₹ 5,00,000 5% 4% of Income Tax

Income from ₹ 5,00,000 – 10,00,000 20% 4% of Income Tax

Income more than ₹ 10,00,000 30% 4% of Income Tax

 Income Tax Slabs for Senior Citizens (80 Years Old or More) for FY 2018-19

Income Tax Slabs Tax Rate Health and Education Cess

Income up to ₹ 5,00,000* No tax

Income from ₹ 5,00,000 – 10,00,000 20% 4% of Income Tax

Income more than ₹ 10,00,000 30% 4% of Income Tax

Surcharge limit-Same for above 3

Surcharge: 10% of income tax, where total income exceeds ₹.50 lakh up to ₹.1 crore.
Surcharge: 15% of income tax, where the total income exceeds ₹.1 crore.

Calculating Taxable Income

 The income of a person can be calculated under the following five heads:

 Income from salary (Section 15 to 17)

 Income from house property (Section 22 to 27)

 Profits and gains of business or profession (Section 28 to 44D)

 Capital gains (Section 45 to 55)

 Income from other sources (Section 56 to 59)

Deferred Income Tax:

• Deferred taxation is the process of transferring tax expense between different periods in order
to better match revenues with expenses through a process called deferred taxation.
A deferred income tax is a liability recorded on a balance sheet resulting from a difference
in income recognition between tax laws and the company's accounting methods. For this reason, the
company's payable income tax may not equate to the total tax expense reported.
Chapter 2
Introduction To TDS ( Tax Deducted at Source)

For this section, please refer to pages 91 to 96 of the book “Taxation Using Tally.ERP 9 Release 6 -
Student Guide”.

Income Tax Return filing:

What is E-filing Returns?

• E-filing or electronic filing is submitting your income tax returns online. The traditional way is
the offline way, where you go the Income Tax Department's office to physically file your returns.
The other way is when you e-file through the internet.

Who should e-file income tax returns?

Online filing of tax returns is easy and can be done by most assessees.

• Assessee with a total income of ₹. 5 Lakhs and above.

• An individual/HUF resident with assets located outside India.

• An assessee is required to furnish a report of audit specified under sections 10(23C) (IV), 10(23C)
(v), 10(23C) (VI), 10(23C) (via), 10A, 12A (1) (b), 44AB, 80IA, 80IB, 80IC, 80ID, 80JJAA, 80LA, 92E,
or 115JB of the Act.

• An assessee is required to give a notice under Section 11(2) (a) to the assessing officer.

• A firm (which does not come under the provisions of section 44AB), AOP, BOI, Artificial Juridical
Person, Cooperative Society, and Local Authority (ITR 5).

• An assessee is required to furnish returns U/S 139 (4B) (ITR 7).

• A resident who has signing authority in any account located outside India.

• A person who claims relief under sections 90 or 90A or deductions under section 91.

• All companies.

Types of E-filing:

• Use Digital Signature Certificate (DSC) to e-file. It is mandatory to file IT forms using Digital
Signature Certificate (DSC) by a chartered accountant.

• If you e-file without DSC, ITR V form is generated, which should then be printed, signed, and
submitted to CPC, Bangalore by ordinary post or speed post within 120 days from the date of e-
filing.
 • You can file e-file IT returns through an E-return Intermediary (ERI) with or without DSC.

Choose the below right forms for filing returns:

Individuals with income from salary, house property ,interest and having income upto 50
ITR 1 (SAHAJ)
lakhs.

Individuals and Hindu Undivided Families (HUF) not having income from any business or
ITR 2
profession.

Individuals/HUFs being partners in firms and not carrying out any business or profession
ITR 3
under any proprietorship..

ITR 4 Individuals and HUFs having income from a proprietary business or profession

ITR 4S (SUGAM) Individuals/HUF having income from a presumptive business.

ITR 5 Firms, AOPs, BOIs, LLP, Artifical juridical person, Cooperative society and Local Authority.

ITR 6 Companies other than companies claiming exemption under section 11

Persons including companies required to furnish return under section 139(4A) or section
ITR 7
139(4B) or section 139(4C) or section 139(4D)
List of Required Documents for e-filing of tax returns:

It is always good to stay a step ahead, especially when it comes to tax filing. The checklist provided
below will help you to get started with the e-filing of tax returns.

General details:

• Bank account details

• PAN number

Reporting salary income:

• Rent receipts for claiming HRA

• Form 16

• Pay slips

Reporting house property income:

• Address of the house property

• Details of the co-owners including their share in the mentioned property and PAN details

• Certificate for home loan interest

• Date when the construction was completed, in case under construction property was purchased

• Name of the tenant and rental income, in case the property is rented

Reporting capital gains:

• Stock trading statement is required along with purchase details if there are capital gains from
selling the shares

• In case a house or property is sold, you must seek out the sale price, purchase price, details of
registration, and capital gain details

• Details of mutual fund statement, sale and purchase of equity funds, debt funds, ELSS, and SIPs

Reporting other income:

• The income from interest is reported. In case of interest accumulated in savings account, bank
account statements are required

• Interest income from tax saving bonds and corporate bonds must be reported

• The income details earned from post office deposit must be reported
Chapter 3
Exercise A

Answer the following questions:

Question-1

Rashmi got a job in Mongo, China on April 1, 2008, and she left for Beijing on May 1, 2008. She stayed in
China for two years before returning to India on April 1, 2010 to get married. On her family’s insistence,
she stayed back till June 15, 2010 before rejoining her office.

During the year 2011-12, she and her husband continued to stay in China but decided to return to India
on August 10, 2012 on account of her pregnancy. After delivering her child, she stayed back in Chennai
till May 31, 2013 with her husband and her newborn.

Based on the details shared above, calculate Rashmi’s residential status in India for the year 2013-14.

Question-2

Which of the following option is not associated with TDS?

a) Interest from fixed deposits (deducted by the bank)

b) Prize money won from lotteries or horse races

c) Payments to non-resident sportsmen or sports associations

d) Rental income (deducted by the owner)

Question-3

Which of the following must be acquired to deduct TDS?

a) TIN

b) TAN

c) PAN

d) ECC

Question-4

Which form is used to apply to a TIN Facilitation Centre of NSDL to obtain a Tax Deduction Account
Number?
a) Form 49A

b) Form 49B

c) ITNS-281

d) GAR- 7

Question-5

Read the following statements and then, choose the correct option accordingly:

Statement A: Income from salary is subjected to TDS.

Statement B: Income from lottery wins or crossword puzzles is not subjected to TDS.

a) Statement A is true and statement B is false.

b) Statement A is false and statement B is true.

c) Both statements are true.

d) Both statements are false.

Question-6

Which of the following challans is used to deposit TDS to the credit of the central government?

a) GAR-7 Challan

b) ITNS-281 Challan

c) ST-3 Challan

d) ITNS-283 Challan
Exercise B

Answer the following questions:

Question-1

Consider the following statements and then, choose the correct option accordingly:
Statement A: The periodicity of Form 24 is annual.
Statement B: The periodicity of Form 26 is quarterly.

a) Statement A is true and statement B is false.

b) Statement A is false and statement B is true.

c) Both statements are true.

d) Both statements are false.

Question-2

Which of the following report in Tally.ERP9 displays TDS Ledger Wise Lower Deductions, Zero Deduction,
and IT Exemption details in the Migrate Tool?

a) Track Migrate Voucher

b) Re-Migrate

c) Track Migrate Bills

d) Track Master

Question-3

Which of the following reports helps in capturing the bank challan number and its date, the name of the
bank and the relevant BSR code?

a) TDS Computation Report

b) TDS Challan Reconciliation

c) TDS Exception Report

d) Track Masters

Question-4

Which of the following option displays the correct alphanumeric order on a PAN Card?

a) BCDF1234AB
b) BCFD12345A

c) BCDFG1234B

d) ABCDF123AB

Question-5

Which of the following sources is not covered under TDS?

a) Deemed dividend

b) Insurance commission

c) Commission, brokerage, etc.

d) Interest on 12% savings (taxable) bonds, 2003

Question-6

Which of the following option shows the correct alphanumeric sequence of TAN?

a) BCDF1234AB

b) BCFD12345A

c) BCDFG1234B

d) ABCDF123AB

Question-7

ITR -1 (Sahaj) form is a simplified one-page form for individuals earning an income up to 50 lakhs per
year.

a) True
b) False

Question-8

Which of the following option has been made mandatory for filing returns from 2018?

a) Rent receipts for claiming HRA

b) Form 16

c) Pay slips
d) Aadhar Card

Question-9

What does PAN stand for?

a) Payment Account Number

b) Public Account Number

c) Permanent Account Number

d) Permanent Assessee Number

Question-10

In how many days is a person supposed to send a signed copy of ITR-V (Income Tax Return Verification)
to the Central Processing Centre (CPC) of the IT department?

a) Within 90 days of e-filing returns

b) Within 120 days of e-filing returns

c) Within 180 days of e-filing returns

d) Within 365 days of e-filing returns

Exercise C

Answer the following questions:

1. List any five payments on which TDS is applicable.

2. On which government site, can you e-file your income tax returns?

3. List three examples each of direct and indirect taxes.

4. List the certificates of TDS which are issued for salaried and non-salaried people respectively.

5. What is the due date for submitting TDS to the government?

Chapter 4
Introduction to GST (Goods and Service Tax)

India is a federal country where both the centre and the states have the power to levy and raise taxes
through appropriate legislations. While the centre is authorized to levy taxes on the manufacture of
goods and services rendered by a company, the states can levy taxes on the goods sold in the market.

Let us take a look at the indirect tax system prevalent in India before GST was implemented in the
country:

Indirect Taxes

Central Taxes State Taxes

Central Excise Duty Value Added Tax (VAT)

Additional Excise Duty (AED) Central Sales Tax (CST)

Countervailing Duty (CVD) Purchase Tax

Special Additional Duty (SAD) Luxury Tax

Service Tax Entry Tax

Surcharge and Cess Octroi

Surcharge and Cess

Let us take a look at the applicability of the taxes:

Goods Services

Manufacturers, Traders, who Service providers, who render Service receivers, who
who deal in deal in trading services receive the service
production
Excise VAT Service Tax Service Tax
AED CST Swachh Bharat Cess Swachh Bharat Cess
CVD/SAD Purchase tax Krishi Kalyan Cess Krishi Kalyan Cess

Let us take a look at the central taxes in detail:

1. Central Excise Duty: It is levied on goods that are manufactured in India.

2. AED: It is levied on specific goods that are manufactured as per the schedule specified by the
Central Excise Tariff Act (CETA)
 3. SAD: It is applicable on imports of goods in addition to Customs Duty.
4. CVD: It is applicable on imports of goods.
5. Service Tax: It is levied on taxable services, which are rendered.
6. Swachh Bharat Cess: It is levied on taxable services, which are rendered, in addition to service
tax.
7. Krishi Kalyan Cess: It is levied on taxable services, which are rendered, in addition to service tax.

Let us take a look at the state taxes in detail:

1. VAT: It is levied on sale of goods in a state.

2. CST: It is applicable on interstate sale of goods.
3. Purchase Tax: It is levied on purchases from unregistered dealers, and it is paid by the buyers.

Milestones in the GST Journey

India is the 166th country to implement GST. It started its journey of GST in the year 2003. Let us take a
look at some of the key milestones in this journey:

1. The draft model of the GST Law was released in the public domain on June 14, 2016,
2. The Rajya Sabha passed the GST bill on August 3, 2016
3. The Lok Sabha passed the GST bill on August 8, 2016,
4. The President of India gave assent to the 122 CAB on September 8, 2016,
5. The Cabinet approved to form the GST council on September 12, 2016,
6. The notification of 101 constitutional Act 2016 was released on September 16, 2016,
7. The GST Rates were finalized by the GST council on November 4, 2016,
8. The revised draft model of the GST Law was announced in the public domain on November 26,
2016.
9. The CGST Bill, the IGST bill, the UTGST and the SGST Compensation Bill were passed in the Lok
Sabha on March 29, 2017.
10. The revised rules were made available on various provisions of law on April 2, 2017.
11. The CGST Bill, the IGST bill, the UTGST, and the GST compensation bill were passed in Rajya
Sabha on April 6, 2017.
12. All four Goods and Service Tax Bills got the President's approval on April 13, 2017.
13. The GST Council met on GST Rate Schedule on May 18, 2017.
14. The GST rules were finalized on June 18, 2017

What was the need to implement GST?

The indirect taxation system had flaws because of the following reasons:

1. Multiple taxes were applicable on the manufacturers and service providers.

2. Multiple tax rates were applicable on the manufacturers and service providers.
3. Multiple points of taxation (manufacturing, trading, rendering services, and others) existed in
the system.
With the introduction of VAT in 2005, the cascading effect (tax-on-tax) of sales tax was overcome, but
due to the limitations of both CENVAT (Central Value Added Tax) and VAT, the cascading effect of tax
couldn't be eliminated completely.

GST, on the other hand, led to a seamless flow of tax credit, and totally eliminated the cascading effect
of all the indirect taxes in the supply. This has resulted in a simple tax structure, which is technology-
driven, and has led to an increase in the revenue.