Module - 6

Balance sheet

• Balance sheet is a statement of assets and

liabilities which helps us to ascertain the
financial position of a concern on a particular
. I N
date, on a date when financial statements or
ES
N O T
KTU
final accounts are prepared or books of
accounts are closed.
• Balance sheet is basically a historical report
showing the cumulative effect of past
transactions.
• It is often described as a detailed expression of
the following fundamental accounting equation.
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 Assets
• Assets represents everything which a
business owns and has money value. In
other words, asset includes all rights or
properties which a business. I Nowns.
O T ES
•
K T U N
Cash, investments, bills receivable,
debtors, stock of raw materials, work in
progress and finished goods, land,
building, machinery, trademarks, patent,
rights etc. are some example of assets.

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 Liabilities

• Liabilities refer to the financial

obligations of a business. These
denote the amountsN which a
T ES . I
business owes to
N Oothers.
K TU
• E.g loans from banks or other
persons, bank overdraft etc.

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 Basic Accounting Terms
Debtors:
• A person who receives a benefit without
giving money or moneys worth
immediately, but liable to pay
. I Nin future
O T ES
course of time is aNdebtor.
K T U
• The debtor are shown as an asset in the
balance sheet.
E.g Mr. Arul bought goods on credit from Mr.
babu for Rs. 10,000. Mr Arul is a debtor to
Mr. Babu till he pays the value of the goods.

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Creditors:
A person who gives a benefit without receiving money or
moneys worth immediately but to claim in future , is a
creditor.
In the above example Mr. Babu is a creditor to Mr. Arul till
he receives the value of the goods.
Purchases:
Purchase refers to the amount of goods bought buy a
business for resale or for use in the production. Goods
ES . I N
N O T
purchased for cash are called cash purchase. If it is
KTU
purchased on credit, it is called as credit purchase. Total
purchase include both cash and credit purchase.
Sales:
Sales refers to the amount of goods sold that are already
bought or manufactured by the business. When goods are
sold for cash, they are cash sales but if goods are sold and
payment is not received at the time of sale, it is credit
sales. Total sales include both cash and credit sales.

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 Characteristics of Balance
sheet
Balance sheet is the position statement
which shows the position of assets and
liabilities . It has got the following features.
• Balance sheet is a statementS . I N
O T E
UN date
• Prepared onKaTspecific
• Knowledge of financial position
• Knowledge about the nature of assets
and liabilities
• Assets and liabilities tally each other.

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 Preparation of Balance sheet
All the permanent accounts, i.e accounts of assets,
liabilities and capital are shown in the balance sheet.
All those accounts which are still not closed after the
preparation of trading and profit and loss account
are taken to balance sheet.
ES . I N
A balance sheet has two sides the left hand side
N O T
KTU
and the right hand side.
Accounts of capital and liabilities are shown on the
left hand side known as liabilities side.
Assets and other debit balances are shown on the
right hand side called assets side.
Each side of the balance sheet must be equal the
other. and hence called as balance sheet.
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Items to be shown on liabilities
side of Balance sheet
Long term liabilities:
Liabilities which are repayable after a long period of time are known
as long term liabilities. E.g capital, long term loans etc.
Fixed Liabilities:
These are long term liabilities which are payable only on the
termination of business such as capital, which is a liability to the owner.
Current Liabilities:
ES . I N
N O T
KTU
Current liabilities are those which are repayable with in a year.
e.g creditors for goods purchased, short term loans etc.
Net Profit:
Net profit is the amount earned by the owner and it is always added
to the capital. As capital is the liability of the firm, net profit is also
shown on the liability side of the balance sheet.
Drawings:
The amount withdrawn by the proprietor is termed as drawings and
has the effect of reducing the balance on his capital account.

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Items to be shown on assets side of
Balance sheet
Fixed assets:
Assets which are permanent in nature having long period
of life and cannot be converted into cash in a short period
are termed as fixed assets.
Fixed assets may be classified as follows:
ES . I N
N O T
• Tangible fixed assets: Which can be seen and touched. E.g
KTU
Land and buildings, plant and machinery etc.
• Intangible fixed assets: Which cannot be seen and touched.
E.g goodwill, patents, trademarks etc.
Current assets:
Current assets are those in which either in the form of cash
or which can be converted into cash within a year. They
include the following

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• Cash in hand & cash at bank
• Bills receivable
• Sundry debtors
• Closing stock
• Prepaid expenses ( Expenses paid in
advance for services to be received future)
• Accrued Income ( Income ES . I N
U N O T which has been
T
K not yet been received)
earned but has
Investments:
Investments represents the funds invested in
government securities, share of a company
etc.

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 Proforma of Balance sheet

Liabilities Amou Amou Assets Amou

nt nt nt
Current liabilities Current assets
Bank overdraft XXX Cash in hand XXX
Bills payable XXX Cash at bank XXX
Outstanding XXX Bills receivable XXX
expenses XXX Sundry debtors XXX
Sundry creditors Prepaid expenses XXX
Income received in XXX
ES . I N
Accrued Income XXX
advance
N O T Closing stock XXX

Long term
KTU XXX Investments XXX
Liabilities XXX
Loans from banks Fixed assets
Debentures Goodwill XXX
XXX Patents XXX
Fixed Liabilities XXX Trademarks XXX
Capital XXX Furniture XXX
Add Net profit XXX XXX Plant & Machinery XXX
Land & Buildings. XXX
Less drawings XXX XXX
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Objectives of Balance sheet
• The function of the correctly
prepared balance sheet is to exhibit
the true and correct view of the state
of affairs of any concern.
ES . I N
U N O T
• In a balance T
K sheet as the assets and
liabilities are shown in details after
being properly valued, a trader can
judge the position of his business
from it.
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 Need for the balance sheet

The need for preparing balance sheet

is as follows.
• To Know the N natureS . I N
E and value of
U O T
K T
assets of the business
• To ascertain the total liabilities of the
business
• To know the position of owners
equity.
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 Forecasting
• A key to successful business operations, planning
and strategy is the use of business forecast.
• Since business planning and strategy involve
decisions or actions at the present time which
S . I N
will have consequences in the future, useful
E
N O T
KTU
forecasts about future uncertain events are
essential.
• The need for business forecasting is found in all
areas and at all levels of business.
• Forecasting forms the basis of planning the
activities of an organization.

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 Definition of forecasting
• “Forecasting an be defined as an estimate of
future events that can be obtained by
systematically combining past and present data
in a predetermined way and arrive at the future
data”
• Demand forecasting and production forecasting etc
ES . I N
N O T
are examples of different types of forecasting.
KTU
• Forecasting begins with demand forecast ( estimate of
demand in future) and is followed by production
forecast ( estimation of quantity and quality of work)
and forecast for costs, finance, purchase, profit or loss
etc.
• Forecast help to determine the amount of inventory to
be kept on hand, how much raw material should be
purchased and how much of a product should be
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 Sources of forecasting data
Sources of data can be classified as follows.

 Primary Data:
Primary source of data is the first hand original data
collected by the investigator through observation, interview,
questionnaire, experimentation and surveys.
. I N
Primary data presents the current scenario of the situation,
ES
N O T
therefore it is more effective in taking business decisions.
KTU
 Secondary data:
Secondary data is the data which is already collected by
other institutions such as annual reports, sales data,
customer records and survey, client databases, payment
records, reports of marketing research companies, trade
association data and reports, company websites etc.

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 Demand forecasting
• Every organization needs the market for selling their
product or services. These sales depend on demand.
• The demand for a product or service depends upon
customer requirements and needs and it can change.
• Demand forecasting is the method of accurate
determination of the demands of sales.
. I N
• It estimates the quantity of production on the basis of
ES
forecasted demand. N O T
KTU
• The estimation of future demand of a product
manufactured by an industrial organizations will be done
on the basis of present and past data of the demand of
the product.
• Forecasting not only plans the quantity of production and
demand but also is necessary to plan material
requirements, schedule of production , operations and
manpower etc.. So that full capacity utilization of
resourcesTo
is get
possible.
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Purpose of demand forecasting
Demand forecasting is essential because the reasons
mentioned below.
• It determines the volume of production and the
production rate.
• It forms basis for production budget, labour budget,
material budget etc. I N
T ES .
O
• It suggests the need for plant expansion
N
KTU
• It suggests the need for changes in production
methods.
• It helps establishing pricing policies.
• It helps deciding the extent of advertising, product
distribution etc.
• It helps to train the personnel so that manpower
requirements can be met.
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 Limitations

• Lack of efficient and experienced

forecasters
ES
• Lack of demandNhistory . I N
U O T
K T
• Change in consumers needs , fashion
and style etc.
• Complex psychology of consumers

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 Essential of a good sales forecasting system

• Simplicity - It should be simple not complicated.

• Accuracy - Marketing planning should be accurate and reliable.

• Availability- It cannot be prepared inT E S . I N

N O time if the required data are not
easily available.
KTU
• Stability - It should be prepared in such a way that there should be no
scope of changes.

• Economy – There should be minimum involvement of time & labour.

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Factors affecting sales forecasting
• General business condition
General economic condition of the country, population, distribution of income
and wealth in the country, general traditions and customs, fashion, seasonal
fluctuations, per capita income, government policy etc.

• Conditions with the industry

Design of product, quality of product, price policy, product line of the
enterprise, stage of competition within the industry, expected improvements in
the product etc.
ES . I N
N O T
KTU
• Internal factors of the enterprise
Plant capacity of the enterprise, quality of the product, price of the product,
advertisement and distribution policies of the enterprise etc.

• Factors affecting export trade

Import and export controls, terms & conditions of export, international policy
etc.

• Market behavior
It is required to consider the market behavior which brings about changes in
demand.
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 Sales forecasting Methods
The various methods used to forecast demand trend can
be categorized into two ways:

 Opinion or judgmental /Qualitative method

 Time series forecasting/Quantitative method

E S . I N
U N O
QualitativeTMethod
• Jury of executiveK T
opinion
• The Delphi Method
• Sales force opinion
• Survey of customers buying

Quantitative method
• Time series forecasting
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 ES . I N
N O T
KTU

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 Opinion and judgmental methods or
Qualitative methods
Jury of executive opinion:
The views of executives or experts from sales, production, finance,
purchasing and administration are averaged to generate a forecast about
future sales as they are well informed about the company's market
position, capabilities, competition and market trend.
Using this method, the demand forecasts can be made relatively quickly
and cheaply.
ES . I N
N O T
Delphi Method: KTU
Delphi method is similar to jury of executive opinion. In this method a
panel of experts is asked to respond to a series of questionnaire.
The responses are tabulated and opinions of the entire group are made
known to each of the other panel members so that they may revise their
previous forecast response.
forecast can be made quickly and economically using this method. Delphi
method is a reliable method because estimates are made on the Basis of
knowledge and experience of sales expert.

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Sales force opinion:
Under this method, the salesmen estimate the expected
sales in their respective territories on the basis of previous
experience.
Then demand is estimated after combining the individual
forecasts of the salesman. So more accurate estimate is
possible.
ES . I N
N O T
KTU
Survey of customers buying:
In this method, market surveys are conducted regarding
specific consumer purchases.
Surveys may consist of telephone contacts, personal
interviews, or questionnaires as a means of obtaining data.
The results are likely to be more accurate. But it is
expensive and time consuming.

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 Time series forecasting or
Quantitative methods
• A trend of company's or industry's
demand is obtained with the help of
historical data relating to demand which
are collected, observed or I N recorded at
successive intervals T
of E S .
time. Such data is
T U N O
K
generally referred to as time series.
• The study may show that the demand
sometimes are increasing and sometimes
decreasing, but a general trend in the long
run will be either upward or downward.

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 ES . I N
N O T
KTU

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 ES . I N
N O T
KTU

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 ES . I N
N O T
KTU

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 ES . I N
N O T
KTU

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 ES . I N
N O T
KTU

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 Business financing
• Finance is essential for a business operation,
development and expansion.
• Funds can be procured from different sources and
therefore procurement is always considered as a
.
complex problem by business concerns.
ES I N
N O T
• Funds procured from different sources have different
KTU
characteristics in terms of cost, risk and control.
• It is crucial for business to choose the most
appropriate source of finance for its several needs
as different sources have its own benefits and costs.

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 Sources of finance
• A company can have two main sources of
funds that is internal and external.
• Internal sources refer to sources from
within the company such .as I N funds raised
O
from retained earnings T E
or
Sthe saving of the
K T U N
company and personal capital.
• External sources refer to outside sources
consisting of equity finance (Share capital)
and debt finance (debenture capital, loans
and advances etc)

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Short term sources of finance are those that are
available for a period of less than one year/ up to 1
year.
It consist of trade credit and bank overdraft.

Medium term source of finance are those that are

available for more than 1 year but less than 5
years/ up to 5 years. ES . I N
N O T
KTU
It consist of public deposits and loan from banks

Long term sources of finance are those that are

repayable over a longer period of time, generally
for more than 5 year.
It consist of shares and debentures.

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Shares:
The capital of a company is divided into a number of very small units called
shares.
The person who holds a share is a share holder he is a debtor of a company
i.e he is liable to all the assets and liabilities of that company.

Debentures:
A debenture is an acknowledgement stating the debt of a company. A holder
of a debenture is a creditor of the company.
When the company is being wound up the debtors should be given first
S
preference during the repayment of capital.
E . I N
N O T
The return on investment of a debenture is interest. Interest is fixed to a
particular percentage.
KTU
A debenture holder cannot participate in the management of the company. A
debenture holder cannot vote during the company meetings.

Retained Earnings:
A company generally does not distribute all its earnings amongst the
shareholders as dividends( the return on investment of a share is dividend).
The portion of the profits which is not distributed among the shareholders but is
retained and is used in business is called retained earnings or ploughing back of
profits.

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Bank overdraft:
Sometimes commercial banks allow overdraft facilities to their
reliable and credit worthy customers. Commercial banks allow such
customers to withdraw more money than they actually deposited in
the bank.
Overdraft is granted against security of goods or sometimes on
persona security of the customer. The bank charges penal rate of
interest on the amount over due.

Trade Credit: ES . I N
N O T
KTU
For many businesses, trade credit is an essential tool for financing
growth. Trade credit is the credit extended to you by suppliers who let
you buy now and pay later. Any time you take delivery of materials,
equipment or other valuables without paying cash on the spot, you're
using trade credit.
The volume and period of credit extended depends on factors such
as reputation of the purchasing firm, financial position of the seller,
volume of purchases, past record of payment and degree of
competition in the market etc.

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 Financial market
• Financial market is the market that
facilitates transfer of funds between
investors/lenders and borrowers/users.
• It consists of individual
ES . I N investors,
U N O T
financial Kinstitution
T and other
intermediaries for trading the various
financial assets and credit institutions.
• Financial market can be classified into
two money market and capital market.

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 Money market
• The money market in that part of a financial market
which deals in the borrowing and lending of short
term loans generally for a period of less than or
equal to one year. It is a mechanism to clear short

ES . N
term monetary transactions in an economy.
I
O T
• money market instruments have the characteristics
N
KTU
of quick conversion into money, minimum
transaction cost and low loss in value.
• Some of the instruments used in the money markets
are certificates of deposits, bills of exchange,
promissory notes, commercial paper, treasury bills,
etc.

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 Capital Market
• Capital market may be defined as a market for
borrowing and lending long term capital funds
required by business enterprises.
• Capital market offers an ideal source of external
S . I N
finance. It refers to all the facilities and the
E
N O T
KTU
institutional arrangements for borrowing and
lending medium term and long term funds.
• The government body like any market , the
capital market is also composed of who demand
funds ( borrowers) and those who supply funds
(lenders).

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 Foreign Direct investment
(FDI)
• The surplus of income over expenditure results in savings
and savings generate investments. Investment may be in
physical assets such as land ,building and factory, or it
may be in financial assets like bank deposits, shares,
debentures and bonds.

ES . N
• Investments made across the national boundaries are
I
N O T
known as international investments.
KTU
• When such an international investment is used to set up
and operate production or service facilities in other
countries, it is referred to as foreign Direct Investment.
• Various software companies like IBM India which is
initially based in Unites States but has opened its
subsidiaries in different part of India. Maruti suzuki is yet
another example in which suzuki of japan had joint
ventured with Maruti Udyog ltd.
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 Advantages to Home
country
• Improves the availability of raw
materials
• Improves the Balance of
payments(BOP) OTES.IN
K T U N
• It creates more revenue
• It creates more employment
• Better political relations
• Gets better investment opportunity.

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Foreign Institutional investor
(FII)
• Foreign institutional investor means an
institution established or incorporated outside
India which proposes to make investment in
securities in India.
S . I N
• FIIS are regulated by SEBI (Securities and
E
N O T
KTU
Exchange Board of India). Foreign entities/Funds
such pension funds, mutual funds, charitable
trusts can be as registered as FII.
• A FII may invest on shares, debentures of
companies, Mutual funds and Government
securities.

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 Foreign portfolio Investor
(FPI)
• Foreign Portfolio Investment is investment by
non residents in Indian securities including
shares, government bonds, corporate bonds,
convertible securities, infrastructure securities
etc. E S . I N
U N O T
T
K Investor should satisfy the
• Foreign Portfolio
eligibility criteria prescribed by the
Government regulatory body, SEBI regulations
2014. Any foreign company invests in the
shares of Infosys ( based in India) is an
example of FPI.

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 Taxation
• Taxes are the most important sources
of government income.
• Dr. Dalton defined a tax as
S
“compulsory contribution
E . I Nimposed by
U N O T
KT
a public authority ,irrespective of the
exact amount of securities rendered
to the tax payer in return”

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 Features of tax
Compulsory payment:
It is a compulsory contribution imposed by the government on the
people residing in the country. Since it is a compulsory payment, a person
who refuses to pay the tax is liable to punishment.

Public welfare:
A tax is that the revenue received through it is spent for public welfare. It
S . I N
does not benefit any single individual in particular, rather entire society
E
gets benefited by it.
N O T
No direct service:
KTU
The tax payer does not get any direct service in return for a tax.
Payment of taxes is personal responsibility of an individual

Legal procedure:
Another feature of tax is that it is imposed legally and properly. Taxes
are levied according to legal procedure.

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 Canons of tax/ characteristics of a
good tax system
A good tax system depends on the level of government
expenditure, role of the government and the level of
economic development.

Canon of Equity:
ES . I N
N O T
Every person should be taxed according to his ability
KTU
to pay that is the rich should pay more and poor should
pay less so that taxes should be progressive in nature.

Canon of certainty:
The amount, time and method of tax should be clear
and certain.

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Canon of convenience:
While imposing tax, the time and method of tax payment
should be convenient to the tax payers.

Canon of economical:
A good tax system should be economical to the government in
the sense that the cost of collection of taxes should be small in
proportional to the revenue from them.

ES . I N
Canon of elasticity:
N O T
KTU
The tax system should be elastic. The government expenditure
increases every year. The tax revenue may be increased or
decreased according to the need of the government.

Canon of productivity:
A good tax system should be such as to bring in sufficient
revenue in the treasury.

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 Taxes on Income/ Direct Tax
Taxes may be direct or indirect
 Direct Tax:
Direct tax is one that is collected directly from the
people. In the case of direct tax, the man who pays it is
also intended to bear the burden of it i.e impact and
incidence are on the same person.
ES . I N
The person from whom it is collected cannot shift its
N O T
KTU
burden to anybody else.
The tax payer knows what to pay , why to pay and when to
pay the direct tax.
e.g income tax, wealth tax, property tax, corporate tax
etc.
In case of direct tax, relationship between the tax payer
and the authorities are direct and personal.

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 Merits of Direct Tax
• Economy
• Certainty
• Elastic
• Equity
• Public spirit

ES . I N
N O T
KTU of Direct Tax
Demerits
• Unpopular
• Inconvenient
• Evasion of taxes
• Narrow coverage

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Taxes on commodity/ Indirect taxes
• Taxes on commodities are generally called indirect taxes.
• When we buy a TV from the market, we have to pay the sales
tax to the shopkeeper in addition to the price of TV.
• In this way the government collects the tax from the shopkeeper
and the shopkeeper collects it from the customer (Buyer).
• Thus, the buyer has to pay the tax indirectly to the government,
. I N
through the shopkeeper . Such taxes are called indirect tax.
ES
• E.g sales tax, VAT etc.
N O T
KTU
• In the case of indirect tax, Impact and incidence are on different
persons. i.e impact is on the sellers and incidence is on the
buyers.
• Indirect taxes are on goods and services and so they are
sometimes known as output taxes, since they are paid only
when certain purchases are made.
• How much a person pays indirect taxes depends on the extend
to which he uses taxed goods and services.

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 Merits of Indirect Tax
• Convenient
• Less evasion
• Wide coverage
• Elastic
• Universality
ES . I N
• Social welfare N O T
KTU
Demerits of Indirect Tax

• Regressive
• Evasion
• High cost of collection
• Uncertainty
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 Classification of tax
Taxes are classified into as follows.
Proportional Tax:
If the tax is imposed at the same rate on the
persons of different income level, it is called
proportional tax. ES . I N
N O T
KTU
In this tax, the tax revenue increases in proportion
to increase in income.
Proportional tax implies that the rate of tax does
not change with the change in income.
A fixed portion of income is levied as tax from all
people.

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 Rate of tax

ES . I N
N O T
KTU Income

Income Percent Amount (Rs)

( Rate)
Rs. 1000 10 100
Rs. 2000 10 200
Rs. 3000 10 300
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 Advantages

Proportional taxation system is easy to

understand, easy to pay, simplicity and
continuity of same level of distribution of
income.
ES . I N
U N O T
KT
Disadvantages

• It is against the principle of equity because

its burden falls heavily on the poor than rich.
• It does not add adequate revenue to the
government.
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 Progressive Tax
• A progressive tax is a tax by which the tax rate
increases as the taxable income amount
increases.
• The principle of progressive tax is higher the
income higher tax rate. TES.I
N
U N O
T adopted progressive method
• All countries Khas
as it is more equitable and reasonable.
• Progressive taxation also allows the
government to have a stable income even in
times of depression.

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 Rate of tax

ES . I N
N O T
KTU Income

Income Percent Amount (Rs)

( Rate)
Rs. 1000 10 100
Rs. 2000 15 300
Rs. 3000 25 750
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 Advantages

• The system of progressive taxation is

reasonable because it takes into consideration
canon of ability. i.e the rich should pay more &
the poor should pay less.
S . I N
• Progressive taxation is economical because a
E
N O T
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raise in tax rate yields larger revenue without
additional expenditure.
Disadvantages

• There is no definite principle of fixing rate of

taxation.
• They leads to evasion of tax.
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 Regressive Tax
• A tax is said to be regressive, when its burden
falls heavily on poor than rich.
• It is the opposite of a progressive tax.
• The income of a person increases, the tax rate
ES . I N
increases & vise versa. i.e a person with high
N O T
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income pays less tax than a low income person.
• No civilized government impose a tax in which,
as income increases, rate of tax is lowered.
• But there are several taxes on commodities
whose burden rest mainly on poor.
• So these tax is impracticable, injustice &
inappropriate in poor countries.
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 Rate of tax

ES . I N
N O T
KTU Income

Income Percent Amount (Rs)

( Rate)
Rs. 1000 10 100
Rs. 2000 8 160
Rs. 3000 6 180
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 Impact & incidents of taxation
These are two terms used by the economist to analyse the burden of
tax.
• Impact of taxation refers to the person from whom the government
receives the amount of tax. i.e it is the first resting place of a tax.

• Incidents of taxation refers to the person who bears the final burden
of taxation or who will have to pay the taxes finally. It is the final
resting place of a tax.
ES . I N
N O T
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• E.g If we buy a musuc system from an shopkeeper, we pay the
sales tax to the shopkeeper. The shopkeeper will pay it to the
government. Technically it may said that the incidence of the sales
tax will be on the customer and its ipact will be on the shopkeeper.

• If the impact & incidents of tax remains on the same person, i.e if
there is no shifting, then that tax is called direct tax.

• If the impact can be passed on to another , i.e if shifting is possible

then that tax is called as Indirect tax.
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 Shifting of tax
• Taxes are not always born by the people who pays
them in the first instance. They are sometimes
shifted.
• Shifting of tax refers to the process by which the
money burden of a tax is transferred from one
person to another. The burden of tax can be shifted
N
through change in price. T ES . I
N O
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• E.g the government impose tax on the manufacture
of cloth & collects the amount of tax from the
manufacturer. The manufacturer will add this tax to
the cost of production of the cloth & thus will raise
its cost. Therefore the manufacturer will also
recover the tax from the consumer in addition to the
price of cloth. The producer has shifted the burden.
Practically every tax can be passed on from one
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 Sales tax
• A sales tax is the tax charged at the point of purchase for
goods and service. The tax is usually se t as a
percentage by the government. Ideally, a sales tax is
charged exactly once on one time. These sales tax
attempts to achieve by charging the tax only on the final
end user.
ES . I N
N O T
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Value Added Tax (VAT)

E.g if a dealer purchases goods for Rs. 100/- from another

dealer and a tax of Rs. 10% has been charged in the bill.
He sells the goods for Rs. 120/- ( Rs 20/- being profit to
him) on which the dealer will charge a tax of Rs 12/-
instead of 10%. Thus the dealer has paid the tax at 10%,
on Rs. 20/-be the value addition in his tax.
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 Tax Evasion
• Tax evasion is the efforts that are made by trusts,
individuals, firms and various other entities to avoid
paying taxes by illegal and unfair means.
• The evasion of tax usually takes place when

ES . I N
taxpayers intentionally hide their incomes from the
O T
tax authorities in order to reduce their liability of tax.
N
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• The level of evasion tax depends on the chartered
accountants and tax lawyers who help companies,
firms, individuals evade paying taxes.
• Tax evasion is a crime in all major countries and the
guilty parties are subjected to imprisonment and
fines.

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 Methods of Tax Evasion
Smuggling
People export or import foreign goods through routes that
are unauthorized.
Customs duty evasion
S . I N
The importers avoid paying customs duty by false
E
N O T
declarations of the description of the product and its quantity.
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Value added tax evasion
The producers collect value added tax from the consumers
and evade paying those taxes to the government by showing
less sales amount.
Illegal tax evasion
Many people earn money by illegal means such as theft,
gambling and drug trafficking and so they do not pay tax on
this amount.
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 Reasons for tax evasion

• No trust in the government

• High tax rates
• Week tax administration S . I N
N O T E
• U
General tendency
K T

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 Control of tax evasion

• Reducing tax rate

• Strong surveillance system
• Bringing strong corruption
ES . I N laws
N O T
• Simplifies K TUlaws and filling
tax
mechanism.

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 ES . I N
N O T
KTU

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