(Alok) Introduction History The history begins with the birth of Indus valley civilizations around 3500 BC.

This was followed by the Aryan invasion around 2500 BC who brought the Vedas with them. It is in the vedic period when the Hinduism first arose. It was in the fifth century BC, India was united under the reign of King Ashoka. It was this time when Buddhism spread to other parts of Asia. Islam first came to India in eighth century AD and established the Mughal Empire. The British invaded India around seventeenth century AD. The great war of independence began around 1857-1858 AD and India finally got its independence on 15th Aug 1947. Religions and Form of the Government India is the largest democracy in the world. The elections are carried out every five years. The Constitution of India came into force on January 26, 1950. The first general elections under the new Constitution were held during the year 1951-52 and the first elected Parliament came into being in April, 1952. The main religions population wise are: Hindu 80.5%, Muslim 13.4%, Christian 2.3%, Sikh 1.9%, other 1.8%, unspecified 0.1% (2001 census) India comprises of 28 states and 7 union territories. Bicameral Parliament or Sansad consists of the Council of States or Rajya Sabha (a body consisting of not more than 250 members up to 12 of whom are appointed by the president, the remainder are chosen by the elected members of the state and territorial assemblies; members serve six-year terms) and the People's Assembly or Lok Sabha (545 seats; 543 members elected by popular vote, 2 appointed by the president; members serve five-year terms). Legal System The highlights of the legal system are the common law system based on the English model; separate personal law codes apply to Muslims, Christians, and Hindus; judicial review of legislative acts Taxation in India India has a well developed tax structure with a three-tier federal structure, comprising the Union Government, the State Governments and the Urban/Rural Local Bodies. The power to levy taxes and duties is distributed among the three tiers of Governments, in accordance with the provisions of the Indian Constitution. The main taxes/duties that the Union Government is empowered to levy are Income Tax (except tax on agricultural income, which the State Governments can levy), Customs duties, Central Excise and Sales Tax and Service Tax. The principal taxes levied by the State Governments are Sales Tax (tax on intra-State sale of goods), Stamp Duty (duty on transfer of property), State Excise (duty on manufacture of alcohol), Land Revenue (levy on land used for agricultural/non-agricultural purposes), Duty on Entertainment and Tax on Professions & Callings. The Local Bodies are empowered to levy tax on properties

(buildings, etc.), Octroi (tax on entry of goods for use/consumption within areas of the Local Bodies), Tax on Markets and Tax/User Charges for utilities like water supply, drainage, etc. Since 1991 tax system in India has under gone a radical change, in line with liberal economic policy and WTO commitments of the country. Some of the changes are:

Reduction in customs and excise duties Lowering corporate Tax Widening of the tax base and toning up the tax administration

Direct Taxes Personal Income Tax : Individual income slabs are 0%, 10%, 20%, 30% for annual incomes upto Rs 50,000, 50,000 - 60,000, 60,000 - 1,50,000 and above 1,50,000 respectively. Corporate Income Tax : For domestic companies, this is levied @ 35% plus surcharge of 5%, where as for a foreign company (including branch/project offices), it is @ 40% plus surcharge of 5%. An Indian registered company, which is a subsidiary of a foreign company, is also considered an Indian company for this purpose (Tatiana) Indian Income Tax Personal income tax is levied by Central Government and is administered by Central Board of Direct taxes under Ministry of Finance in accordance with the provisions of the Income Tax Act. Tax rates In this budget, the senior citizens are divided into two categories as senior citizen from 60 - 80 years of age and very senior citizens years of the age 80 and above. The new tax slabs applicable from April 1, 2011 are as follows: On all incomes up to Rs. 1,80,000 per year. (For women - Rs. 1,90,000, for senior citizens - Rs. 2,50,000 and for very senior citizens - Rs. 5,00,000 ), no Income Tax is applicable. From Rs. 1,80,001 - Rs. 5,00,000 : 10% of amount ( For women - Rs. 1,90,001 to Rs. 5,00,000 and for senior citizens - Rs. 2,50,001 to Rs. 5,00,000) From Rs. 5,00,001 to Rs. 8,00,000 : 20% of amount ( Same for women, senior citizens and very senior citizens) Above Rs. 8,00,000 : 30% of amount ( Same for women, senior citizens and very senior citizens). Income from Salary Under this head, income received as salary under Employer-Employee relationship is taxed. If income exceeds minimum exemption limit, then Employers must withhold tax compulsorily as Tax Deducted at Source (TDS). The employees should also be provided with a Form 16 which shows the tax deductions and net paid income. Form

16 also contains any other deductions provided from salary as follows: Medical reimbursement up to Rs. 15,000 per year is tax exempt provided bills are given Conveyance allowance up to 9600 per year is tax free Professional taxes which are usually a slabbed amount based on gross income are deductible from income tax. House rent allowance: the minimum of the following is available as deduction The actual HRA received 50%/40 % (metro/non-metro) of 'salary' Rent paid minus 10% of 'salary' Income from House Property Income from House property is calculated by considering the Annual Value. The annual value (for a let out property) will be the maximum of the following: HRA Rent received Municipal Valuation Fair Rent (as determined by the I-T department) However if a house is not let out and not self-occupied, then annual value is assumed to have accrued to the owner. In case of a self-occupied house, annual value is to be taken as NIL. But if there is more than one self-occupied house then the annual value of the other house/s is taxable. From this, Municipal Tax paid is deducted to arrive at the Net Annual Value. From this Net Annual Value, the following are deducted: 30% of Net value as repair cost - mandatory deduction Interest paid or payable on a housing loan for the house Income from Business or Profession Income arising from profits and gains of any Business or Profession; income derived by a Trade/ Professional/ similar Association by performing specific services for its members; any benefit from business whether convertible into money or not, incentives for exporters; any salary, interest, bonus, commission or remuneration received by Partner of a firm; any amount received under a Key man Insurance Policy which also covers Bonus; income from managing agency and speculative transactions; is taxable. Income from Capital Gains Under section 2(14) of the I.T. Act, 1961, Capital asset is defined as property of any kind held by an assessee such as real estate, equity shares, bonds, jewellery, paintings, art etc. but does not consist of items like stock-in-trade for businesses or for personal effects. Capital gains arise by transfer of such capital assets. Long term and short term capital assets are considered for tax purposes. Long term assets are those assets which are held by a person for three years except in case of shares or mutual funds which becomes long term just after one year of holding. Sale of long term assets give rise to long term capital gains which are taxable as below: As per Section 10(38) of Income Tax Act, 1961 long term capital gains on shares/securities/ mutual funds on which Securities Transaction Tax (STT) has been deducted and paid, no tax is payable. Higher capital gains taxes will apply only on those transactions where STT is not paid. For other shares & securities, person has an option to either index costs to inflation and pay 20% of indexed gains, or pay 10% of non-indexed gains. For all other long term capital gains, indexation benefit is available and tax rate is 20%

Income from Other Sources There are some specific incomes which are to be taxed under this category such as income by way of dividends, horse races, winning of bull races, winning of lotteries, amount received from key man insurance policy. So as we can see the Indian Income Tax law is a subject which is filled with legal jargons and complexities that keep on changing every new financial year and the importance of this law in our routine life simply cannot be ignored. Whether it is filing of Inco me Returns on due dates or whether it's a financial investment decision to be taken, everywhere the Income Tax provisions play a major role in driving of the cost factor. (Catherine) The United States of America was formed over two hundred years ago by individuals that were breaking away from the confines of the tax system that was imposed on them in European countries. Initially, there was no federal income tax structure in place. As our nation grew, the need became apparent that the country needed to raise money in order to support growth. The first tax that was imposed was under the Revenue Act of 1813 (Tax History). Taxes were imposed when needed. This methodology held true to the beliefs that were in place by the founders of America. As the nation grew more, there was an increased need to have taxes in place more consistently. On July 1, 1862 Congress formed the Office of Commissioner in Internal Revenue (within the US Treasury) to meet the fiscal demands of the Civil War. After the war, the tax requirements declined and in 1872 the Act was repealed. The American culture at the time was focused primarily on freedom, a notion that did not support the government taking money that was earned by its citizens. Many countries struggle financially during a period of war and America was no exception. When America entered into World War I, there had never been a greater demand financially on the country; a demand that required all citizens to work together in support of their troops. At the time, the tax rate spiked up to 77% in 1918. The culture of the country had been changing drastically. Once a nation built upon the principles that it would not take money from its citizens now needed the citizens to support the country that was attempting to participate in a large war. Through the next couple of years, the tax rate continued to fluctuate based on the needs of the country. As the country grew, the tax system became more complex. In current times, the tax system now supports taxes being collected at all points in time. One could argue that this is because our global economy has grown so drastically that there is always the need for tax systems to support growth and development and for our country to remain a leader with the world economy. Below is a comparison of the tax rates between 1960 and 2004 (Piketty, 12):

The current tax structure is based on the concept that there is a constant flow of income coming into the Internal Revenue Service. Many people only think of paying their taxes once a year on April 15th or October 15th (depending on whether or not an extension of time to file was granted). In actuality, taxes are collected consistently throughout the year. Every time a person is paid, there is a certain amount of withholding tax that is taken out of their paycheck. This withholding tax is sent directly to the government by the employer, therefore, your taxes are being paid constantly. The county has set up many different facets of the tax system. There are four basic federal taxes: the individual income tax; the corporate income tax; the estate (and gift) tax; and the payroll tax, which finances disability, retirement, and health benefits for the elderly. These four groups represent over 90 percent of all federal income taxes (Piketty, 7). The country taxes its citizens on world-wide income. This means that if an individual has their money invested in a savings account that is located outside the United States, they still must report the interest income earned at the end of the year on their personal income tax return. Certain tax credits are granted if foreign taxes are paid on that money as well. The modern day tax structure within the United States has created a different culture among Americans that mimic the same behaviors as the past when the country was founded and people were escaping high tax rates. The corporate tax structure is built to tax companies on the amount of money that they made. When a person owns a company and takes a paycheck from that company, the end result is known as double taxation. The company is being taxed on the amount of income that it has, as well as the owner who is being taxed on the amount of income that they are making from the company. This has led many people to form different corporate structures in an effort to avoid as much tax as possible. People are now turning to forming an S-corporation which will allow the same limited liability as a regular corporation but the company passes out all of its income to the shareholders and pays no tax directly, therefore, only

having one tax paying entity. The tax culture now is based on tax avoidance. People and companies structure their income streams to create the least amount of tax as possible. This is accomplished through holding real estate and claiming the maximum amount of deductions possible, making charitable contributions and investing in certain bonds that will not require taxes to be paid on a state level. (Angie) Indias tax difference in comparison to the United States is fairly new and needs improvements. India is known for having the worst tax collection records. Their ratio of tax revenue to GDP is low by international standards. They collect personal income taxes from only 12 million people out of 960 million, which pay personal income tax. In addition, only 12,000 declare an income of more than 1million rupees. It has been noted that their tax system has a high dependence on indirect taxes. They have low effective tax rates, low tax productivity and high marginal effective tax rates. The Indian government has set certain provisions to aid the collection of tax. In 1997 they introduced the Voluntary Disclosure of Income Tax where the government had a no question ask and no plenty policy. In the previous year they introduced the Finance act of 1996 where the company with taxable profits of 30% less than adjusted book profits would pay a minimum of 30%. The issue of tax collection and the goal of economic growth has lead to India to major tax reform. Individual income taxes rates range from 0% to 30%, which is slightly lower from United States tax rate of 10% to 35%. India currently has a wealth tax of 1% on an individual value of net worth. This is also applied to corporations where assets minus debts greater than Rs 1.5 million are taxed additional 1%. Corporate tax is subject to 30% rate plus a 10% surcharge and 3% education cess. The overall rate a corporation pays is 33.99% and foreign corporation pay 42.23%. In the United States a corporation pays 15% to 35% tax rate. At this point it seems that a business has a favorable rate in the United States but in India they have tax free zones, where business are exempt from tax for the first five year of operation; if they export 75% of total turnover each year. Dividends distribution are taxed at 15% domestically and 25% for money market or any liquid funds. In India dividends distribution has been on going battle, where in past years it has been removed. For the United States the rate for qualified dividends are 15% and ordinary dividends are at 35%. In addition, capital tax in India for listed shares are taxed at 10% and for non-listed shares are taxed at 30%. In regards to penalty United States has a rigorous laws than India. If estimated taxes paid are too little the paid interest rate is 4%. When an income tax is filed and a balance is due there is an interest charge and a second penalty of 0.5% per month applied to the unpaid balance of tax and interest. The 0.5% penalty is capped at 25% of the total unpaid tax. In addition, the Employer is required to withhold income and social security taxes from wages paid to employees, and pay these amounts promptly to the government. On the other hand, India penalties are failure to pay tax. (Not Sure of India) India has been competing for prized position of superpower nation. They face tough competitors like the United States, European Union, Japan, China, and but with time they will definitely reach that status. Currently they have been developing into the open

market and making changes to old policies to better compete. For example, the Income Tax Act of 1922 caused a shift in there tax system, which allowed for the first administrative and tax system in Indias history. They have had economic liberation which entailed industrial deregulation, privatization of state owned enterprise, and reduction in foreign trade control. On average tariffs have fallen to below 15% from as high as 200% as India began to re- integrate with the global economy. Exports have risen 14 times as India has rapidly gained trade share. These changes have allowed for a rapid growth and can be seen since 1997 where the countrys growth increased on average 7% per year.

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Another aspect of India that leads us to believe that they are an emerging superpower is that services are their major source for economic growth. There service business, account for more than half of Indias output with only using one third of its labor force. The success of their service business is due to the increase of the English speaking population, which, allows them to export information technology and software workers. The evidence can be seen in the United States, where even the most privileged and unthinkable professions are outsourced. For example, income taxes are no longer done by your accountant but by low pay workers from India. Similar scenarios are seen medical and law profession. India is tapping into many countries and their efforts have made them a frontrunner.

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Goldman Sachs predicts that by 1945 the GDP of India will surpass that of United States. Although that are slightly behind of China, it illustrates that India is on its through reform and change. In addition, history has showed us that India has rebounded from global financial crises because of strong domestic demand. In addition, a monsoon in 2009 and inefficiency in government raised inflation to 11%. However, its budget deficit today is predicted to hold at 5.5%, which is lower by 6.8% from the prior year. India will need some improvements and overcome several challenges before accomplishing Goldman Sachs predictions. India has a widespread poverty and insufficient higher education. On the verge for a rapid growth India will not be able to meet high demands in the workforce if the population is not educated. In addition, India currently does not have land, housing or major highways to meet the high rural to urban migration. The tension between rural-versus-urban and an educated-versus- uneducated will be the major contributors to India rapid growth risk.

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Reference: Government of India. (2005). Parliament. Retrieved December 2, 2011, from http://india.gov.in/govt/parliament.php Indian History in short. (n.d.). In Indian History. Retrieved December 2, 2011, from http://www.indhistory.com/ CEO India Company. (2011). Income Tax in India. Retrieved November 21, 2011 from http://www.tax4india.com/income-tax-india/income-tax-india.html http://books.google.com/books?id=oVa-D3MZDYC&pg=PA31&dq=india+tax+system,&hl=en&ei=lFHUTq1OqfXSAdqjieQB&s a=X&oi=book_result&ct=result&resnum=3&ved=0CEkQ6AEwAjgK#v=onepage&q=in dia%20tax%20system%2C&f=false Penalty http://www.incometaxindia.gov.in/Archive/Tax_deducted_Source_otherthansalaries_Vol 1.pdf Goldman Sachs http://www.usindiafriendship.net/viewpoints1/Indias_Rising_Growth_Potential.pdf Tax Slabs http://financeminister.in/latest-india-income-tax-slabs http://business.mapsofindia.com/india-tax/concepts/history-taxation.html) https://www.cia.gov/library/publications/the-world-factbook/geos/in.html