Answers for Assignment of Taxation Direct and Indirect

Answer for Question No. 1

As asked in the question Mr. Bob who is a resident of London, and wants to start a business in
India. First as a consultant we have to discuss the structure of tax in India which is a three tier
federal structure. The central government, state governments and local municipal bodies make
up the tax structure of India.
Article 256 of the Indian constitution states that “No Tax shall be collected by except by the
authority of low.”
Interestingly, the tax systems in India traces its origin to the prehistoric text Such as
Arthashashtra and Manusmiriti. Based on these texts, the foundation of the modern tax system
in India was conceptualized by Sir James Wilson during the British Rule in India in the Year 1860,
however post-independence the newly –established Indian Government then Soldered the
system to propel the economic development of the country. After this period, the Indian Tax
structure has been subject to a host of changes.
Further if we discuss the tax system in India that allows two type of taxes Direct Taxes and Indirect
Taxes before implementation of GST, which can be shown in below mentioned chart:

The tax system in India for long was a complex one considering its length and breadth, post GST
implementation, the process has become easier as it replaced all indirect taxes (Such as VAT/
Service Tax).
If we discuss about direct taxes in India, which have been shown in the above mentioned chart,
Direct Tax (I.e. Income Tax, wealth tax, capital gain tax etc.) is levied directly on individuals and
corporates entities. These types of tax cannot pass to anybody else. Further income tax is the
most popular tax within this section, which is levied on individual’s income earned with different
tax slabs for income levels. The term individual includes individuals, Hindu Undivided Family
(HUF), company/ corporates, firms, trust etc.
Indirect taxes, are meant taxes which are indirectly levied on the public through goods and
services. The seller of the goods and services collect the tax which is then collected by the
government authorities. Before implementation of GST the following Taxes were collected which
are also mentioned in the above chart:
1. Value Added Tax (VAT), which was sales tax levied on goods sold in the states, the rate
was depended on the government.
2. Octroi Tax, which was levied on goods which move from one state to another, the rates
depended on the state government.
3. Service Tax, in which the tax was levied on service providers by the government.
4. Customs Duty, which was levied on anything which was imported into India from foreign
nation.
In India, there are three Tax Collection Authorities which can collect fixed types of taxes they
permitted under the defined rules.
1. The Central Government, Income Tax, Custom Duties, central excise duty and IGST &
CGST (Post implementation of GST)
2. The State Government, tax on agricultural income, professional tax, value added tax,
state excise duty, stamp duty and SGST (Post implementation of GST)
3. Local Bodies, property tax, water tax, other taxes on drainage and small services.
If we discuss tax structure post GST implementation in India which was implemented on 01 st
July’2019, and it incorporates many of the indirect taxes levied by states and central government
and the direct taxes remains same. GST has replaced the following taxes:

 Sales Tax
 Central Excise Duty
 Entertainment Tax
 Octroi
 Service Tax
 Value Added Tax
 Purchase Tax
It is a multi-stage destination- based tax as it is levied on each stage of the supply chain right from
purchase of raw material to the sales of the finished goods to the end consumer whenever there
is value addition and each transfer of ownership.
Destination-based because the final purchase is the place whose government can collect GST.
For Example if any laptop is manufactured in Delhi but sold in Mumbai, the Maharashtra
government collect the GST.
A major benefit is the simplification of taxation in India for government authorities. GST has three
components which are mentioned below:
1. C-GST (Central Goods and Service Act) in which the central government collects the tax
on an intrastate supply of goods or services
2. S-GST (State Goods and Services Tax), in which the state government collects the tax on
an intrastate supply of goods or services
3. I-GST (Integrated Goods and Services Tax), in which the central government collects the
tax for inter-state sale of goods or services
After post implementation of GST, the new tax system of India for Indirect Taxes can be shown
in the below mentioned chart:

For a smooth implementation of the Indian Tax System, there are bodies dedicated to it which
are known as the revenue authorities which are as per following:

 CBDT: The Central Board of Direct Taxes is part of the revenue department under the
ministry of finance. It has two-fold role. It provides important ideas and inputs for
planning and policy with regard to direct tax in India. Second, it assists the income tax
department in the administration of direct taxes.
 CBEC: The Central Board of Excise and Customs deals with policy formulation with regards
to levy and collection of customs and central excise duties and service tax.
  CBIC: Post GST implementation, the CBES has been renamed as The Central Board of
Indirect Taxes & Customs (CBIC). The main role of CBIC is assisting the government in
policy-making matters related to GST.
The above mentioned discussion may be helpful to Mr. Bob for understanding the tax system of
India for starting his business.

Answer for Question No. 2

Under Section of 22 of the Act, Income is taxable under the head “Income from House Property”
if the following three conditions are satisfied:
1. The property should consist of any building or lands appurtenant thereto.
2. The assessee should be owner of the property
3. The property should not be used by the owner for the purpose of business or profession
carried on by him, the profits of which are chargeable to income tax.
Income from house property has been described under sections 22 to 27 of the Income Tax Act’
1961 which can be described as follows:

 Section 22, relates to chargeability of the income of house property

 Section 23, relates to the calculation of annual value of a property
 Section 24, relates to two types of deductions that can be claimed by an assessee in
respect of the income received from house property
 Section 25, states the amounts that cannot be deducted from the income received from
house property
 Section 27, states various terms related to income from house property i.e. owner of
house property, annual charges etc.
If we discuss the cases where income from house property is not chargeable to tax under the
head “Income from House Property” and chargeable under any other head. If apart from
recovering rent of the building, in some cases, the owner gets rent of other assets (like furniture)
or he charges for different services provided in the building (i.e. security, charges for lift, air
conditioning, electricity, water etc.) the amount so recovered is known as “Composite Rent”.
Following is the tax treatment of “Composite Rent”:
1. Where composite includes rent of building and charges for different services, in such
cases, composite rent is to be split up and amount of services is chargeable under the
head of “Profits and gains of business and profession” or “income from other sources” as
the case may be and income received from rent from building will be charged under
“Income from House Property”. This rule is applicable even if it is difficult to split up the
amount.
2. Where composite rent is rent of letting out of building and letting out of other assets (like
furniture) and two letting are not separable i.e. letting of one is not acceptable to other
party without letting of the other, in such situations, income is taxable either under the
head of “Profits and gains of business or profession” or “Income from other sources” as
the case may be. This rule is applicable even if sum receivable for the two lettings is
separately.
3. Where composite rent is rent of letting out building and letting out of other assets and
two lettings are separable i.e., letting of one is acceptable to other party without letting
of the other, in such situations, income from letting out of building is taxable under the
head of “Income from house property” and income from letting out of other assets is
taxable under the head of “Profits and gains of business or profession” or “Income from
other sources” as the case may be. This rule is applicable even if the assessee receives
composite rent from his tenant for two lettings.
The following other cases may be discussed except the composite rent which is treated under
the other heads not “Income from House Property” and Under section 10 of the Income Tax
Act’1961 allows some exemptions in Income from House property:
1. If any income received from any empty area within the property, the same income will be
treated under “Income from business or profession” or “Income from other sources” as
the house property does not include the empty areas.
2. If any income received from the vacant plots it will be charged under “Income from
business or profession” or “Income from other sources”.
3. If income is generated from sub-letting the same will be charged under “Income from
business or profession” or “Income from other sources”.
4. If warehousing charges received for keeping merchandise it will be charged under
“Income from business or profession”
5. If surplus area of non-processing plant letting out such income will be charged any other
head not “Income from House Property.
6. As per Section 2(1)(C), if a building owned or occupied by agriculturalist and any income
generates from the building, such income is not chargeable to tax, if it is located in the
immediate vicinity of agricultural land which is used for agricultural purposes
7. The Income of property possessed by religious or charitable purposes is exempted in
following conditions:
a. Section 11 (1) (a)- Income will be exempted
i. To the extent such income is applied in India for such purposes; and
ii. Where any such income is accumulated or set apart for application to such
purposes in India, to the extent to which the income so accumulated or set
apart is not excess 15% of the income from such property.
8. If the property is self-occupied, no tax will be levied on the assesse as the net annual value
of the same shall be taken as nil but in case he owns more than one house, then only one
of his choice but normally of higher value shall be treated as self-occupied.
 9. As per Section 10 (24), House property of a register trade union or authority is not taxed.
10. Palaces of ex-ruler of Indian States are exempted from tax, but only one palaces they can
choose for availing the exemption.
11. As per section 23 (3), in case an assessee keeps one of his own houses reserved for self-
occupation but is living in rented house elsewhere due to his employment or profession
the income from such house taken as nil.

The points of discussion are considered the cases where the income derived are treated under
“Income from House Property”.

Answer for Question No. 3 (A)

Section 80C of the Income Tax Act provides deduction up to 1,50,000/- provided we have
invested according to condition given in section itself. One of the most popular way to avail the
benefits from this section, is to purchase the insurance policy. This is the common perception
that premium paid up to 1.5Lacs on any insurance product like life insurance or unit linked plan
is fully allowed, this is not correct. The reasons for such conclusion is section 80C (3) and 3(A) of
the Income Tax Act.
To calculate the total eligible deduction for FY 2018-19, as per section 80C for Mr. Saurabh
Pandey, we have to consider these subsections i.e. 3 and 3(A) of 80C.

 In respect of premium paid of Rs. 20,000/- for his spouse having sum assured 1.5 lacs,
deduction will be restricted to 10% of sum assured. Therefore, he will be eligible for Rs.
15,000/- out of Rs. 20,000/- under section 80C as the policy was issued on May 01, 2015.
(If policy was issued between 01.04.2003 and on or before 31.03.2012, he may claim 20%
of capital sum assured)
 In respect of premium paid of Rs. 50,000/- for his policy having sum assured 2 lacs, the
deduction will be restricted to 10% as the policy was issued after 31.03.2012 (i.e. May 31,
2012), and as per subsection 3 & 3(A) of 80C, the allowable deduction will be Rs. 20,000/-
(10% of 2,00,000/-)
 In respect of premium paid of Rs. 60,000/- for his daughter with a disease specified
under section 80DDB having sum assured 3 lacs, the deduction will be restricted to 15%
as the policy was issued after 01.04.2013 (i.e. June 01, 2015), therefore allowable
deduction will be 45,000/- (15% of 3,00,000/-)
 In respect of Premium paid of Rs. 40,000/- for his son with a disease specified under
section 80DDB having sum assured 2 lacs, the deduction will be restricted to 10% as the
policy was issued before 01.04.2013 (i.e. Jan 01, 2013), therefore allowable deduction
will be Rs. 20,000/- (10% of 2,00,000/-)
  In respect premium paid of Rs. 75,000/- for his parents having sum assured 5 lacs, No
deduction will be allowed as per sub section 4 of 80C, the person referred in sub-section
(2) shall be following:
o (a) for the purpose of clause (i) which refers the effect in force an insurance on
the life of person includes the followings:
 (i) in the case of an individual, the individual, the wife or husband any
children of such individual, and
 (ii) in case of a Hindu undivided family, any member there-of.
According the above, the deduction against premium paid for parent’s policy will not be
allowed, hence, allowable deduction will be Nil.

Therefore the total deduction under section 80C for Mr. Pandey will be Rs. 1,00,000/-

Answer for Question No. 3(B)

Any individual or HUF can get the tax deduction up to 1.5 lacs per financial year under section
80C of the Income Tax Act. This deduction is not available for partnerships, companies and other
corporate bodies. The individual have to claim this deduction in his income tax return (ITR) which
has to be filed by 31st July each year for individuals.
Further this amount individual may claim under this section is reduced from his gross total
income for the purpose of computing income tax, for example, if the gross total income of any
individual is Rs. 7 lacs and he has claimed a deduction of Rs. 1.5 lacs under section 80C, his taxable
income will be Rs. 5.5 Lacs.
Eligibility under Section 80 C, an individual or any member of Hindu undivided family (HUF) can
claim deduction up to 1.5 lacs under section 80C and there is no minimum limit under this section.
Further the partnership firms, companies and other corporate bodies are not eligible for the
deduction under section 80C.
Further the Section 80C provides provisions for tax deductions on a number of payments, with
both individual and HUFs eligible for these deductions, the following payments are eligible under
this section:

 Life Insurance Premiums either for yourself or family members. However the insurance
policy cannot be terminated within two years of commencement if it is a single premium
policy. If it is multiple premium policy, you must pay at least two years’ premiums. Failures
to do so will lead to reversal of deduction under this Section. Unit Linked Life Insurance
Policies (ULIPS) are also eligible for deduction under Section 80C.
 Tax on Returns: The returns on Life Insurance policies, where the insurance cover is at
least 10 times the annual premium, are exempted from tax under Section 10(10)(D).
 Investments in ELSS mutual funds, Equity Linked savings schemes have a lock in of 3 years
and invest 80% of their corpus in equities (Stocks)
Tax on Returns: ELSS returns above Rs. 1 lac are subject to long term capital gain tax at
a rate %.
 Public Provident Fund (PPF), this is a government savings scheme with government-
administered interest rate. We can invest in it through most banks and post offices. It has
a tenure of 15 years.
 Employees’ Provident Fund (EPF), Employees’ contribution to the EPF account is eligible
for deduction under section 80C. Employers’ contribution is also tax free but it is not
eligible for deduction under Section 80C.
 National Saving Certificates, NSCs are a government backed savings instrument with a
tenure of 5 years. The interest of these certificates is also eligible for tax deduction under
Section 80C.
Above of these we can claim Tuition Fee, home loan repayment and stamp duty/ fee under the
Section under 80C.