Saturday, February 24, 2007

Corporate tax may go down by 3% in budget

February, 21st 2007

Companies are expected to breathe a bit easy as statutory tax rates on them are likely to be reduced by 3% in the Budget either through abolition of 10% surcharge or reduction of corporate tax from the current level of 30%.

Either corporate tax rate is likely to be reduced to 27% or surcharge abolished to give 3% relief to companies, sources said.

The statutory rate of taxes on companies stands at about 33.66% with corporate tax of 30% and surcharge of 10% along with education cess of 2%. Corporates are demanding around 5% cut in taxes, but it is not likely to be accepted entirely, sources said adding the cut may be limited to 3% only.

Companies in India are given a host of tax exemptions. These include tax holiday for software technology parks, EoUs, infrastructure service providers and units set up in backward areas. Because of all these exemptions, effective rate of taxation on corporates works out to be much lower.

The government collected close to 50% more corporate tax at Rs 97,315 crore during the first 10 months of this fiscal against Rs 65,094 crore during April-January of the previous fiscal.

Refund Banker Scheme

Finance Minister Sh. P. Chidambaram Inaugurates Refund Banker Pilot for Income Tax Refunds

 

The pilot scheme for sending I-T refunds  through a bank was inaugurated by the Finance Minister Sh. P. Chidambaram on 24 th January. This scheme will be run on a pilot basis in salary charges and in charge of Commissioner of Income Tax IX, Delhi and 1 Commissioner of Income Tax charge in Patna for a period of 3 months. In this scheme the Income Tax refunds due to taxpayers will be sent by the State Bank of India directly from their CMP Branch in Mumbai.

 
How will it work?: The scheme of Refund Banker is based on the concept of Refund Bankers for IPOs. In this scheme the Assessing Officer will process the Income Tax returns on his computer. If a refund is due to the taxpayer, the data will be picked up automatically and transmitted to the bank. The bank will then send the funds as indicated by the assessing officer either through ECS discipline or by a banker's cheque on the taxpayers address as indicated on the return of income. An advice will also be sent to all tax payers regarding the funds deposited in their account by ECS mode. The bank will despatch refund cheques within 3 working days of receipt of data.

Penalty for not collecting TDS



Penalty for not collecting TDS
February, 21st 2007

Employers who are not collecting and depositing tax deducted at source (TDS) from the salary of their employees will have to pay heavy penalty from April 1 onward as per the indications made by the Income Tax Department.

Following the information received by the Central Board of Direct Taxes (CBDT) that in a number of cases, employers as well as accounting departments in many corporates were not collecting and depositing the TDS, especially after the expansion of the provisions of TDS, in its recent circular, the department inserted a new Section 271ca to provide for imposition of penalty on any person who is responsible for collecting tax and has failed to collect TDS in accordance with the provisions of Act.

This amendment will take effect from April 1, 2007, and will, accordingly, apply in relation to the assessment year 2007-08 and subsequent assessment years.


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Wednesday, February 21, 2007

Home loan the best way to save tax

Tax planning, a legitimate exercise, should not be confused with tax avoidance or tax evasion. Good tax planning comprises tax compliance and availing proper tax benefits, coupled with proper analysis of the financial implications of a decision. There are many situations that demand a proper understanding of, and approach to, tax matters. One such situation is where an individual has acquired, constructed, repaired, renewed or reconstructed a residential house. Where the individual has borrowed capital for purpose, amount of any interest payable for that year, and subject to certain conditions for earlier years, on such borrowing is allowable as deduction from income from house property. If there is a loss as a result of such a claim, it can be set off against other income. Thus, interest paid on such borrowing brings down taxable income. The maximum deduction that one may claim in respect of such interest is Rs 1, 50,000 in a year if the house is acquired or constructed within three years of borrowing and is self-occupied. However, if the borrowing was made on or before March 31, 1999, the amount of deduction will be restricted to Rs 30,000. These limits of interest will not be applicable to the following cases: The house is not treated as self occupied; the house is rented out; if a borrowing is made for renovation, renewal or reconstruction of a self-occupied house, a maximum interest of Rs 30,000 only will be allowed, no matter when the money was borrowed. This benefit must not lure one into borrowing unnecessarily. For example, you earn interest on capital, say, at the rate of 8% per annum. You should not borrow at the rate of 10% per annum, for then you end up losing interest at the rate of 2% per annum. Instead, reduce your interest income by withdrawing capital. That too will reduce taxable income and will result in tax saving. Besides deduction for interest, one is also eligible for deduction for repayment of principal of housing loans taken for buying or constructing a house. Payment made for stamp duty, registration fee and other expenses for the purpose of transfer of such house property to the individual is also eligible for deduction from income. The maximum amount of such deduction that one can claim in a year is Rs 1, 00,000, together with certain other payments like life insurance premiums and payments into public provident fund account. One must note that while deduction of interest on a housing loan is allowed where the loan was taken for buying, constructing, renovating, or reconstructing a house, deduction of repayment of principal amount is allowed if the loan was taken for buying or constructing a house.

SOME RELEVANT CASE-LAWS

12.1      Employer-employee relationship:

The nature and extent of control which is the basis requisite to establish employer- employee relationship would vary from business to business. The test which is uniformly applied in order to determine the relationship is the existence of a "right to control" in respect of the manner in which the work is to be done.  
(Dharangadhra Commercial Works v State of Saurashtra 1957 SCR 152)

 
 
 
12.2      Leave Encashment(S.10(10AA):

Retirement" includes resignation. What is relevant is retirement: how it took place is immaterial for the purpose of this clause. Therefore even on resignation, if an employee gets any amount by way of leave encashment, S10(10AA) would apply.(CIT v D.P. Malhotra(1997) 142 CTR 325(Bom)). (CIT vR.J. Shahney(1986)(159 ITR 160(Mad)

 
 
 
12.3      House Rent Allowance(S.10(13A):

When commission is paid to a person based upon fixed percentage of turnover achieved by the employee it would amount to "Salary" for the purpose of Rule 2 (h) of part A of IV Schedule(Gestetner Duplicators vCIT 117 ITR 1 (SC)).

   
 
 
 
12.4      Perquisite (S17):

12.4.1     

One can not be said to allow a perquisite to an employee if the employee has no vested right to the same. (CIT v L.W. Russel(1964) 531 ITR 91 (SC)).  

  

12.4.2     

Reimbursement of expenses incurred by the employee has been intended to be roped in the definition of " Salary" by bringing it as part of " Profit in lieu of salary." ( I.E . I Ltd. v CIT (!993) 204 ITR 386(Cal)  

 
 
 
12.5      Rent free Accommodation:

A rent free accommodation was provided to the assessee by his employer but the never occupied it. Held that, unless the employee expressly forgoes his right to occupying it, the perk value would be taxable even though he never occupies it. (CIT v B.S. Chauhan 150 ITR 8(Del)).

 
 
 
12.6      Deduction under S.80G:

By the very nature of calculation required to be made u/s 80G(4) it is necessary that all deduction under chapter VIA be first ascertained and deducted before granting deduction u/s 80G (Scindia Steam Navigation Co v CIT (1994) 75 Taxman 495(Bom))

 
 
 
12.7      Deduction u/s 80RRA:

Fees received by a consultant or technical for rendering services abroad would also come within the purview of s 80RRA (CBDT v Aditya V. Birla (1988) 170 ITR 137(SC))

 
 
 
12.8      Relief u/s 89:

Where arrears of salary are paid under orders of court, the employee would be entitled to relief u/s 89. (K.C. Joshi v Union of India(1987) 163 ITR 597(SC).

 
 
 
12.9      Revised return

A belated return filed u/s 139(4) can not be revised u/s 139(5). ( Kumar J.C. Sinha v CIT (1996) 86 Taxman 122(SC)).

 
 
 
12.10      Return showing income below taxable limit:

Is a valid return. (CIT v Ranchhoddas Karosands(1959(361ITR 869 (SC)).

OVERVIEW OF CAPITAL GAINS

4.1      CAPITAL GAINS

Profit or gains arising from the transfer of a capital asset during the previous year is taxable as "Capital Gains" under   section 45(1) of the Income Tax Act, . The taxability of capital gains is in the year of transfer of the capital asset.  

4.2      CAPITAL ASSET

  As defined in section 2(14) of the Income Tax Act, it means property of any kind held by the assessee except:

Your browser may not support display of this image.       Stock in trade, consumable stores or raw materials held for the purpose of business or profession.

Your browser may not support display of this image.       Personal effects, being moveable property (excluding Jewellery)held for personal use.

Your browser may not support display of this image.      Agricultural land, except land situated within or in area upto 8 kms, from a municipality, municipal corporation, notified area committee, town committee or a cantonment board with population of at least 10,000.  

Your browser may not support display of this image.      Six and half percent Gold Bonds, National Defense Bonds and Special Bearer Bonds.  

4.3      TYPE OF CAPITAL GAINS

When a capital asset is transferred by an assessee after having held it for at least 36 months, the capital gains arising from   this transfer is known as Long Term Capital Gains. In case of shares of a company or unit of UTI or a unit of a Mutual   Fund, the minimum period of holding for long term capital gains to arise is 12 months. if the period of holding is less than   above, the capital gains arising there from are known as Short Term Capital Gains. It may be mentioned here that Long   Term Capital Gains are taxed at a flat rate of 20%, the benefit of indexing the cost of acquisition is available and a    number of exemptions there from are also available, specified in Section 54 to section 54G of the Income Tax Act. The   Finance Act 1999 has provided that in case of transfer of a long term capital asset, being listed securities, if the tax   payable exceeds 10% of the amount of capital gains computed without indexing the cost of acquisition, then such excess   would be ignored for the purpose of computing the tax payable by the assessee.  

4.4      COMPUTATION OF CAPITAL GAINS (Sec.48)

Capital gain is computed by deducting from the full value of consideration, for the transfer of a capital asset,the following:-

Your browser may not support display of this image.   Cost of acquisition of the asset(COA):- In case of Long Capital Gains, the cost of acquisition is indexed by a factor which is equal to the ratio of the cost inflation index of the year of transfer to the cost inflation index of the year of acquisition of the asset. Normally, the cost of acquisition is the cost that a person has incurred to acquire the capital asset. However in certain cases, it is taken as following  

    1. When the capital asset becomes a property of an assessee under a gift or will or by succession or inheritance or on partition of Hindu Undivided Family or on distribution of assets, or dissolution of a firm, or liquidation of a company, the COA shall be the cost for which the previous owner acquired it, as increased by the cost of improvement till the date of acquisition of the asset by the assessee.
    2. When shares in an amalgamated Indian company had become the property of the assessee in a scheme of amalgamation, the COA shall be the cost of acquisition of shares in the amalgamating company.
    3. Where the capital asset is goodwill of a business, tenancy right, stage carriage permits or loom hours the COA is the purchase price paid, if any or else nil.
    4. The COA of rights shares is the amount which is paid by the subscriber to get them. In case of bonus shares, the COA is nil
    5. If a capital asset has become the property of the assessee before 1.4.81, the assessee may choose either the fair market value as on 1.4.81 or the actual cost of acquisition of the asset as the COA.

Your browser may not support display of this image.   Cost of improvement, if any such cost was incurred. In case of long term capital assets, the

indexed cost of improvement will be taken.

Your browser may not support display of this image.   Expenses connected exclusively with the transfer such as brokerage etc.  

4.5      IMPORTANT EXEMPTIONS FROM LONG TERM CAPITAL GAINS

Your browser may not support display of this image.   Section 54: In case the asset transferred is a long term capital asset being a residential house, and if out of the capital gains, a new residential house is constructed within 3 years, or purchased 1 year before or 2 years after the date of transfer, then exemption on the LTCG is available on the amount of investment in the new asset to the extent of the capital gains. It may be noted that the amount of capital gains not appropriated towards purchase or a public This amount should subsequently be used for construction may be deposited in the Capital Gains Account Scheme of sector bank before the due date of filing of Income Tax Return. purchase or construction of a new house within 3 years.  

Your browser may not support display of this image.    Section 54F: When the asset transferred is a long term capital asset other than a residential house , and if out of the consideration, investment in purchase or construction of a residential house is made within the specified time as in sec. 54, then exemption from the capital gains will be available as:

(i)   If cost of new asset is greater than the net consideration received, the entire capital gain is exempt.

(ii)    Otherwise, exemption = Capital Gains x Cost of new asset/ Net consideration. It may be noted that this exemption is   not available, if on the date of transfer, the assessee owns any house other than the new asset. It may be noted that the   Finance Act 2000 has provided that with effect from assessment year 2001-2002, the above exemption shall not be   available if assessee owns more than one residential house, other than new asset, on the date of transfer. Investment in the   Capital Gains Account Scheme may be made as in Sec.54.

Your browser may not support display of this image.      Section 54EA: If any long term capital asset is transferred before 1.4.2000 and out of the consideration, investment in specified bonds/debentures/shares is made within 6 months of the date of transfer, then exemption from capital gains is available as computed in Section 54F.  

Your browser may not support display of this image.      Section 54EB: If any long term capital asset is transferred before 1.4.2000 and investment specified assets is made within a period of 6 months from the date of transfer, then exemption would be available as computed in section54F  

Your browser may not support display of this image.      Section 54EC: This section has been introduced from assessment year 2001-2002 onwards. It provides that if any long term capital asset is transferred and out of the consideration, investment in specified assets (including bonds issued by National Bank for Agricultural & Rural) Development or by National Highway Authority of India or by Rural Electrification Corporation is made within 6 months from the date of transfer, then exemption would be available as computed in Sec. 54F.  

Your browser may not support display of this image.      Section 54ED: This section has been introduced from assessment year 2002-03 onwards, It provides that if a long term capital asset, being listed securities or units, is transferred and out of the consideration, investment in acquiring equity shares forming part of an eligible issue of capital is made within six months from the date of transfer, then exemption would be available as computed in Sec. 54F.  

4.6      LOSS UNDER CAPITAL GAINS -can not be set off against any income under any other head but can be carried  forward for 8 assessment years and be set off against capital gains in those assessment years.  

4.7      EXEMPT INCOME

Your browser may not support display of this image.      The Finance Act 2003, has introduced S.10(33) and S.10(36) w.e.f. 01.04.2004 which provide that

 income arising from certain types of transfer of capital assets shall be treated as exempt income. S.10(33)

 provides for exemption of income arising from transfer of units of the US 64 (Unit scheme 1964) S.10(36)

 provides that income arising form transfer of eligible equity shares held for a period of 12 months

 or more shall be exempt. 

Your browser may not support display of this image.      The Finance Act'2004 has introduced section 10(38) of the I.T, Act which provides that no capital gains shall arise in case of transfer of equity shares held as a long term capital asset by an individual or HUF w.e.f . 01.04.2005 provided such a transaction is chargeable to 'securities transaction tax'.

Your browser may not support display of this image.      COST OF INFLATION INDEX

      Financial Year Cost inflation Index
      1981-82 100
      1982-83 109
      1983-84 116
      1984-85 125
      1985-86 133
      1986-87 140
      1987-88 150
      1988-89 161
      1989-90 172
      1990-91 182
      1991-92 199
      1992-93 223
      1993-94 244
      1994-95 259
      1995-96 281
      1996-97 305
      1997-98 331
      1998-99 351
      1999-2000 389
      2000-2001 406
      2001-2002 426
      2002-2003 447
      2003-2004 463
      2004-2005 480

Important events affecting the administrative set up in the Income-tax department:

Year  
1939 Appellate functions separated from inspecting functions.

A class of officers known as AACs came into existence.

Jurisdiction of Commissioners of Income tax extended to certain classes of cases and a central charge was created at Bombay.

1940 Directorate of Inspection (Income-tax) came into being.

Excess Profits Tax introduced w.e.f. 1-9-1939.

1941 Income-tax Appellate Tribunal came into existence.

central charge created at Calcutta. 

1943 Special Investigation Branches set up. 
1946 A few officers of Class-I directly recruited.

Demonetisation of high denomination notes made.

Excess Profits Tax Act repealed.

1947 Business Profits Tax enacted (for the period 1-4-1946 to 31-3-1949).
1951 Report of Income-tax Investigation Commission known as Vardhachari Commission received.

Voluntary Disclosure Scheme introduced. 

1952 Directorate of Inspection (Investigation) set up.

Inspector of Income-tax declared as an I.T. authority.

1953 Estate Duty Act, 1953 came into existence w.e.f. 15-10-1953.

Act XXV of 1953 gave effect to the recommendations of Commission appointed under Taxation of Income (Investigation Commission) Act, 1947.

1954 Internal Audit Scheme in the Income-tax Department introduced.

Taxation Enquiry Commission known as John Mathai Commission set up.

1957 The Wealth tax Act, 1957 introduced w.e.f. 1-4-1957.

I.R.S.(DT) Staff College started functioning at Nagpur and much later four R.T.Is . stationed at Bombay, Calcutta, Bangalore and Lucknow opened.

1958 The Gift-tax Act, 1958 introduced w.e.f. 1-4-1958.

Report of Law Commission received.

1959 Direct Taxes Administration Enquiry Committee submitted its report.
1960 Directorate of Inspection (Research, Statistics & Publications)was set up.

Two grades of Inspectors - selection and ordinary grades - merged into one single grade. 

1961 Direct Taxes Advisory Committee set up - Direct Taxes Administrative Enquiry Committee constituted.

Income-tax Act, 1961 came into existence w.e.f. 1-4-1962.

Revenue Audit introduced for the first time in the Department.

New system for evaluation of work done by Income-tax Officers introduced.

1963

&

1964

Central Board of Revenue bifurcated and a separate Board for Direct Taxes known as Central Board of Direct Taxes (CBDT)constituted under the Central Board of Revenue Act, 1963.

For the first time an officer from the department became Chairman of the CBDT w.e.f. 1-1-1964.

The Companies (Profits) Sur -tax Act, 1964 was introduced.

Annuity Deposit Scheme, 1964 introduced.

1965 Voluntary Disclosure Scheme came into operation.
1966 Functional Scheme introduced.

Special Recovery Unit created.

Intelligence Wing created and placed under the charge of Directorate of Inspection (Investigation).

1968 Valuation Cell came into existence in the Income tax Department.

Report of rationalisation and simplification of tax structure (Bhoothalingam Committee) received.

Administrative Reforms Commission set up.

1969 Direct Recruitment to Class II Income-tax Officers made.

The post of IAC (Audit) created in the Income-tax Department.

1970 The posts of Addl. Commissioner of Income-tax created and abolished after one year.

Recovery functions which were hitherto performed by Income- tax Officers, given to Tax Recovery Officers. Prior to that State Government officials exercised the functions of a Tax Recovery Officer. 

1971 A new cadre of posts known as Tax Recovery Commissioners introduced w.e.f. 1.1. 1972.

Report of Direct Taxes Enquiry Committee received.

Summary Assessment Scheme introduced w.e.f. 1-4-1971.

1972 A Special Cell within the Directorate of Inspection (Investigation) created to oversee the cases of big industrial houses.

A new cadre of posts known as IAC(Acq.) created and IAC appointed as Competent Authority with the insertion of new Chapter XXA in the Income Tax Act, 1961 on the acquisition of immovable properties in certain cases of transfer to counter evasion of tax.

Directorate of Organisation & Management Services (Income- tax) created.

The post of I.T.O. (Internal Audit) created.

Bradma Scheme in the Income-tax Department introduced.

System of Permanent Account Number introduced.

Valuation Officers given statutory powers under the Income-tax Act, 1961 and Wealth-tax Act, 1957.

1974 Compulsory Deposit Scheme (Income-tax Payers) Act, 1974 introduced.

Action Plan for the Income-tax Officers introduced for the first time.

Concept of M.B.O introduced.

1975 Voluntary Disclosure Scheme for Income and Wealth implemented.

Special Cell for dealing with Smugglers' cases created. 

1976 Settlement Commission created and Taxation Laws (Amendment) Act, 1975insertedanewChapterXIXAintheIncomeTaxActw.e.f.1-4-1976.

Smugglers and Foreign Exchange Manipulators (Forfeiture of Property) Act, 1976 introduced w.e.f. 25-1-1976.

A new scheme for departmentalization of accounts introduced.

Chokshi Committee submitted its interim report.

1977 A new cadre of posts known as IAC (Assessment) created.
1978 Appellate functions given to a new cadre of Commissioners known as Commissioner (Appeals).

Directorate of Inspection (Recovery) set up.

A new directorate known as Directorate of Inspection (Vigilance) came into existence by bifurcating the functions of Directorate of Inspection (Investigation).

Chokshi Committee submitted its final report. 

1979 A new directorate designated as Directorate of Inspection (Publication & Public Relations) created out of the Directorate of Inspection (RS&P). 
1980 Hotel Receipt Tax Act, 1980 came into force w.e.f. 1.4.1981.
1981 Economic Administrative Reforms Commission set up.

Three new Directorates viz. Directorate of Inspection (Intelligence), Directorate of Inspection (Survey) and Directorate of Inspection (Systems) created.

Within the Directorate of Inspection (Income Tax and Audit), a separate Director of Inspection (Audit) appointed.

Directorate of Inspection (RS&P) re-organised and Directorate of Inspection (P&PR) re-designated as Directorate of Inspection (Printing & Publications).

I.R.S.(DT) Staff College, Nagpur, re-designated as National Academy of Direct Taxes.

Special Bearer Bonds (Immunities & Exemptions) Act promulgated.

Director General (Special Investigation) and Director General (Investigation) appointed to control the functioning of various Directorates under the control of Central Board of Direct Taxes.

Five posts of Chief Commissioner (Administration) created.

A few posts of Commissioner of Income-tax were earmarked as Commissioner of Income-tax (Inv.) and Commissioner of Income- tax (Recovery).

1982 Special Cell within the Directorate of Inspection (Investigation) converted into a separate Directorate and re-designated as Directorate of Inspection (Special Investigation).

DIT (Systems) appointed in the Directorate of Income-tax (Organisation and Management Services) to coordinate efforts in introducing electronic data processing in the IT Deptt. A microprocessor based EDP system along with data entry system was installed heralding the era of computerisation.

Levy of Hotel Receipts Tax discontinued.

Regional Training Institute at Nagpur started functioning under the control of the National Academy of Direct Taxes.

1983 The vigilance set up reorganised and the strength of Dy. Director (Vigilance) and Asstt. Director(Vigilance) augmented.

Computerised systems for processing challans and PAN designed and developed. 

1984 Taxation Laws(Amendment) Act1984 passed to streamline procedures in the interest of better work management; avoid inconvenience to tax payers; reduce litigation; remove anomalies and rationalise some provisions.
1985 Post of Director General (Investigation) created for more effective checking of tax evasion.

E.D.(Amendment) Act1985 discontinues levy of estate duty on deaths occurring on or after 16.03.1985.

Compulsory Deposit Scheme (Income Tax Payers) Act 1974 discontinued w.e.f. 1.4.1985.

Interest Tax Act, 1974 discontinued w.e.f. 31.3.1985

A new "Reward Scheme" for motivating officers introduced w.e.f. 1.4.1985.

1986 The I.T. Act and W.T. Act amended by Taxation Laws (Amendment and Miscellaneous Provisions) Act :-

Established Settlement Commission.

Introduced Block assets concept for depreciation.

Four offices of Appropriate Authority for acquiring property in which unaccounted money is invested set up in metropolitan cities. 
 

      
1987 Government's approval obtained to set up three new benches of Settlement Commission.

L.K. Jha Committee set up for simplification and rationalisation of tax laws.

Office of Directorate General (Tax Exemption) set up at Calcutta.

The Direct Tax Law(Amendment) Act1987 introduced uniform previous year and redesignated the following authorities :-

Director of Inspection

Insp. Asstt. Commissioner of I.Tax

Appellate. Asstt. Commissioner

Income tax Officer Gr. A

Income tax Officer Gr. B

      Director of Income Tax

Dy. Commissioner of Income Tax.

-Do- (Appeals)

Asstt. Commissioner of I.Tax

Income tax Officer 
 

Expenditure Tax Act 1987 brought into force.

1988        Benami Transactions Prohibition Act1988 introduced.

The Government announced a "Time Window Scheme" which allowed tax payers 50% rebate of interest u/s 220(2) if they pay the tax and balance interest. The scheme was in operation between 1.7.88 to 30.9.88.

CIT (Central) placed under the control and supervision of Director General (Investigation).

Government decided that cadre control for Group 'C' and 'D' posts would be with Chief Commissioner and with CBDT for Group 'A' and 'B'posts.

Extension of Direct Tax Law to the State of Sikkim by a notification of the President of India dated 7.11.1988.

1989 Creation of an attached office of DGIT(Management Systems) to supervise Directorate of I.Tax(Research, Statistics, Publication & Public Relations) and Directorate of I.Tax (Organisation and Management Services) from Sept.1989
1990 Gift tax Bill introduced on 31.5.1990

Creation of 65 posts of Dy. Commissioner of I.Tax by up gradation of equal number of posts of Asstt. Commissioner of I.Tax.

1991 Interest Tax Act, 1974 revived.

Directorate of I.Tax(Systems) started reporting directly to Board.

1992 Rs. 1400 Presumptive Taxation scheme introduced as a measure to widen tax base.

The post of Director General of Income-tax (Management Systems) was abolished.

1993 40 additional posts of Commissioner of Income-tax (Appeals) created.

Authority for Advance Rulings set up.

A comprehensive phased cadre review for Group B, C and D initiated.

1994 2068 additional posts in Group B, C and D sanctioned.

New PAN introduced.

Regional Computer Centres (RCCs) were set up in Chennai, Delhi and Mumbai.

1995 New procedure for search assessment introduced.

50 years of training commemorated and "Seminar Twenty Five" introduced by National Academy of Direct Taxes. 

1996 77 posts of Commissioners of Income-tax created.

Infrastructure for operational needs strengthened.

Study report on 4th cadre review of Group 'A' officers (IRS) of the Department prepared by Directorate of Income Tax (Organisation and Management Services).

1997 Rates of Income-tax reduced significantly.

Legal measures to widen tax base on certain economic indicators introduced in selected cities.

Presumptive tax scheme discontinued.

Voluntary Disclosure Scheme 1997 introduced.

Minimum Alternate Tax introduced.

National Computer Centre (NCC) was set up in Delhi.

1998 Sec. 260A introduced enabling direct appeals to High Court.

1/6 Scheme & penalty for non-filing of return introduced to widen tax base.

Gift-tax abolished for gifts made after 1.10. 1998.

Kar Vivad Samadhan Scheme 1998 introduced.

Silver Jubilee of Regional Training Institutes celebrated.

Designation of Asstt. Commissioner (Senior Time Scale) changed to Dy. Commissioner and that of Dy. Commissioner (Junior Administrative Grade) to Joint Commissioner.

1999 Furnishing details of bank account and credit cards in the prescribed form made mandatory for refund purpose.

Prima-facie adjustments to return done away with; acknowledgments to serve as intimations.

Samman Scheme introduced in1999 to honour deserving tax payers.

2000 The process of implementation of restructuring of the Department commenced to increase efficiency and to deal with increased workload.

Total sanctioned work force reduced from 61,031 to 58,315.

Certain rationalisation measures at structural levels introduced.

Interest-tax Act terminated with effect from 1-4-2000.

2001 The restructuring of the Department resulted in reducing the stagnation at all levels and large number of personnel were promoted in various grades.

Jurisdiction pattern was revamped.

New posts were created at the level of DGIT/DIT in the areas of Research, International Taxation and Infrastructure.

2002 Computerised processing of returns all over the country introduced.

Kelkar Committee Report, inter alia, recommended :-

      i. Outsourcing of non-core functions of the department ;

      ii. Reduction in exemptions, deductions, relief, rebates etc.

Hello World!

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Monday, February 19, 2007

History of Taxation PRE – 1922

"It was only for the good of his subjects that he collected taxes from them, just as the Sun draws moisture from the Earth to give it back a thousand fold" –  
                                    --Kalidas in Raghuvansh eulogizing KING DALIP.

 

It is a matter of general belief that taxes on income and wealth are of recent origin but there is enough evidence to show that taxes on income in some form or the other were levied even in primitive and ancient communities. The origin of the word "Tax" is from "Taxation" which means an estimate. These were levied either on the sale and purchase of merchandise or livestock and were collected in a haphazard manner from time to time. Nearly 2000 years ago, there went out a decree from Ceaser Augustus that all the world should be taxed. In Greece, Germany and Roman Empires, taxes were also levied sometime on the basis of turnover and sometimes on occupations. For many centuries, revenue from taxes went to the Monarch. In Northern England, taxes were levied on land and on moveable property such as the Saladin title in 1188. Later on, these were supplemented by introduction of poll taxes, and indirect taxes known as "Ancient Customs" which were duties on wool, leather and hides. These levies and taxes in various forms and on various commodities and professions were imposed to meet the needs of the Governments to meet their military and civil expenditure and not only to ensure safety to the subjects but also to meet the common needs of the citizens like maintenance of roads, administration of justice and such other functions of the State.

 

In India, the system of direct taxation as it is known today, has been in force in one form or another even from ancient times. There are references both in Manu Smriti and Arthasastra to a variety of tax measures. Manu, the ancient sage and law-giver stated that the king could levy taxes, according to Sastras. The wise sage advised that taxes should be related to the income and expenditure of the subject. He, however, cautioned the king against excessive taxation and stated that both extremes should be avoided namely either complete absence of taxes or exorbitant taxation. According to him, the king should arrange the collection of taxes in such a manner that the subjects did not feel the pinch of paying taxes. He laid down that traders and artisans should pay 1/5 th of their profits in silver and gold, while the agriculturists were to pay 1/6th, 1/8th and 1/10th of their produce depending upon their circumstances. The detailed analysis given by Manu on the subject clearly shows the existence of a well-planned taxation system, even in ancient times. Not only this, taxes were also levied on various classes of people like actors, dancers, singers and even dancing girls. Taxes were paid in the shape of gold-coins, cattle, grains, raw-materials and also by rendering personal service.

 

The learned author K.B.Sarkar commends the system of taxation in ancient India in his book "Public Finance in Ancient India", (1978 Edition) as follows:-

"Most of the taxes of Ancient India were highly productive. The admixture of direct taxes with indirect Taxes secured elasticity in the tax system, although more emphasis was laid on direct tax. The tax-structure was a broad based one and covered most people within its fold. The taxes were varied and the large variety of taxes reflected the life of a large and composit population".

 

However, it is Kautilya's Arthasastra, which deals with the system of taxation in a real elaborate and planned manner. This well known treatise on state crafts written sometime in 300 B.C., when the Mauryan Empire was as its glorious upwards move, is truly amazing, for its deep study of the civilisation of that time and the suggestions given which should guide a king in running the State in a most efficient and fruitful manner. A major portion of Arthasastra is devoted by Kautilya to financial matters including financial administration. According to famous statesman, the Mauryan system, so far as it applied to agriculture, was a sort of state landlordism and the collection of land revenue formed an important source of revenue to the State. The State not only collected a part of the agricultural produce which was normally one sixth but also levied water rates, octroi duties, tolls and customs duties. Taxes were also collected on forest produce as well as from mining of metals etc. Salt tax was an important source of revenue and it was collected at the place of its extraction.

 

Kautilya described in detail, the trade and commerce carried on with foreign countries and the active interest of the Mauryan Empire to promote such trade. Goods were imported from China, Ceylon and other countries and levy known as a vartanam was collected on all foreign commodities imported in the country. There was another levy called Dvarodaya which was paid by the concerned businessman for the import of foreign goods. In addition, ferry fees of all kinds were levied to augment the tax collection.

 

Collection of Income-tax was well organised and it constituted a major part of the revenue of the State. A big portion was collected in the form of income-tax from dancers, musicians, actors and dancing girls, etc. This taxation was not progressive but proportional to the fluctuating income. An excess Profits Tax was also collected. General Sales-tax was also levied on sales and the sale and the purchase of buildings was also subject to tax. Even gambling operations were centralised and tax was collected on these operations. A tax called yatravetana was levied on pilgrims. Though revenues were collected from all possible sources, the underlying philosophy was not to exploit or over-tax people but to provide them as well as to the State and the King, immunity from external and internal danger. The revenues collected in this manner were spent on social services such as laying of roads, setting up of educational institutions, setting up of new villages and such other activities beneficial to the community.

 

The reason why Kautilya gave so much importance to public finance and the taxation system in the Arthasastra is not far to seek. According to him, the power of the government depended upon the strength of its treasury. He states – "From the treasury, comes the power of the government, and the Earth whose ornament is the treasury, is acquired by means of the Treasury and Army". However, he regarded revenue and taxes as the earning of the sovereign for the services which were to be rendered by him to the people and to afford them protection and to maintain law and order. Kautilya emphasised that the King was only a trustee of the land and his duty was to protect it and to make it more and more productive so that land revenue could be collected as a principal source of income for the State. According to him, tax was not a compulsory contribution to be made by the subject to the State but the relationship was based on Dharma and it was the King's sacred duty to protect its citizens in view of the tax collected and if the King failed in his duty, the subject had a right to stop paying taxes, and even to demand refund of the taxes paid.

 

Kautilya has also described in great detail the system of tax administration in the Mauryan Empire. It is remarkable that the present day tax system is in many ways similar to the system of taxation in vogue about 2300 years ago. According to the Arthasastra, each tax was specific and there was no scope for arbitratiness. Precision determined the schedule of each payment, and its time, manner and quantity being all pre-determined. The land revenue was fixed at 1/6 share of the produce and import and export duties were determined on advalorem basis. The import duties on foreign goods were roughly 20 per cent of their value. Similarly, tolls, road cess, ferry charges and other levies were all fixed. Kautilya's concept of taxation is more or less akin to the modern system of taxation. His over all emphasis was on equity and justice in taxation. The affluent had to pay higher taxes as compared to the not so fortunate. People who were suffering from diseases or were minor and students were exempted from tax or given suitable remissions. The revenue collectors maintained up-to-date records of collection and exemptions. The total revenue of the State was collected from a large number of sources as enumerated above. There were also other sources like profits from Stand land (Sita) religious taxes (Bali) and taxes paid in cash (Kara). Vanikpath was the income from roads and traffic paid as tolls.

 

He placed land revenues and taxes on commerce under the head of tax revenues. These were fixed taxes and included half yearly taxes like Bhadra, Padika, and Vasantika. Custom duties and duties on sales, taxes on trade and professions and direct taxes comprised the taxes on commerce. The non-tax revenues consisted of produce of sown lands, profits accuring from the manufacture of oil, sugarcane and beverage by the State, and other transactions carried on by the State. Commodities utilised on marriage occasions, the articles needed for sacrificial ceremonies and special kinds of gifts were exempted from taxation. All kinds of liquor were subject to a toll of 5 precent. Tax evaders and other offenders were fined to the tune of 600 panas.

 

Kautilya also laid down that during war or emergencies like famine or floods, etc. the taxation system should be made more stringent and the king could also raise war loans. The land revenue could be raised from 1/6 th to 1/4th during the emergencies. The people engaged in commerce were to pay big donations to war efforts.

Taking an overall view, it can be said without fear of contradiction that Kautilya's Arthasastra was the first authoritative text on public finance, administration and the fiscal laws in this country. His concept of tax revenue and the on-tax revenue was a unique contribution in the field of tax administration. It was he, who gave the tax revenues its due importance in the running of the State and its far-reaching contribution to the prosperity and stability of the Empire. It is truly an unique treatise. It lays down in precise terms the art of state craft including economic and financial administration.  
 

History of Taxation post 1922  

1. Preliminary : 

      The rapid changes in administration of direct taxes, during the last decades, reflect the history of socio-economic thinking in India. From 1922 to the present day changes in direct tax laws have been so rapid that except in the bare outlines, the traces of the I.T. Act, 1922 can hardly be seen in the 1961 Act as it stands amended to date. It was but natural, in these circumstances, that the set up of the department should not only expand but undergo structural changes as well.  

2. Changes in administrative set up since the inception of the department: 

      The organisational history of the Income-tax Department starts in the year 1922. The Income-tax Act, 1922, gave, for the first time, a specific nomenclature to various Income-tax authorities. The foundation of a proper system of administration was thus laid. In 1924, Central Board of Revenue Act constituted the Board as a statutory body with functional responsibilities for the administration of the Income-tax Act. Commissioners of Income- tax were appointed separately for each province and Assistant Commissioners and Income-tax Officers were provided under their control. The amendments to the Income tax Act, in 1939, made two vital structural changes: (i) appellate functions were separated from administrative functions; a class of officers, known as Appellate Assistant Commissioners, thus came into existence, and (ii) a central charge was created in Bombay. In 1940, with a view to exercising effective control over the progress and inspection of the work of Income-tax Department throughout India, the very first attached office of the Board, called Directorate of Inspection (Income Tax) - was created. As a result of separation of executive and judicial functions, in 1941, the Appellate Tribunal came into existence. In the same year, a central charge was created in Calcutta also.

2.1  World War II brought unusual profits to businessmen. During 1940 to 1947, Excess Profits Tax and Business Profits Tax were introduced and their administration handed over to the Department (These were later repealed in 1946 and 1949 respectively). In 1951, the 1st Voluntary Disclosure Scheme was brought in. It was during this period, in 1946, that a few Group 'A' officers were directly recruited. Later on in 1953, the Group 'A' Service was formally constituted as the 'Indian Revenue Service'.

      2.2  This era was characterised by considerable emphasis on development of investigation techniques. In 1947, Taxation on Income (Investigation) Commission was set up which was declared ultra vires by the Supreme Court in 1956 but the necessity of deep investigation had by then been realised. In 1952, the Directorate of Inspection (Investigation) was set up. It was in this year that a new cadre known as Inspectors of Income Tax was created. The increase in 'large income' cases necessitated checking of the work done by departmental officers. Thus in 1954, the Internal Audit Scheme was introduced in the Income-tax Department.

      2.3  As indicated earlier, in 1946, for the first time a few Group A officers were recruited in the department. Training them was important. The new recruits were sent to Bombay and Calcutta where they were trained, though not in an organised manner. In 1957, I.R.S. (Direct Taxes) Staff College started functioning in Nagpur. Today this attached office of the Board functions under a Director-General. It is called the National Academy of Direct Taxes. By 1963, the I.T. department, burdened with the administration of several other Acts like W.T., G.T., E.D., etc., had expanded to such an extent that it was considered necessary to put it under a separate Board. Consequently, the Central Board of Revenue Act, 1963 was passed. The Central Board of Direct Taxes was constituted, under this Act.

      2.4  The developing nature of the economy of the country brought with it both steep rates of taxes and black incomes. In 1965, the Voluntary Disclosure Scheme was brought in followed by the 1975 Disclosure Scheme. Finally, the need for a permanent settlement mechanism resulted in the creation of the Settlement Commission.

      2.5  A very important administrative change occurred during this period. The recovery of arrears of tax which till 1970 was the function of State authorities was passed on to the departmental officers. A whole new wing of Officers - Tax Recovery Officers was created and a new cadre of post of Tax Recovery Commissioners was introduced w.e.f. 1-1-1972.

      2.6  In order to improve the quality of work, in 1977, a new cadre known as IAC (Assessment) and in 1978 another cadre known as CIT (Appeals) were created. The Commissioners' cadre was further reorganised and five posts of Chief Commissioners (Administration) were created in 1981.

      2.7  Tax Reforms : Certain important policy and administrative reforms carried out over the past few years are as follows :-

            (a). The policy reforms include :-

  • Lowering of rates;
  • Withdrawls/reduction of major incentives;
  • introduction of measures for presumptive taxation;
  • simplification of tax laws, particularly relating to capital gains; and
  • widening the tax base.

            (b). The administrative reforms include :-

  • Computerisation involving allotment of a unique identification number to tax payers which is emerging as a unique business identification number; and
  • realignment of the available human resources with the changed business needs of the organisation.

      2.8  Computerisation : Computerisation in the Income-tax Department started with the setting up of the Directorate of Income tax (Systems) in 1981. Initially computerisation of processing of challans was taken up. For this 3 computer centres were first set up in 1984-85 in metropolitan cities using SN-73 systems. This was later extended to 33 major cities by 1989. The computerized activities were subsequently extended to allotment of PAN under the old series, allotment of TAN, and pay roll accounting. These computer centres used batch process with dumb terminals for data entry.

In 1993 a Working Group was set up by the Government to recommend computerisation of the department. Based on the report of the Working Group a comprehensive computerisation plan was approved by the Government in October, 1993. In pursuance of this, Regional Computer Centres were set up in Delhi, Mumbai, and Chennai in 1994-95 with RS6000/59H Servers. PCs were first provided to officers in these cities in phases. The Plan involved networking of all users on LAN/WAN. Network with leased data circuits were accordingly set up in Delhi, Mumbai and Chennai in Phase-I during 1995-96. A National Computer Centre was set up at Delhi in 1996-97. Integrated application software were developed and deployed during 1997-99. Thereafter, RS6000 type mid range servers were provided in the other 33 Computer Centres in various major cities in 1996-97. These were connected to the National Computer Centre through leased lines. PCs were provided to officers of different level upto ITOs in stages between 1997 and 1999. In phase II offices in 57 cities were brought on the network and linked to RCCs and NCC.

2.9  Restructuring of the Income-tax department : The restructuring of the Income-tax Department was approved by the Cabinet in its meeting held on 31-8-2000 to achieve the following objectives :-

  • Increase in effectiveness and productivity;
  • Increase in revenue collection;
  • Improvement in services to tax payers;
  • Reduction in expenditure by downsizing the workforce;
  • Improved career prospects at all levels;
  • Induction of information technology; and
  • Standardization of work norms

The aforementioned objectives have been sought to be achieved by the department through a multi-pronged strategy of :

a. redesigning business processes through functionalisation;

b.  increasing the number of officers to rationalise the span of control for better supervision, control and management of workload and to improve tax-payer services and

c.  re-orient, retrain and redeploy the workforce with appropriate incentives in the form of career advancement.

For year wise major changes in the Income Tax see next file "Important events affecting the administrative set up in the Income-tax department" in this same file section.