TAX LAWS

REFERENCE :

“BUSINESS ENVIRONMENT”

By SHAIKH SALEEM , Chap 8

BECAUSE TAXES INFLUENCE PERSONAL & BUSINESS DECISIONS

BECAUSE COMPLIANCE IS COSTLYRECORD KEEPINGPREPARATION TIME & EFFORTTAX PAYMENTRETURN FILINGFOLLOW UP

WHY STUDY TAX?WHY STUDY TAX?

BECAUSE TAX LAWS INFLUENCE ROUTINE AS WELL AS NEW VENTURE DECISIONSBUYING AND SELLINGFINANCING DECISIONSEMPLOYER DECISIONS

FRINGE BENEFITS DEFERRED COMPENSATION

WHY STUDY TAX?WHY STUDY TAX?

FOR SELF PROTECTIONPENALTIES FOR ERRORS IN PAYING TAXES, AND INCORRECT REPORTING

MISTAKES BY PREPARER OR TAXPAYER

WHY STUDY TAX?WHY STUDY TAX?

WHAT IS THE DEFINITION OF A TAX?

WHAT IS THE DEFINITION OF A TAX?

AN ENFORCED, INVOLUNTARY CONTRIBUTION

REQUIRED AND DETERMINED BY

LAW

PROVIDING REVENUE FOR PUBLIC

AND GOVERNMENTAL PURPOSES

FOR WHICH NO SPECIFIC BENEFITS

OR SERVICES ARE RECEIVED

WHAT IS THE PURPOSE OF A TAX?

REVENUE TO GOVERNMENT

PENALTY FOR IMPORTS

SOCIAL CHANGES

ECONOMIC CHANGES

EQUITY

CITIZEN

BREATHING TAX?SLEEPING TAX?WALKING TAX? TNOT DOING ANYHING TAX?

PROFESSIONAL TAX

ENTERTAINMENT TAX

TOLLTAX

CESSES

ENTRY OCTROITAX

SALES TAX

CUSTOMS DUTIES

EXCISEDUTIES

INCOMETAX

WEALTHTAX

GIFT TAXDEATH

TAX SERVICETAX

LUXURYTAX

CORPNTAX

OVERVIEW ON TYPES OF

TAXES

ORIGIN OF THE WORD “TAX”: TAXARE =TO TOUCH SHARPLY

TYPES OF TAXESTYPES OF TAXESDIRECT & INDIRECT TAXES : A TAX IS A DIRECT TAX IF THE

IMPACT AND INCIDENCE OF THE TAX IS ON THE SAME PERSON,

IT IS INDIRECT TAX IF THEY ARE ON DIFFERENT PERSONS.

EXAMPLES : INCOME TAX , WEALTH TAX , GIFT TAX ARE

IMPORTANT DIRECT TAXES.

TYPES OF TAXESTYPES OF TAXESINDIRECT TAXES :

SALES TAX , EXCISE DUTY , CUSTOMS DUTY, SERVICE TAX, VAT, ARE IMPORTANT INDIRECT TAXES.

TYPES OF TAXESTYPES OF TAXES

INCOME TAXTAXES ARE PAID BY

INDIVIDUALS, CORPORATIONS, ESTATES, AND TRUSTS

TAX BASE IS TOTAL INCOME LESS ALLOWED DEDUCTIONS

INCOME TAX IS GOVERNED BY THE INCOME TAX ACT,1961.

Direct Tax: Corporate Income Tax

Effective Corporate Tax Rate = 30 %

Sur-Charge = 10 %

Education Cess = 3 %

ON

Taxable Profit

After

Depreciation & Interest

Fringe Benefit tax – Sec 115 WThe fringe are benefits enjoyed by employees at the cost of employer

These are taxed to Employer full or at concessional rate

Free tickets, Equity shares, Contribution to superannuation fund, etc. (100% taxed)

Conveyance, Telephones, Club, Tour & travel, Sales promotion, etc.

(20/50% taxed)

Other Taxes on CorporatesDividend Distribution Tax :

15% +10% SC +3% Cess (16.995%)

Wealth Tax : @1% on Net Wealth as on 31st March each year exceeding Rs.15 lac

WT not payable on assets used in business

Works Contract Tax: 1% on Building construction works

RETURN FILING REQUIREMENTSRETURN FILING REQUIREMENTS

A TAX RETURN MUST BE FILED ANNUALLY FOR ASSESSMENT OF TAX IN PRESCRIBED RETURN FORMS EACH YEAR BY ASSESSEE

NOW RETURNS CAN BE FILED ONLINE.

PAN,TAN,REBATES,SURCHARGE, SET OFF OF LOSSES,TAX HOLIDAY, TAXATION OF FOREIGN INCOME etc.

ASSESSMENTASSESSMENT

CORRESPONDENCE EXAMINATIONS

OFFICE EXAMINATIONS

FIELD EXAMINATIONS

REFUNDS, DEMANDS

REVISIONS

ASSESSMENT AND APPEALS PROCESSASSESSMENT AND APPEALS PROCESS

SETTLEMENT APPEALSMEETING WITH IRS OFFICERSA CASE MAY BE FILED WITH TAX

TRIBUNALS.

TAX PLANNINGTAX PLANNING

GOAL IS TO MAXIMIZE AFTER -TAX WEALTH

TAX PLANNING : TIMINGTAX PLANNING : TIMINGTIME VALUE OF MONEYDEFER INCOMEACCELERATE DEDUCTIONS

MARGINAL TAX RATERECOGNIZE INCOME IN YEAR OF

LOWER MARGINAL RATERECOGNIZE DEDUCTIONS IN YEAR OF

HIGHER MARGINAL RATESHIFT INCOME TO TAXPAYER WITH

LOWER MARGINAL RATE

TAX PLANNING:TAX AVOIDANCE VS. TAX

EVASION

TAX PLANNING:TAX AVOIDANCE VS. TAX

EVASIONTAX AVOIDANCE - TAXPAYERS HAVE NO OBLIGATION TO PAY MORE TAX THAN THE LAW REQUIRES

TAX EVASION - TAXPAYERS MAY NOT USE FRAUDULENT OR DECEPTIVE BEHAVIOR TO HIDE TAX LIABILITY

ETHICS ETHICS

TAXPAYERS ARE SUBJECT TO PENALTIES FOR NOT PAYING TAXES AND NOT FILING RETURNS TIMELY , AND FOR ANY NEGLIGENCE OR FRAUD.IGNORANCE OF LAW IS NO EXCUSE.

INDIAN INDIRECT TAXATION : AN OVERVIEW

INDIRECT TAXES CAN BE ON GOODS OR “NON-GOODS”

# CUSTOMS DUTY

GOODS

ON GOODS IMPORTED/EXPORTED

#EXCISE DUTY

ON GOODS PRODUCED OR MANUFACTURED

From and to outside“INDIA”

IN INDIA

INDIRECT TAXES• TAX EVENT ATTRACTING TAX

IMPORTOR

EXPORTCUSTOMS

CENTRALEXCISE

PRODUCTION/MANFACTURE

OF GOODS

SALESTAX

SALE OR PURCHASEOF GOODS

INDIRECT TAXESON GOODS PURCHASEDOR SOLD (INCLUDING DEEMED SALE)

SALES TAX

ENTRY TAX/OCTROI

ON GOODS ENTERING AN AREA FOR

CONSUMPTION, USE,TRADE

INDIRECT TAXES

> SERVICE TAX ON RENDERING OFSPECIFIED SERVICES

ON NON GOODS :

ENTERTAINMENT TAX

ON DIFFERENT TYPES OFENTERTAINMENT AND LEISURE

ACTIVITIES

> LUXURY TAXHOTELS, RESORTS AND

OTHERLUXURY PLACES

CENTRAL EXCISE DUTYCENTRAL EXCISE DUTYEXCISE IS PRINCIPAL SOURCE OF REVENUE FOR CENTRAL GOVT.EXCISE IS LEVIABLE ON ALL GOODS(OTHER THAN SALT) PRODUCED IN INDIA.TWO TYPES:1. SPECIFIC ,AND

2. AD VALOREM

CENTRAL EXCISE DUTYCENTRAL EXCISE DUTYTHE MODVAT SCHEME ESSENTIALLY ENABLES MANUFACTURERS OF EXCISABLE GOODS TO REDUCE THE FINAL FINAL BURDEN OF EXCISE DUTY BY CLAIMING CREDIT FOR THE EXCISE DUTY PAID ON RAW MATERIALS,COMPONENTS etc.

CUSTOMS DUTYCUSTOMS DUTYCUSTOMS DUTY IS LEVIED BY CENTRAL GOVERNMENT ON IMPORT OR EXPORT OF GOODS.THE RATES OF DUTY IS SPECIFIED UNDER THE CUSTOMS TARIFF ACT 1975,AND FOLLOWS A CODING SYSTEM.

CUSTOMS DUTYCUSTOMS DUTYTHE GOVT IS EMPOWERED UNDER THE ACT TO NOTIFY BAN ON IMPORT OR EXPORT OF CERTAIN GOODS.

IF CUSTOM IS CHARGED AD VALOREM , IT IS CHARGED AT PREVAILING INTERNATIONAL PRICES.

SALES TAXSALES TAXMAJOR SOURCE OF REVENUE FOR STATE GOVT.

CST ON INTERSTATE TRADE AS PER CENTRAL SALES TAX ACT 1956 AS STATES CANNOT IMPOSE SALES TAX ON INTERSTATE TRADE.

V.A.T.

WHAT IS V.A.T. ANDWHAT IT IS NOT

VALUE ADDED TAXA METHOD TO ELIMINATE DOUBLE TAXATION ON THE SAME TRANSACTION

THIS IS NOTVAT !#*&*

VAT : CHARECTERISTICS

MULTIPOINT TAXATION: TAX AT EVERY POINT OF SALE

EFFECTIVE TAX AT EVERY POINT OF SALE: ONLY ON THE VALUE ADDITION AT EACH POINT OF SALE

METHODOLOGY ADOPTED IS BY A SYSTEM OFOFFERING CREDIT OF TAX TO THE BUYER . HE USES THIS FOR PAYING TAX ON HIS SALES

PURCHASED SOLD

DESTINATION BASED. ENTIRE BURDEN ON CONSUMER

VAT :CLARITY OF ISSUES

WHAT IS <VALUE ADDITION>

VALUE ADDITIONWITHOUT ANY CHANGEIN THE PRODUCT

EG: TRADING OR RESALE

VALUE ADDITIONRESULTING IN A NEW PRODUCT

EG: MANUFACTUREOF NEW GOODSFROM OTHER GOODS

WE MAKETASTY FOOD

CAR DEALER

FINANCIAL REGULATION IN INDIA

REFERENCES

•“INDIAN FINANCIAL SYSTEM”

•by: •1) H. R. Machiraju•2) M.Y. Khan •3) Bharati Pathak

Financial System in India • Financial Sector consists of three

main segments :• 1) Financial markets - money

market, debt market, capital market,

forex market• 2) Financial institutions - banks,

mutual funds, insurance companies

• 3) Financial products - loans, deposits, bonds, equities

Types of Financial MarketsTypes of Financial Markets

Types of Financial MarketsTypes of Financial MarketsTypes of Financial Markets

Types of Financial MarketsCapital Market

Money Market

Forex Market

EquityDebt

RetailCorporateBanksFIFIIs

T-BillsCall MoneyICD, CP, CD

BanksCorporateFI, FIIs

SpotsForwards

BanksCorporateFI, FIIs

AgricultureProduces,Metals,Financialfutures likeInterest rate,currency,indices etc

Banks, FIsCorporate

DerivativesMarket

GOIMinistry of Finance

RBISEBI

Depositories Companies

BrokerDealers

ClearingCorporations

StockExchanges

MutualFunds

Banks

Registrar of Companies

MerchantBankers

Registrar &TransferAgents

PrimaryDealers

GOIDept of Co. Affairs

DepositoryParticipants

Structure of Indian Financial Markets GOI

Ministry of Finance

RBISEBI

Depositories Companies

BrokerDealers

ClearingCorporations

StockExchanges

MutualFunds

Banks

Registrar of Companies

MerchantBankers

Registrar &TransferAgents

PrimaryDealers

GOIDept of Co.

Affairs

DepositoryParticipants

Structure of Indian Financial System

Scams, scams, and more scams…. Murarka Finance, 1987 Mazda Leasing and Mehta, April

1992 Morgan Stanley Mutual Fund, April

1994 tMt = TNT, 1999 – 2000 Mastershare and UTI 1988 – 2002 ?? ????????? Scams, scams, and more scams….

Greed: Two hands to clap! The financial “services” industry

wishes to make quick money, Investors wish to make “quick”

profits, Greed on both sides No investment, but speculation! The regulator comes into picture!

Financial Sector Regulators

Regulators

Reserve Bank of India(RBI)

Securities & Exchange

Board of India(SEBI)

Insurance Regulatory

and DevelopmentAuthority

(IRDA)

BanksCapital Markets/

Mutual FundsInsurance Companies

Banking in India

Legal frameworkof

Banks

Banking Regulation

Act,1949

Reserve Bank of

India Act,1934

Banking in India - Banking in India is governed by BR Act, 1949 and RBI Act, 1934 - Banking in India is monitored &

controlled by RBI and Govt of India - Controls for different banks are

different based on whether the bank is

a) a statutory corporation b) a banking company c) a cooperative society

Reserve Bank of India

CENTRAL BANK

RBI

REGULATOR SUPERVISOR FACILITATOR

RESERVE BANK OF INDIA

SUPERVISORY & REGLATORYIssuance of currency notesBanker’s BankerLender of the last resortCredit Control & Monetary PolicyExchange Control & Forex

ManagementFunds Transfer

Money Market Instruments• Inter bank call money/deposit• Inter bank notice

money/deposit• Inter bank term money/deposit• Certificates of Deposit• Commercial Paper• Treasury Bills• Bill rediscounting• Repos

INDIAN CAPITAL MARKET

• Indian Capital Market plays an important role in the economic development of the country

• It provides opportunities for investors to invest in the market and also to earn attractive rate of return.

• It also creates source of funds for the various sectors

• National Stock Exchange (NSE) and Bombay Stock Exchange (BSE) are the major stock exchanges in India

Securities & Exchange Board of India (SEBI)

• SEBI was constituted in 1988, and obtained the statutory powers in March,1992

• SEBI’s functions:• To protect the interests of investors• To recognize the business in stock

exchanges and other security markets• To supervise and regulate work of

intermediaries, such as stock brokers merchant bankers / custodians / credit

raters depositories / bankers to the issues

SIGNIFICANT DEVELOPMENTS

•SYSTEMICTransparent IPO Process

World Class Disclosure Standards

Principle Based Accounting Standards

Corporate Governance Norms

Regulatory Framework• Regulations concerning issues and issuers • Regulations concerning investors• Regulations concerning securities of all types • Regulations concerning Stock Exchanges or

securities markets : primary & secondary markets, and market processes ,

• Regulations concerned with Brokers,dealers and agents

• Regulations concerned with service providers such as Depositories, Credit rating agencies , Clearing houses , underwriters , registrars , lead managers , banks etc.

• Clearing Corporation Bye-Laws• Listing regulations• Regulations on corporate governance , etc….

Legislative Framework• Securities and Exchange Board of India Act,

1992– Rules made by the Government of India – Regulations made by SEBI– Securities Contracts (Regulation) Act, 1956

• Securities Contracts (Regulation) Rules, 1957• Depositories Act, 1996• Stock Exchange Bye-Laws• Depository Bye-Laws• Clearing Corporation Bye-Laws• Listing Agreements with Stock Exchanges• Companies Act, 1956

Penal Framework•Four-pronged penal framework :–Directions in investor interest –Enquiry Proceedings–Adjudication Proceedings–Criminal Prosecution

•Each course without prejudice to the others

•Action under Companies Act, 1956

Appellate Structure• Any order passed by SEBI is

appealable • Consent orders not appealable• Appeal from SAT lies directly

in the Supreme Court – only questions of law

• Jurisdiction of civil courts entirely barred

• Writ jurisdiction of High Courts rarely used

SEBI LAW• Implementation of revised Clause 49 :

– Independent Directors– Subsidiary Monitoring– Shareholders’ Prior approval for compensation / stock options to NEDs– Audit Committee – Eligibility Criteria,

mandatory review etc.– Statutory Compliance Review– Risk Management Procedure– Code of Conduct for Directors & Sr

Management– CEO and CFO Certification– Non-Mandatory : Term of Independent

Directors

SEBI Law• SEBI Press Release (no. 108/2005

dated August 26, 2005) on Minimum Public Shareholding – All listed companies to maintain at

least 25% shareholding with public for continuous listing. However, companies permitted to make an IPO of atleast 10% to public under Rule 19(2)(b) to maintain min. 10% only

– Listed companies, not complying with the min. public holding requirement to be given a period of 2 years for compliance

– Government companies, infrastructure companies and companies registered with BIFR to be exempted

SEBI Law•Review of Demat Charges :

– Effective 9-1-2006, no charges will be levied by a depository on a DP and by a DP on a Beneficiary Owner (BO) when a BO transfers his account to another branch of the same DP or to another DP of the same depository or another depository.

– SEBI had already waived the following charges effective February 1, 2005 –•charge towards opening of a BO Account

except for applicable statutory charges •charge for credit of securities into BO

Account •custody charge

SEBI Law• SEBI Press Release dated Dec 30, 2005

– Public issue refunds through Electronic Clearing Scheme (ECS)

– Introduction of optional grading of IPOs by credit rating agencies

– Rationalizing disclosure requirements for further public offers and rights issues

– Common platform for electronic filing and dissemination of corporate information

– Amendment to Takeover Regulations – Amendment to SEBI (Delisting of Securities)

Guidelines

Association of Mutual Funds in India (AMFI)• AMFI is an association as a non

profit organization.• AMFI represents mutual funds

in India and working for healthy growth of the Mutual Funds.

• AMFI conduct examinations for MF executives as part of their training

activities

Insurance Regulatory & Development Authority (IRDA)

• The regulator for insurance business in India is IRDA .

• IRDA was established in 2000 .• IRDA’s functions :• To regulate, promote and ensure

orderly growth of the insurance business and reinsurance business in India .

• To protect the interests of policy holders .

QUESTIONS ?QUESTIONS ?

THANK YOU