CU-MBA-SEM-III-Tax Planning and Management- Second Draft-converted

MASTER OF BUSINESS ADMINISTRATION SEMESTER III TAX PLANNING AND MANAGEMENT MBA503

CHANDIGARH UNIVERSITY Institute of Distance and Online Learning Course Development Committee Prof. (Dr.) R.S.Bawa Pro Chancellor, Chandigarh University, Gharuan, Punjab Advisors Prof. (Dr.) Bharat Bhushan, Director – IGNOU Prof. (Dr.) Majulika Srivastava, Director – CIQA, IGNOU Programme Coordinators & Editing Team Master of Business Administration (MBA) Bachelor of Business Administration (BBA) Coordinator – Dr. Rupali Arora Coordinator – Dr. Simran Jewandah Master of Computer Applications (MCA) Bachelor of Computer Applications (BCA) Coordinator – Dr. Raju Kumar Coordinator – Dr. Manisha Malhotra Master of Commerce (M.Com.) Bachelor of Commerce (B.Com.) Coordinator – Dr. Aman Jindal Coordinator – Dr. Minakshi Garg Master of Arts (Psychology) Bachelor of Science (Travel &Tourism Management) Coordinator – Dr. Samerjeet Kaur Coordinator – Dr. Shikha Sharma Master of Arts (English) Bachelor of Arts (General) Coordinator – Dr. Ashita Chadha Coordinator – Ms. Neeraj Gohlan Academic and Administrative Management Prof. (Dr.) R. M. Bhagat Prof. (Dr.) S.S. Sehgal Executive Director – Sciences Registrar Prof. (Dr.) Manaswini Acharya Prof. (Dr.) Gurpreet Singh Executive Director – Liberal Arts Director – IDOL © No part of this publication should be reproduced, stored in a retrieval system, or transmitted in any form or by any means, electronic, mechanical, photocopying, recording and/or otherwise without the prior written permission of the authors and the publisher. SLM SPECIALLY PREPARED FOR CU IDOL STUDENTS Printed and Published by: TeamLease Edtech Limited www.teamleaseedtech.com CONTACT NO:- 01133002345 For: CHANDIGARH UNIVERSITY 2 Institute of Distance and Online Learning CU IDOL SELF LEARNING MATERIAL (SLM)

First Published in 2021 All rights reserved. No Part of this book may be reproduced or transmitted, in any form or by any means, without permission in writing from Chandigarh University. Any person who does any unauthorized act in relation to this book may be liable to criminal prosecution and civil claims for damages. This book is meant for educational and learning purpose. The authors of the book has/have taken all reasonable care to ensure that the contents of the book do not violate any existing copyright or other intellectual property rights of any person in any manner whatsoever. In the event the Authors has/ have been unable to track any source and if any copyright has been inadvertently infringed, please notify the publisher in writing for corrective action. 3 CU IDOL SELF LEARNING MATERIAL (SLM)

CONTENTS Unit 1: Basics Of Taxes .............................................................................................................5 Unit 2: Basics Of Taxes ...........................................................................................................35 Unit 3: Tax Planning................................................................................................................53 Unit 4: Methods Of Tax Planning............................................................................................60 Unit 5: Companies And Taxes.................................................................................................67 Unit 6: Companies And Taxes.................................................................................................94 Unit 7: Areas Of Tax Planning ..............................................................................................128 Unit 8: Tax Planning And Financial Management ................................................................148 Unit 9: Financial Management...............................................................................................157 Unit 10: Business And Tax Planning.....................................................................................168 Unit 11: Special Provisions....................................................................................................180 Unit 12: Taxation Of Non-Residents .....................................................................................195 Unit 13: Deduction Of Tax At Source ...................................................................................201 4 CU IDOL SELF LEARNING MATERIAL (SLM)

UNIT 1: BASICS OF TAXES Structure 1.0 Learning Objectives 1.1 Introduction 1.2 Overview of Income-tax law in India 1.3 Levy of Income-tax 1.4 Goods and Service Tax 1.5 Concept of GST 1.6 Taxes Subsumed in GST 1.7 Summary 1.8 Keywords 1.9 Learning Activity 1.10 Unit End Questions 1.11 References 1.0 LEARNING OBJECTIVES After studying this unit, you will be able to: • Appreciate the components of Income-tax Law • Outline the procedure for computation of total income for the purpose of levy of income-tax • Explain the concept of GST • State the various benefits to be accrued from implementation of GST 1.1 INTRODUCTION Taxes are levied by the Governments to meet the common welfare expenditure of the society. There are two types of taxes - direct taxes and indirect taxes. Direct Taxes: If tax is levied directly on the income or wealth of a person, then, it is a direct tax. The person who pays the tax to the Government cannot recover it from somebody else i.e., the burden of a direct tax cannot be shifted. e.g., Income tax. Indirect Taxes: If tax is levied on the price of a good or service, then, it is an indirect tax e.g., Goods and Services Tax (GST) or Custom Duty. In the case of indirect taxes, the person paying the tax passes on the incidence to another person. Why are taxes Levied? 5 CU IDOL SELF LEARNING MATERIAL (SLM)

The reason for levy of taxes is that they constitute the basic source of revenue to the Government. Revenue so raised is utilized for meeting the expenses of Government like defence, provision of education, health-care, infrastructure facilities like roads, dams etc. Power to levy taxes The Constitution of India, in Article 265 lays down that “No tax shall be levied or collected except by authority of law.” Accordingly, for levy of any tax, a law needs to be framed by the government. Constitution of India gives the power to levy and collect taxes, whether direct or indirect, to the Central and State Government. The Parliament and State Legislatures are empowered to make laws on the matters enumerated in the Seventh Schedule by virtue of Article 246 of the Constitution of India. Seventh Schedule to Article 246 contains three lists which enumerate the matters under which the Parliament and the State Legislatures have the authority to make laws for the purpose of levy of taxes. The following are the lists: (i) Union List: Parliament has the exclusive power to make laws on the matters contained in Union List. (ii) State List: The Legislatures of any State has the exclusive power to make laws on the matters contained in the State List. (iii) Concurrent List: Both Parliament and State Legislatures have the power to make laws on the matters contained in the Concurrent list. Income-tax is the most significant direct tax. Entry 82 of the Union List i.e., List I in the Seventh Schedule to Article 246 of the Constitution of India has given the power to the Parliament to make laws on taxes on income other than agricultural income 1.2 OVERVIEW OF INCOME-TAX LAW IN INDIA The income-tax law in India consists of the following components – 1. Income Tax Act 2. Annual Finance Act 3. Income Tax Rules 4. Circulars/ Notifications 5. Legal decisions of courts The various instruments of law containing the law relating to income-tax are explained below: Income-tax Act, 1961 6 CU IDOL SELF LEARNING MATERIAL (SLM)

The levy of income-tax in India is governed by the Income-tax Act, 1961. In this book, we shall briefly refer to this as the Act. • It extends to the whole of India. • It came into force on 1 st April, 1962. • It contains sections 1 to 298 and schedules I to XIV. A section may have sub-sections or clauses and sub-clauses. When each part of the section is independent of each other and one is not related with other, such parts are called a “Clause”. “Sub section”, on the other hand refers to such parts of a section where each part is related with other and all sub sections taken together completes the concept propounded in that section. Example 1 • the clauses of section 2 define the meaning of terms used in the Income-tax Act, 1961. Clause (1A) defines “agricultural income”, clause (1B) defines “amalgamation” and so on. Each one of them is independent of other clause of the same section. • Likewise, the clauses of section 10 contain the exemptions in respect of certain income, like clause (1) provides for exemption of agricultural income and clause (2) provides for exemption of share income of a member of a Hindu undivided family and so on. • Section 5 defining the scope of total income has two subsections (1) and (2). Sub-section (1) defines the scope of total income of a resident and sub-section (2) defines the scope of total income of a non-resident. Each sub section is related with the other in the sense that only when one reads them all, one gets the complete idea related with scope of total income. A section may also have Provisos and Explanations. The Proviso(s) to a section/sub-section/clause spells out the exception(s)/condition(s) to the provision contained in the respective section/sub-section/clause, i.e., the proviso spells out the cases where the provision contained in the respective section/sub-section/clause would not apply or where the provision would apply with certain modification. The Explanation to a section/sub-section/clause gives a clarification relating to the provision contained in the respective section/sub-section/clause. Example 2 • Sections 80GGB and 80GGC provides for deduction from gross total income in respect of contributions made by companies and other persons, respectively, to political parties or an electoral trust. 7 CU IDOL SELF LEARNING MATERIAL (SLM)

• The proviso to sections 80GGB and 80GGC provides that no deduction shall be allowed under those sections in respect of any sum contributed by cash to political parties or an electoral trust. Thus, the provisos to these sections spell out the circumstance when deduction would not be available thereunder in respect of contributions made. • The Explanation below section 80GGC provides that for the purposes of sections 80GGB and 80GGC, “political party” means a political party registered under section 29A of the Representation of the People Act, 1951. Thus, the Explanation clarifies that the political party has to be a registered political party. The Income-tax Act, 1961 undergoes change every year with additions and changes brought in by the Annual Finance Act passed by Parliament. Sometimes, legislative amendments are made for amending the provisions of the Income-tax Act, 1961 through legislations like Taxation Laws (Amendment) Act, 2019. The Finance Act Every year, the Finance Minister of the Government of India introduces the Finance Bill in the Parliament’s Budget Session. When the Finance Bill is passed by both the houses of the Parliament and gets the assent of the President, it becomes the Finance Act. Amendments are made every year to the Income-tax Act, 1961 and other tax laws by the Finance Act. The First Schedule to the Finance Act contains four parts which specify the rates of tax – • Part I of the First Schedule to the Finance Act specifies the rates of tax applicable for the current Assessment Year. Accordingly, Part I of the First Schedule to the Finance Act, 2020 specifies the rates of tax for A.Y. 2020-21. • Part II specifies the rates at which tax is deductible at source for the current Financial Year. Accordingly, Part II of the First Schedule to the Finance Act, 2020 specifies the rates at which tax is deductible at source for F.Y. 2020-21 • Part III gives the rates for calculating income-tax for deducting tax from income chargeable under the head “Salaries” and computation of advance tax. • Part IV gives the rules for computing net agricultural income. Income-tax Rules, 1962 The administration of direct taxes is looked after by the Central Board of Direct Taxes (CBDT). • The CBDT is empowered to make rules for carrying out the purposes of the Act. • For the proper administration of the Income-tax Act, 1961, the CBDT frames rules from time to time. These rules are collectively called Income-tax Rules, 1962. • Rules also have sub-rules, provisos and Explanations. The proviso to a Rule/Sub-rule spells out the exception to the limits, conditions, guidelines, basis of valuation, as the case may be, spelt out in the Rule/Sub-rule. The Explanation gives clarification for the purposes of the Rule. 8 CU IDOL SELF LEARNING MATERIAL (SLM)

• It is important to keep in mind that along with the Income-tax Act, 1961, these rules should also be studied. Circulars and Notifications Circulars • Circulars are issued by the CBDT from time to time to deal with certain specific problems and to clarify doubts regarding the scope and meaning of certain provisions of the Act. • Circulars are issued for the guidance of the officers and/or assessees. • The department is bound by the circulars. While such circulars are not binding on the assessees, they can take advantage of beneficial circulars. Notifications Notifications are issued by the Central Government to give effect to the provisions of the Act. The CBDT is also empowered to make and amend rules for the purposes of the Act by issue of notifications which are binding on both department and assessees. Case Laws Case Laws refer to decision given by courts. The study of case laws is an important and unavoidable part of the study of Income-tax law. It is not possible for Parliament to conceive and provide for all possible issues that may arise in the implementation of any Act. Hence the judiciary will hear the disputes between the assessees and the department and give decisions on various issues. The Supreme Court is the Apex Court of the Country and the law laid down by the Supreme Court is the law of the land. The decisions given by various High Courts will apply in the respective states in which such High Courts have jurisdiction. 1.3 LEVY OF INCOME-TAX Income-tax is a tax levied on the total income of the previous year of every person [Section 4]. A person includes an individual, Hindu Undivided Family (HUF), Association of Persons (AOP), Body of Individuals (BOI), a firm, a company etc. (1) Total Income and Tax Payable Income-tax is levied on an assessee’s total income. Such total income has to be computed as per the provisions contained in the Income-tax Act, 1961. Let us go step by step to understand the procedure for computation of total income of an individual for the purpose of levy of income-tax – 9 CU IDOL SELF LEARNING MATERIAL (SLM)

Step 1 – Determination of residential status The residential status of a person has to be determined to ascertain which income is to be included in computing the total income. The residential status as per the Income-tax Act, 1961 can be classified as under – In the case of an individual, the duration for which he is present in India determines his residential status. Based on the time spent by him, he may be (a) resident and ordinarily resident, (b) resident but not ordinarily resident, or (c) non-resident. The residential status of a person determines the taxability of the income. For e.g., income earned and received outside India will not be taxable in the hands of a non-resident but will be taxable in case of a resident and ordinarily resident. A deemed resident (concept introduced by the Finance Act, 2020) is always a resident but not ordinarily resident in India. Step 2 – Classification of income under different heads A person may earn income from different sources. For example, a salaried person earns income by way of salary. He also gets interest from bank savings account/fixed deposit. Apart from this, if he has invested in shares, he would be getting dividend and when he sells these shares, he may earn profit on such sale. If he owns a residential property which he has let out, he would earn rental income. Under the Income-tax Act, 1961, for computation of total income, all income of a tax payer is classified into five different heads of income. There is a charging section under each head of income which defines the scope of income chargeable under that head. These heads of income exhaust all possible types of income that can accrue to or be received by the tax payer. Accordingly, income earned is classified as follows: 1. Salary, pension earned is taxable under the head “Salaries”. 2. Rental income is taxable under the head “Income from house property”. 3. Income derived from carrying on any business or profession is taxable under the head “Profits and gains from business or profession”. 4. Profit from sale of a capital asset (like land) is taxable under the head “Capital Gains”. 5. The fifth head of income is the residuary head. Income which is chargeable to tax but not taxable under the first four heads will be taxed under the head “Income from other sources”. The tax payer has to classify the income earned under the relevant head of income. 10 CU IDOL SELF LEARNING MATERIAL (SLM)

Step 3– Computation of income under each head Income is to be computed in accordance with the provisions governing a particular head of income. Exemptions: There are certain incomes which are wholly exempt from income-tax e.g., agricultural income. These incomes have to be excluded and will not form part of Total Income. Also, some incomes are partially exempt from income-tax e.g., House Rent Allowance, Education Allowance. These incomes are excluded only to the extent of the limits specified in the Act. The balance income over and above the prescribed exemption limits would enter computation of total income and have to be classified under the relevant head of income. Deductions: There are deductions and allowances prescribed under each head of income. For example, while calculating income from house property, municipal taxes and interest on loan are allowed as deduction. Similarly, deductions and allowances are prescribed under other heads of income. These deductions etc. have to be considered before arriving at the net income chargeable under each head. Step 4 – Clubbing of income of spouse, minor child etc. In case of individuals, income-tax is levied on a slab system on the total income. The tax system is progressive i.e., as the income increases, the applicable rate of tax increases. Some taxpayers in the higher income bracket have a tendency to divert some portion of their income to their spouse, minor child etc. to minimize their tax burden. In order to prevent such tax avoidance, clubbing provisions have been incorporated in the Act, under which income arising to certain persons (like spouse, minor child etc.) have to be included in the income of the person who has diverted his income for the purpose of computing tax liability. Step 5 – Set-off or carry forward and set-off of losses An assessee may have different sources of income under the same head of income. He may have profit from one source and loss from the other. For instance, an assessee may have profit from his textile business and loss from his printing business. This loss can be set-off against the profits of textile business to arrive at the net income chargeable under the head “Profits and gains of business or profession”. 11 CU IDOL SELF LEARNING MATERIAL (SLM)

Similarly, an assessee can have loss under one head of income, say, Income from house property and profits under another heads of income, say, profits and gains of business or profession. There are provisions in the Income-tax Act, 1961 for allowing inter-head adjustment in certain cases. However, there are also restrictions in certain cases, like business loss is not allowed to be set-off against salary income. Further, losses which cannot be set-off in the current year due to inadequacy of eligible profits can be carried forward for set-off in the subsequent years as per the provisions contained in the Act. Generally, brought forward losses under a particular head cannot be set-off against income under another head i.e., brought forward business loss cannot be set-off against income from house property of the current year. Step 6 – Computation of Gross Total Income The final figures of income or loss under each head of income, after allowing the deductions, allowances and other adjustments, are then aggregated, after giving effect to the provisions for clubbing of income and set-off and carry forward of losses, to arrive at the gross total income. Step 7 – Deductions from Gross Total Income There are deductions prescribed from Gross Total Income. These deductions are of following types – 1. Deductions in respect of certain payments E.g., Life Insurance Premium paid, Contribution to Provident Fund/ Pension Fund, Medical insurance premium paid, Payment of interest on loan taken for higher education etc. 2. Deductions in respect of certain incomes E.g., Employment of new employees, Royalty income etc. of authors of certain books other than text books, Royalty on patents etc. 3. Deductions in respect of other income E.g., Interest on deposits in saving account, Interest on deposits in case of senior citizens 4. Other deductions E.g., Deduction in case of a person with disability. Step 8 – Total income 12 CU IDOL SELF LEARNING MATERIAL (SLM)

The income arrived at, after claiming the above deductions from the Gross Total Income is known as the Total Income. It should be rounded off to the nearest multiple of ₹ 10 as per section 288A. Step 9 – Application of the rates of tax on the total income The rates of tax for the different classes of assessees are prescribed by the Annual Finance Act. For individuals, HUF etc., there is a slab rate and basic exemption limit. At present, the basic exemption limit is ₹ 2,50,000 for individuals. This means that no tax is payable by individuals with total income of up to ₹ 2,50,000. Those individuals whose total income is more than ₹ 2,50,000 but less than ₹ 5,00,000 have to pay tax on their total income in excess of ₹ 2,50,000 @5%. However, resident individuals in this slab enjoy rebate of lower of ₹ 12,500 or tax payable under section 87A. Total income between ₹ 5,00,000 and ₹ 10,00,000 attracts tax @20%. The highest rate is 30%, which is attracted in respect of income in excess of ₹ 10,00,000. However, new section 115BAC provides an option for concessional slab rates to individual and HUF subject to certain conditions. The tax rates have to be applied on the total income to arrive at the income-tax liability. For certain special Income (like Long Term Capital Gains, Lottery Income, Specified Short Term Capital Gains etc.), slab rates are not applicable. These incomes are taxable at special rates of taxation. While slab rates are given in Annual Finance Act, special rates are contained in the Income-tax Act itself. Step 10 - Surcharge / Rebate under section 87A Surcharge: Surcharge is an additional tax payable over and above the income-tax. Surcharge is levied as a percentage of income-tax, where total income exceeds ₹ 50 lakhs. The rates of surcharge applicable for different slabs of total income are discussed later on in this chapter. Rebate under section 87A: In order to provide tax relief to the individual tax payers who are in the 5% tax slab, section 87A provides a rebate from the tax payable by an assessee, being an individual resident in India, whose total income does not exceed ₹ 5,00,000. The rebate shall be equal to the amount of income tax payable on the total income for any assessment year or an amount of ₹ 12,500, whichever is less. Step 11 – Health and education cess on income-tax 13 CU IDOL SELF LEARNING MATERIAL (SLM)

The income-tax, as increased by the surcharge or as reduced by the rebate under section 87A, if applicable, is to be further increased by an additional surcharge called health and education cess on income-tax @4% of income-tax plus surcharge, if applicable. Step 12 – Advance tax and tax deducted at source Although the tax liability of an assessee is determined only at the end of the year, tax is required to be paid in advance in four instalments on the basis of estimated income i.e., on or before 15th June, 15th September, 15th December and 15th March. However, residents opting for presumptive taxation scheme can pay advance tax in one instalment on or before 15th March instead of four instalments. In certain cases, tax is required to be deducted at source from the income by the payer at the rates prescribed in the Income-tax Act, 1961 or the Annual Finance Act. Such deduction should be made either at the time of accrual or at the time of payment, as prescribed by the Act. Example 3: In the case of salary income, the obligation of the employer to deduct tax at source arises only at the time of payment of salary to the employees. However, in respect of other payments like, fees for professional services, fees for technical services, interest payable to residents, the person responsible for paying is liable to deduct tax at source at the time of credit of such income to the accounts of the payee or at the time of payment, whichever is earlier. Such tax deducted at source has to be remitted to the credit of the Central Government through any branch of the RBI, SBI or any authorized bank within the statutory due dates. Step 13: Tax Payable/Tax Refundable After adjusting the advance tax and tax deducted at source, the assessee would arrive at the amount of net tax payable or refundable. Such amount should be rounded off to the nearest multiple of ₹ 10 as per section 288B. The assessee has to pay the amount of tax payable (called self-assessment tax) on or before the due date of filing of the return. Similarly, if any refund is due, assessee will get the same after filing the return of income. (2) Return of Income The Income-tax Act, 1961 contains provisions for filing of return of income. Return of income is the format in which the assessee furnishes information as to his total income and tax payable. The format for filing of returns by different assessees is notified by the CBDT. The particulars of income earned under different heads, gross total income, deductions from gross total income, total income and tax payable by the assessee are required to be furnished 14 CU IDOL SELF LEARNING MATERIAL (SLM)

in the return of income. In short, a return of income is the declaration of income by the assessee in the prescribed format. The Act has prescribed due dates for filing return of income in case of different assessees. Companies and firms have to mandatorily file their return of income before the due date. Other assessees are required to file a return of income subject to fulfilling of certain conditions. 1.4 GOODS AND SERVICE TAX Genesis of GST In India In the year 2000, the then Prime Minister mooted the concept of GST and set up a committee to design a Goods and Services Tax (GST) model for the country. In 2003, the Central Government formed a task force on Fiscal Responsibility and Budget Management, which in 2004 strongly recommended fully integrated ‘GST’ on national basis. Subsequently, the then Union Finance Minister, Shri P. Chidambaram, while presenting the Union Budget (2006-2007), announced that GST would be introduced from April 1, 2010. Since then, GST missed several deadlines and continued to be shrouded by the clouds of uncertainty. The talks of ushering in GST, however, gained momentum in the year 2014 when the NDA Government tabled the Constitution (122nd Amendment) Bill, 2014 on GST in the Parliament on 19th December, 2014. The Lok Sabha passed the Bill on 6th May, 2015 and Rajya Sabha on 3rd August, 2016. Subsequent to ratification of the Bill by more than 50% of the States, Constitution (122nd Amendment) Bill, 2014 received the assent of the President on 8th September, 2016 and became the Constitution (101st Amendment) Act, 2016, which paved the way for introduction of GST in India. In the following year, on 27th March, 2017, the Central GST legislations - Central Goods and Services Tax Bill, 2017, Integrated Goods and Services Tax Bill, 2017, Union Territory Goods and Services Tax Bill, 2017 and Goods and Services Tax (Compensation to States) Bill, 2017 were introduced in Lok Sabha. Lok Sabha passed these bills on 29th March, 2017 and with the receipt of the President’s assent on 12th April, 2017, the Bills were enacted. The enactment of the Central Acts was followed by the enactment of the State GST laws by various State Legislatures. Telangana, Rajasthan, Chhattisgarh, Punjab, Goa and Bihar were among the first ones to pass their respective State GST laws. By 30th June, 2017, all States and Union Territories had passed their respective SGST and UTGST Acts except Jammu and Kashmir. With effect from 1st July, 2017, the historic indirect tax reform – GST was introduced. GST law was extended to Jammu and Kashmir on 8th July, 2017. 15 CU IDOL SELF LEARNING MATERIAL (SLM)

GST is a path breaking indirect tax reform which attempts to create a common national market. GST has subsumed multiple indirect taxes like excise duty, service tax, VAT, CST, luxury tax, entertainment tax, entry tax, etc. VAT and GST are often used inter-changeably as the latter denotes comprehensiveness of VAT by coverage of goods and services. France was the first country to implement VAT/GST in 1954. Presently, more than 160 countries have implemented VAT/GST in some form or the other because this tax has the capacity to raise revenue in the most transparent and neutral manner. Most of the countries follow unified GST i.e., a single tax applicable throughout the country. However, in federal polities like Brazil and Canada, a dual GST system is prevalent. Under dual system, GST is levied by both the federal and the State Governments. India has adopted dual GST model because of its unique federal nature. 1.5 CONCEPT OF GST Before we proceed with the finer nuances of Indian GST, let us first understand the basic concept of GST. • GST is a value added tax levied on supply i.e., manufacture or sale of goods and provision of services. • GST offers comprehensive and continuous chain of tax credits from the producer's point/service provider's point up to the retailer's level/consumer’s level thereby taxing only the value added at each stage of supply chain. • The supplier at each stage is permitted to avail credit of GST paid on the purchase of goods and/or services and can set off this credit against the GST payable on the supply of goods and services to be made by him. Thus, only the final consumer bears the GST charged by the last supplier in the supply chain, with set-off benefits at all the previous stages. • Since, only the value added at each stage is taxed under GST, there is no tax on tax or cascading of taxes under GST system. The same can be understood better with the help of the following example: Particulars Manufacturer (₹) Distributor (₹) Retailer (₹) Consumer (₹) Cost + profit 1,00,000 1,00,000 + 11,200 1,11,200 + Cost = = 1,35,840 + = 1,11,200 24,640 24,451.20 1,35,840 Value 1,00,000 11,200 24,640 Nil 16 CU IDOL SELF LEARNING MATERIAL (SLM)

addition GST payable 1,00,000 × 18% = 1,11,200 × 18% = 1,35,840 × 18% - 18,000 20,016 = 24,451.20 Input Tax Nil 18,000 20,016 Nil Credit 20,016 – 18,000 = 24,451.20 – Tax borne by GST Paid to 18,0000 = the consumer Government 2,016 20,016 = 24,451.20 4,435.20 Table 1.1 Concept of GST Framework of GST As Introduced In India I. Dual GST: India has adopted a Dual GST model in view of the federal structure of the country. Consequently, Centre and States simultaneously levy GST on taxable supply of goods or services or both which, takes place within a State or Union Territory. Thus, tax is imposed concurrently by the Centre and States, i.e., Centre and States simultaneously tax goods and services. Now, the Centre also has the power to tax intra-State sales & States are also empowered to tax services. GST extends to whole of India including the State of Jammu and Kashmir. II. CGST/SGST/UTGST/IGST GST is a destination-based tax applicable on all transactions involving supply of goods or services or both for a consideration subject to exceptions thereof. GST in India comprises of Central Goods and Services Tax (CGST) - levied and collected by Central Government, State Goods and Services Tax (SGST) - levied and collected by State Governments/Union Territories with Legislatures and Union Territory Goods and Services Tax (UTGST) - levied and collected by Union Territories without Legislatures, on intra-State supplies of taxable goods and/or services. As a general rule, where the location of the supplier and the place of supply of goods or services are in the same State/Union territory, it is treated as intra-State supply of goods or services respectively. Further, where the location of the supplier and the place of supply of goods or services are in (i) two different States or (ii) two different Union Territories or (iii) a State and a Union territory, it is treated as inter-State supply of goods or services respectively. Inter-State 17 CU IDOL SELF LEARNING MATERIAL (SLM)

supplies of taxable goods and/or services are subject to Integrated Goods and Services Tax (IGST). IGST is the sum total of CGST and SGST/UTGST and is levied by Centre on all inter-State supplies. III. Legislative Framework There is single legislation – CGST Act, 2017 - for levying CGST. Similarly, Union Territories without Legislatures [i.e. Andaman and Nicobar Islands, Lakshadweep, Ladakh, Dadra and Nagar Haveli & Daman and Diu and Chandigarh] are governed by UTGST Act, 2017 for levying UTGST. States and Union territories with their own legislatures [i.e. Delhi, Jammu and Kashmir and Puducherry] have their own GST legislation for levying SGST. Though there are multiple SGST legislations, the basic features of law, such as chargeability, definition of taxable event and taxable person, classification and valuation of goods and services, procedure for collection and levy of tax and the like are uniform in all the SGST legislations, as far as feasible. This is necessary to preserve the essence of dual GST. IV. Classification of goods and services HSN (Harmonised System of Nomenclature) is used for classifying the goods under the GST. Chapters referred in the Rate Schedules for goods are the Chapters of the First Schedule to the Customs Tariff Act, 1975. A new Scheme of Classification of Services has been devised wherein the services of various descriptions have been classified under various sections, headings and groups. Each group consists of various Service Codes (Tariff). V. Composition Scheme In GST regime, tax (i.e., CGST and SGST/UTGST for intra-State supplies and IGST for inter-State supplies) is payable by every taxable person and in this regard, provisions have been prescribed in the law. However, for providing relief to small businesses, primarily manufacturers, suppliers of food articles, traders, etc., making intra-State supplies, a simpler method of paying taxes is prescribed, known as Composition Levy. The scope of this scheme has now been extended to small service providers also. VI. Registration 18 CU IDOL SELF LEARNING MATERIAL (SLM)

Every supplier of goods and/ or services is required to obtain registration in the State/UT from where he makes the taxable supply if his aggregate turnover exceeds the threshold limit during a FY. Different threshold limits have been prescribed for various States and Union Territories depending upon the fact whether the supplier is engaged exclusively in supply of goods, or exclusively in supply of services or in supply of both goods and services. The threshold limit prescribed for various States/UTs are as follows: States with threshold limit of ₹ 10 lakh for both goods and services • Manipur • Mizoram • Nagaland • Tripura States with threshold limit of ₹ 20 lakh for both goods and services • Arunachal Pradesh • Meghalaya • Sikkim • Uttarakhand • Puducherry • Telangana States with threshold limit of ₹ 20 lakh for services and ₹ 40 lakh for goods** • Jammu and Kashmir • Assam • Himachal Pradesh • All other States **persons engaged exclusively in intra-State supply of goods VII. Exemptions Apart from providing relief to small-scale business, the law also contains provisions for granting exemption from payment of tax on essential goods and/or services. VIII. Seamless flow of credit Since GST is a destination-based consumption tax, revenue of SGST ordinarily accrues to the consuming States. The inter-State supplier in the exporting State is allowed to set off the available credit against the IGST payable on inter-State supply made by him (order of utilisation of credit is explained below). 19 CU IDOL SELF LEARNING MATERIAL (SLM)

The buyer in the importing State is allowed to avail the credit of IGST paid on inter-State purchases made by him. Thus, unlike the earlier scenario where the credit chain used to break in case of inter-State sales on account of non-VAT able CST, under GST regime there is a seamless credit flow in case of inter-State supplies too. The revenue of inter-State sale does not accrue to the exporting State and the exporting State transfers to the Centre the credit of SGST/UTGST used in payment of IGST. The Centre transfers to the importing State the credit of IGST used in payment of SGST/UTGST. Order of utilization of credit - There is a specified order in which ITC should be utilized. First, IGST credit should be utilized towards IGST payment, and then towards payment of CGST and SGST/UTGST in any order and in any proportion. After entire ITC of IGST is utilized, ITC of CGST should be utilized for payment of CGST and IGST in that order. Thereafter, ITC of SGST /UTGST should be utilized for payment of SGST/UTGST and IGST in that order. It may be noted that ITC of CGST cannot be utilized for payment of SGST/UTGST and vice versa. Also, ITC of SGST/UTGST should be utilized for payment of IGST, only after ITC of CGST has been utilized fully. The seamless flow of credit under GST, in case of intra-State and inter-State supplies, can be better understood with the help of the following illustrations: Intra-State Supply ILLUSTRATION 1 In case of local supply of goods/ services, the supplier would charge dual GST i.e., CGST and SGST at specified rates on the supply. I. Supply of goods/ services by A to B Amount (in ₹) 10,000 Value charged for supply of goods/ services 900 Add: CGST @ 9% 900 Add: SGST @ 9% 20 CU IDOL SELF LEARNING MATERIAL (SLM)

Total price charged by A from B for local supply of goods/ services 11,800 The CGST & SGST charged on B for supply of goods/services will be remitted by A to the appropriate account of the Central and State Government respectively. A is the first stage supplier of goods/services and hence, does not have credit of CGST, SGST or IGST. II. Supply of goods/services by B to C – Value addition @ 20% B will avail credit of CGST and SGST paid by him on the purchase of goods/ services and will utilise such credit for being set off against the CGST and SGST payable on the supply of goods/services made by him to C. Value charged for supply of goods/ services (` 10,000 x 120%) Amount (in Add: CGST @ 9% ₹) Add: SGST @ 9% 12,000 Total price charged by B from C for local supply of goods/ services 1,080 1,080 14,160 Computation of CGST, SGST payable by B to Government Amount (in ₹) CGST payable 1080 Less: Credit of CGST 900 CGST payable to Central Government 180 SGST payable 1080 Less: Credit of SGST 900 SGST payable to State Government 180 CU IDOL SELF LEARNING MATERIAL (SLM) 21

Note: Rates of CGST and SGST have been assumed to be 9% each for the sake of simplicity. Statement of revenue earned by Central and State Government Transaction Revenue to Central Revenue to State Government (₹) Government (₹) Supply of goods/services by A to 900 900 B Supply of goods/services by B to 180 180 C Total 1080 1080 Inter-State Supply ILLUSTRATION 2 In case of inter-State supply of goods/ services, the supplier would charge IGST at specified rates on the supply. I. Supply of goods/services by X of State 1 to A of State 1 Amount (in ₹) Value charged for supply of goods/ services 10,000 Add: CGST @ 9% 900 Add: SGST @ 9% 900 Total price charged by X from A for local supply of goods/ services 11,800 X is the first stage supplier of goods/services and hence, does not have any credit of CGST, SGST or IGST. II. Supply of goods/services by A of State 1 to B of State 2 – Value addition @ 20% Amount (in ₹) 22 CU IDOL SELF LEARNING MATERIAL (SLM)

Value charged for supply of goods/ services (₹ 10,000 x 120%) 12,000 Add: IGST @ 18% 2,160 Total price charged by A from B for interstate supply of goods/ services 14,160 Computation of IGST payable to Government Amount (in ₹) IGST payable 2160 Less: Credit of CGST 900 Less: Credit of SGST 900 IGST payable to State Government 360 The IGST charged on B of State 2 for supply of goods/services will be remitted by A of State 1 to the appropriate account of the Central Government. State 1 (Exporting State) will transfer SGST credit of ₹ 900 utilised in the payment of IGST to the Central Government. III. Supply of goods/services by B of State 2 to C of State 2 – Value addition @ 20% B will avail credit of IGST paid by him on the purchase of goods/services and will utilise such credit for being set off against the CGST and SGST payable on the local supply of goods/services made by him to C. Value charged for supply of goods/ services (₹ 12,000 x 120%) Amount (in ₹) 14,400 Add: CGST @ 9% 1,296 Add: SGST @ 9% 1,296 Total price charged by B from C for interstate supply of goods/ services 16,992 Computation of CGST, SGST payable to Government 23 CU IDOL SELF LEARNING MATERIAL (SLM)

CGST payable Amount (in Less: Credit of IGST ₹) CGST payable to Central Government 1296 SGST payable 1296 Less: Credit of IGST (₹ 2160 – ₹ 1296) Nil SGST payable to State Government 1296 864 432 Central Government will transfer IGST credit of ₹ 864 utilised in the payment of SGST to State 2 (Importing State). Note: Rates of CGST, SGST and IGST have been assumed to be 9%, 9% and 18% respectively for the sake of simplicity. Statement of revenue earned by Central and State Governments Transaction Revenue to Central Revenue to Revenue to Government (₹) Government of Government of state 1 (₹) state 2 (₹) Supply of goods/services by X 900 900 to A Supply of goods/services by A 360 to B Transfer by State 1 to Centre 900 (900) Nil Supply of goods/services by B 432 to C 864 Transfer by Centre to State 2 (864) 1296 Total 1296 24 CU IDOL SELF LEARNING MATERIAL (SLM)

IX. GST Common Portal Before GST, since, the Centre and State indirect tax administrations worked under different laws, regulations, procedures and formats, their IT infrastructure and systems were also independent of each other. Integrating them for GST implementation was complex since it required integrating the entire indirect tax ecosystem so as to bring all the tax administrations (Centre, State and Union Territories) to the same level of IT maturity with uniform formats and interfaces for taxpayers and other external stakeholders. Besides, GST being a destination-based tax, the inter-State trade of goods and services (IGST) needed a robust settlement mechanism amongst the States and the Centre. A Common Portal was needed which could act as a clearing house and verify the claims and inform the respective Governments to transfer the funds. This was possible only with the help of a strong IT Infrastructure. Resultantly, Common GST Electronic Portal – www.gst.gov.in – a website managed by Goods and Services Network (GSTN) [a company incorporated under the provisions of section 8 of the Companies Act, 2013] is set by the Government to establish a uniform interface for the tax payer and a common and shared IT infrastructure between the Centre and States. The GST portal is accessible over Internet (by taxpayers and their CAs/Tax Advocates etc.) and Intranet by Tax Officials etc. The portal is one single common portal for all GST related services. A common GST system provides linkage to all State/ UT Commercial Tax Departments, Central Tax authorities, Taxpayers, Banks and other stakeholders. The ecosystem consists of all stakeholders starting from taxpayer to tax professional to tax officials to GST portal to Banks to accounting authorities. The functions of the GSTN include facilitating registration; forwarding the returns to Central and State authorities; computation and settlement of IGST; matching of tax payment details with banking network; providing various MIS reports to the Central and the State Governments based on the taxpayer return information; providing analysis of taxpayers' profile. However, it is important to note that the Common GST Electronic Portal for furnishing electronic way bill is www.ewaybillgst.gov.in [managed by the National Informatics Centre, Ministry of Electronics & Information Technology, Government of India]. E-way bill is an electronic document generated on the GST portal evidencing movement of goods. X. GSPs/ASPs GSTN has selected certain Information Technology, Information Technology enabled Services and financial technology companies, to be called GST Suvidha Providers (GSPs). GSPs develop applications to be used by taxpayers for interacting with the GSTN. They facilitate the tax payers in uploading invoices as well as filing of returns and act as a single stop shop for GST related services. 25 CU IDOL SELF LEARNING MATERIAL (SLM)

They customize products that address the needs of different segment of users. GSPs may take the help of Application Service Providers (ASPs) who act as a link between taxpayers and GSPs. XI. Compensation Cess A GST Compensation Cess at specified rate has been imposed under the Goods and Services Tax (Compensation to States) Cess Act, 2017 on the specified luxury items or demerit goods, like pan masala, tobacco, aerated waters, motor cars etc., computed on value of taxable supply. Compensation cess is leviable on intra-State supplies and inter-State supplies with a view to provide for compensation to the States for the loss of revenue arising on account of implementation of the GST. Compensation is to be provided to a State for a period of 5 years from the date on which the State brings its SGST Act into force XII. GST – A tax on goods and services GST is levied on all goods and services, except alcoholic liquor for human consumption and petroleum crude, diesel, petrol, ATF and natural gas. Alcoholic liquor for human consumption is outside the realm of GST. The manufacture/production of alcoholic liquor continues to be subjected to State excise duty and inter-State/intra-State sale of the same is subject to CST/VAT respectively. Petroleum crude, diesel, petrol, ATF and natural gas: As regards petroleum crude, diesel, petrol, ATF and natural gas are concerned, they are not presently leviable to GST. GST will be levied on these products from a date to be notified on the recommendations of the GST Council. Till such date, central excise duty continues to be levied on manufacture/production of petroleum crude, diesel, petrol, ATF and natural gas and inter-State/intra-State sale of the same is subject to CST/ VAT respectively. Tobacco: Tobacco is within the purview of GST, i.e., GST is leviable on tobacco. However, Union Government has also retained the power to levy excise duties on tobacco and tobacco products manufactured in India. Resultantly, tobacco is subject to GST as well as central excise duty. 26 CU IDOL SELF LEARNING MATERIAL (SLM)

Opium, Indian hemp and other narcotic drugs and narcotics: Opium, Indian hemp and other narcotic drugs and narcotics are within the purview of GST, i.e., GST is leviable on them. However, State Governments have also retained the power to levy excise duties on such products manufactured in India. Resultantly, Opium, Indian hemp and other narcotic drugs and narcotics are subject to GST as well as State excise duties. Further, real estate sector has been kept out of ambit of GST, i.e., GST will not be levied on sale/purchase of immovable property. 1.6 TAXES SUBSUMED IN GST The various central, state and local levies were examined to identify their possibility of being subsumed under GST. While identifying, the following principles were kept in mind: (i) Taxes or levies to be subsumed should be primarily in the nature of indirect taxes, either on the supply of goods or on the supply of services. (ii) Taxes or levies to be subsumed should be part of the transaction chain which commences with import/ manufacture/ production of goods or provision of services at one end and the consumption of goods and services at the other. (iii) The subsuming of taxes should result in free flow of tax credit in intra and inter-State levels. The taxes, levies and fees that were not specifically related to supply of goods & services would not be subsumed under GST. (iv) Revenue fairness for both the Union and the States individually would need to be attempted. Taking the above principles into account, following taxes were subsumed in the GST: Central Taxes State Taxes • Central Excise Duty & Additional • State surcharges and cesses in so far Excise Duties as they relate to supply of goods & services • Service Tax • Excise Duty under Medicinal & • Entertainment Tax (except those levied by local bodies) Toilet Preparation Act • CVD & Special CVD • Tax on lottery, betting and gambling • Central Sales Tax • Entry Tax (All Forms) & Purchase • Central surcharges & Cesses in so far Tax as they relate to supply of goods & • VAT/ Sales tax services • Luxury Tax • Taxes on advertisements 27 CU IDOL SELF LEARNING MATERIAL (SLM)

Table 1.2 Central Taxes & State Taxes 5. BENEFITS OF GST GST is a win-win situation for the entire country. It brings benefits to all the stakeholders of industry, Government and the consumer. The significant benefits of GST are discussed hereunder: Creation of unified national market: GST has made India a common market with common tax rates and procedures. Further, it has removed the economic barriers resulting in an integrated economy at the national level. Boost to ‘Make in India' initiative: GST has given a major boost to the ‘Make in India' initiative of the Government of India by making goods and services produced in India competitive in the national as well as international market. This will make India a manufacturing hub. Enhanced investment and employment: The subsuming of major Central and State taxes in GST, complete and comprehensive set-off of input tax on goods and services and phasing out of Central Sales Tax (CST) has reduced the cost of locally manufactured goods and services. Resultantly, the competitiveness of Indian goods and services in the international market has increased which has given boost to investments and Indian exports. With a boost in exports and manufacturing activity, more employment is likely to be generated and GDP is likely to be increased. Simplified tax structure Ease of doing business: Simpler tax regime with fewer exemptions along with reduction in multiplicity of taxes under GST has led to simplification and uniformity in tax structure. The uniformity in laws, procedures and tax rates across the country makes doing business easier. Certainty in tax administration: Common system of classification of goods and services across the country ensures certainty in tax administration across India. Easy tax compliance Automated procedures with greater use of IT: There are simplified and automated procedures for various processes such as registration, returns, refunds, tax payments. All 28 CU IDOL SELF LEARNING MATERIAL (SLM)

interaction is through the common GSTN portal, therefore, less public interface between the taxpayer and the tax administration. Reduction in compliance costs: The compliance cost is lesser under GST as multiple record-keeping for a variety of taxes is not needed, therefore, there is lesser investment of resources and manpower in maintaining records. The uniformity in laws, procedures and tax rates across the country goes a long way in reducing the compliance cost. Advantages for trade and industry Benefits to industry: GST has given more relief to trade and industry through a more comprehensive and wider coverage of input tax set-off and service tax set-off, subsuming of several Central and State taxes in the GST and phasing out of CST. The transparent and complete chain of set-offs which results in widening of tax base and better tax compliance also leads to lowering of tax burden on an average dealer in trade and industry. Mitigation of ill effects of cascading: By subsuming most of the Central and State taxes into a single tax and by allowing a set-off of prior-stage taxes for the transactions across the entire value chain, it helps in mitigating the ill effects of cascading, improving competitiveness and improving liquidity of the businesses. Benefits to small traders and entrepreneurs: GST has increased the threshold for GST registration for small businesses. Further, single registration is needed in one State. Small businesses have also been provided the additional benefit of composition scheme. With the creation of a seamless national market across the country, small enterprises have an opportunity to expand their national footprint with minimal investment. 1.7 SUMMARY • Taxes are levied by the Governments to meet the common welfare expenditure of the society. There are two types of taxes - direct taxes and indirect taxes. • The reason for levy of taxes is that they constitute the basic source of revenue to the Government. • If tax is levied directly on the income or wealth of a person, then, it is a direct tax. • If tax is levied on the price of a good or service, then, it is an indirect tax. • Seventh Schedule to Article 246 contains three lists which enumerate the matters under which the Parliament and the State Legislatures have the authority to make laws for the purpose of levy of taxes. 29 CU IDOL SELF LEARNING MATERIAL (SLM)

• Three List for levy of Tax laws: • Union List • State List • Concurrent List • The levy of income-tax in India is governed by the Income-tax Act, 1961. • Every year, the Finance Minister of the Government of India introduces the Finance Bill in the Parliament’s Budget Session. • The administration of direct taxes is looked after by the Central Board of Direct Taxes (CBDT). • Circulars are issued by the CBDT from time to time to deal with certain specific problems and to clarify doubts regarding the scope and meaning of certain provisions of the Act. • Notifications are issued by the Central Government to give effect to the provisions of the Act. • Income-tax is a tax levied on the total income of the previous year of every person. • A person includes an individual, Hindu Undivided Family (HUF), Association of Persons (AOP), Body of Individuals (BOI), a firm, a company etc. • A person may earn income from different sources. • In the year 2000, the then Prime Minister mooted the concept of GST and set up a committee to design a Goods and Services Tax (GST). • In 2003, the Central Government formed a task force on Fiscal Responsibility and Budget Management, which in 2004 strongly recommended fully integrated ‘GST’ on national basis. • VAT and GST are often used inter-changeably as the latter denotes comprehensiveness of VAT by coverage of goods and services. • France was the first country to implement VAT/GST in 1954. Presently, more than 160 countries have implemented VAT/GST in some form or the other because this tax has the capacity to raise revenue in the most transparent and neutral manner. • GST is a path breaking indirect tax reform which attempts to create a common national market. GST has subsumed multiple indirect taxes like excise duty, service tax, VAT, CST, luxury tax, entertainment tax, entry tax, etc. • India has adopted a Dual GST model in view of the federal structure of the country. Consequently, Centre and States simultaneously levy GST on taxable supply of goods or services or both which, takes place within a State or Union Territory. • GST is a destination-based tax. • GST in India comprises of 2 taxes in case of intra-State supplies of taxable goods and/or services. • Central Goods and Services Tax (CGST) - levied and collected by Central Government. 30 CU IDOL SELF LEARNING MATERIAL (SLM)

• State Goods and Services Tax (SGST) - levied and collected by State Governments/Union Territories with Legislatures. • Union Territory Goods and Services Tax (UTGST) - levied and collected by Union Territories without Legislatures. • In Case of Inter-State Supply of goods/Services, Integrated Goods and Services Tax(IGST) • For providing relief to small businesses, primarily manufacturers, suppliers of food articles, traders, etc., making intra-State supplies, a simpler method of paying taxes is prescribed, known as Composition Levy. • Before GST, since, the Centre and State indirect tax administrations worked under different laws, regulations, procedures and formats, their IT infrastructure and systems were also independent of each other. • Common GST Electronic Portal – www.gst.gov.in – a website managed by Goods and Services Network (GSTN) [a company incorporated under the provisions of section 8 of the Companies Act, 2013] is set by the Government to establish a uniform interface for the taxpayer and a common and shared IT infrastructure between the Centre and States. • GSTN has selected certain Information Technology, Information Technology enabled Services and financial technology companies, to be called GST Suvidha Providers (GSPs). GSPs develop applications to be used by taxpayers for interacting with the GSTN. • A GST Compensation Cess at specified rate has been imposed under the Goods and Services Tax (Compensation to States) Cess Act, 2017 on the specified luxury items or demerit goods, like pan masala, tobacco, aerated waters, motor cars etc., computed on value of taxable supply. • Compensation is to be provided to a State for a period of 5 years from the date on which the State brings its SGST Act into force • Alcoholic liquor for human consumption is outside the realm of GST. • Petroleum crude, diesel, petrol, ATF, and natural gas are not presently leviable to GST. GST will be levied on these products from a date to be notified on the recommendations of the GST Council. • Tobacco is within the purview of GST, i.e., GST is leviable on tobacco. However, Union Government has also retained the power to levy excise duties on tobacco and tobacco products manufactured in India. Resultantly, tobacco is subject to GST as well as central excise duty. • Opium, Indian hemp and other narcotic drugs and narcotics are within the purview of GST, i.e., GST is leviable on them. However, State Governments have also retained the power to levy excise duties on such products manufactured in India. Resultantly, Opium, Indian hemp and other narcotic drugs and narcotics are subject to GST as well as State excise duties. 31 CU IDOL SELF LEARNING MATERIAL (SLM)

• Real estate sector has been kept out of ambit of GST, i.e., GST will not be levied on sale/purchase of immovable property. • Taxes Subsumed in GST a. Central Taxes: • Central Excise Duty & Additional Excise Duties • Service Tax • Excise Duty under Medicinal & Toilet Preparation Act • CVD & Special CVD • Central Sales Tax • Central surcharges & Cess in so far as they relate to supply of goods & services b. State Taxes: • State surcharges and Cess in so far as they relate to supply of goods & services • Entertainment Tax (except those levied by local bodies) • Tax on lottery, betting, and gambling • Entry Tax (All Forms) & Purchase Tax • VAT/ Sales tax • Luxury Tax • Taxes on advertisements • GST is a win-win situation for the entire country. It brings benefits to all the stakeholders of industry, Government, and the consumer. • GST has made India a common market with common tax rates and procedures. 1.8 KEYWORDS • GST – Goods and Service Tax • CBDT – Central Board of Direct Taxes • RBI – Reserve Bank of India • SBI – State Bank of India • VAT – Value Added Tax 1.9 LEARNING ACTIVITY 1. Learn more about indirect taxes that existed in Pre GST-Regime. ___________________________________________________________________________ _____________________________________________________________________ 2. Learn More about Wealth tax, its importance, and its current position in statutory arsenal. 32 CU IDOL SELF LEARNING MATERIAL (SLM)

___________________________________________________________________________ _____________________________________________________________________ 1.10 UNIT END QUESTIONS A. Descriptive Questions Short Questions 1. What are the central taxes that are subsumed under GST? 2. What are the steps for computation of total income? 3. Mr. Anand (aged 37) earned a net profit from his business of ₹ 12,50,000. He has a life insurance policy for which he paid an annual premium of ₹ 1,00,000. Compute Mr. Anand’s taxable income. 4. Explain briefly about benefits of GST 5. Explain about registration requirements under GST. Long Questions 1. Explain about the Taxation system in India. 2. Explain about the constitutional provisions for levy of tax. 3. Briefly explain the concept of GST. 4. Explain the benefits of GST. 5. Discuss briefly the threshold limits for registration under GST. 6. M Sports, a supplier registered under GST in the state of Tamilnadu supplied sport goods (taxable at 12%) for a value of ₹ 10,00,000 to D Sports who is also a registered supplier under GST in the state of Tamilnadu. D sports sold those goods at a margin of 20% to another supplier G Sports who is registered in the state of Karnataka. Show a detailed calculation of the GST involved in both the supplies and clearly mention the tax amounts earned by respective Governments (State Governments and Central Government). B. Multiple Choice Questions 1. When each part of the section is independent of each other, such parts are called _________. a. Sub-section b. Clause c. Sub-clause d. None of these 2. Which of the following is a type of deduction from Gross Total Income in respect of payment? a. Life insurance premium 33 CU IDOL SELF LEARNING MATERIAL (SLM)

b. Interest on savings bank account c. Both (a) and (b) d. None of these 3. The threshold limit applicable for a person supplying goods exclusively in the state of Tamilnadu is a. 20 Lakhs b. 10 Lakhs c. 40 Lakhs d. None of these 4. For intrastate supply of goods ___________ will be applicable. a. IGST only b. CGST only c. CGST and SGST d. SGST only 5. Which of the following is outside the purview of GST? a. Tobacco b. Diesel c. Alcoholic liquor for human consumption d. None of these Answer 1-b 2-a 3-c 4-c 5-c 1.11 REFERENCES • Prasad, Bhagabati: Direct Tax Law & Practice, New Age Publ., N. Delhi. • H.C. Mehrotra –Income Tax Law & Practice • H.P. Ranina: Corporate Taxation: A Hand Book (Tax Mann). • V.S. Datey: Indirect Taxes – Law and Practice (Tax Mann Publications Limited) • Ahuja, Girish & Gupta, Ravi: Systematic Approach to Income Tax; Central Sales Tax, Bharat Law House, N. Delhi. 34 CU IDOL SELF LEARNING MATERIAL (SLM)

UNIT 2: BASICS OF TAXES Structure 2.0 Learning Objectives 2.1 Introduction 2.2 Applicability of MAT 2.3 Computation of Book Profit 2.4 Set off of credit of tax paid under section 115JB 2.5 Fringe Benefit Tax 2.6 Summary 2.7 Keywords 2.8 Learning Activity 2.9 Unit End Questions 2.10 References 2.0 LEARNING OBJECTIVES After studying this unit, you will be able to: • State the concept of MAT and applicability of MAT • Explain the concept of book profit and its computation • Explain the concept of set off of credit of tax paid under sec 115JB • Outline the fringe benefit tax and its related concepts 2.1 INTRODUCTION What Is Minimum Alternate Tax? Minimum Alternate Tax (MAT) is a tax effectively introduced in India by the Finance Act of 1987, vide Section 115J of the Income Tax Act, 1961, to facilitate the taxation of ‘zero tax companies’ i.e., those companies which show zero or negligible income to avoid tax. Under MAT, such companies are made liable to pay to the government, by deeming a certain percentage of their book profit as taxable income. MAT is an attempt to reduce tax avoidance. It was introduced to contain the practices followed by certain companies to avoid the payment of income tax, even though they had the “ability to pay”. MAT is applied when the taxable income calculated as per the normal provisions is less than 15% of the book profits. MAT is levied at the rate of 15% of the book profits. Background 35 CU IDOL SELF LEARNING MATERIAL (SLM)

MAT was first introduced in India vide Section 80VVA of the IT Act through the Finance Act of 1983. Section 80VVA placed a restriction on certain deductions in the case of companies, or in other words, placed a ceiling on allowances and required companies to pay a minimum tax on at least 30% of their profits. The allowances that were unabsorbed in a particular year, due to the restriction, could be carried forward and absorbed in a later year, if there were sufficient profits. Section 80VVA was omitted by the Finance Act, 1987 (from the assessment year 1988-89), which instead introduced section 115J in a modified form. Section 115J, as drafted in 1987, introduced a two-step process. First, the assessing authority had to calculate the income of the company. Second, the book profit had to be determined. If the income of the assessee company was less than 30% of its book profit, the total income chargeable to tax would be 30% of the book profit. The Explanation to Section 115J (1) explained the calculation of “book profits”, which were essentially the net profits shown by the company in its profit and loss account prepared under Part II and Part III of Schedule VI to the Companies Act, 1956. For the purpose of income tax, these book profits were then subject to certain adjustments, in the form of reductions and increases, in accordance with provisions of Section 115J. Section 115J was, again made inoperative from Assessment Year 1991-92 when government widened the tax base and attempted a rationalisation. The MAT provisions were subsequently reintroduced in 1996 by the Finance Act (No. 2) of 1996, through Section 115JA; and then by the Finance Act of 2000, which replaced Section 115JA with Section 115JB. Section 115JB, which was amended by the Finance Act of 2015, provides that in case the tax payable on the total income of a company in respect of any previous year, computed under the Income Tax Act, is less than 18.5% of its book profit, such book profit shall be deemed to be the total income of such company. The tax payable for the relevant year for such company shall then be 18.5% of its book profit. From the FY 2020-21 onwards, MAT is payable at 15% of the book profits. 2.2 APPLICABILITY OF MAT As per section 115JB(1), in case of company (domestic or foreign), if the income-tax payable on the total income computed under the Income-tax Act, 1961 is less than, 15% of its book profit, such book profit shall be deemed to be the total income of the assessee and the tax payable by the assessee on such total income shall be the amount of income-tax at the rate of 15% (add surcharge, if applicable, i.e., 7% for domestic companies and 2% for foreign companies, where the total income exceeds ₹ 1 crore but does not exceed ₹ 10 crore, and 12% for domestic companies and 5% for foreign companies where the total income exceeds ₹ 10 crore). Further, health and education cess @ 4% shall be added on the aggregate of income-tax and surcharge. 36 CU IDOL SELF LEARNING MATERIAL (SLM)

Maintenance of statement of profit and loss [Section 115JB (2)] a) Every company other than a company referred to in section 115JB(2)(b) shall for the purpose of this section, prepare its statement of profit and loss for the relevant previous year in accordance with the provisions of Schedule III to the Companies Act, 2013 [Section 115JB(2)(a)]. b) Insurance companies, banking companies, companies engaged in generation or supply of electricity or any other class of company for which a form of financial statement has been specified in or under the Act governing such class of company, shall for the purposes of this section, prepare its statement of profit and loss for the relevant previous year in accordance with the provisions of the Act governing such company [Section 115JB(2)(b)]. c) The section also specifies that the statement of profit and loss for the relevant previous year has to be drawn in accordance with Schedule III to the Companies Act, 2013. Further, while preparing the annual accounts- i. the accounting policies, the accounting standards followed for preparing such accounts, including statement of profit and loss ii. the method and rates for calculating depreciation d) shall be the same as have been adopted for the purpose of preparing such accounts including statement of profit and loss and laid before the company at its annual general meeting. e) Where the financial year adopted by the company under the Companies Act, 2013 is different from the previous year under the Income-tax Act, 1961, the accounting policies, accounting standards and methods and rates adopted for calculating depreciation shall correspond to the accounting policies followed for preparing such accounts including statement of profit and loss for the financial year. 2.3 COMPUTATION OF BOOK PROFIT [EXPLANATION 1 BELOW SECTION 115JB (2)] For computing the book profit, the profit shall be increased by the following amounts, if the amount referred in (a) to (i) is debited to the statement of profit and loss a) Income-tax: Income-tax paid or payable, and the provision therefor; [It may be noted that income-tax includes – (1) interest; (2) surcharge; (3) health and education cess (Explanation 2 to section 115JB)]. b) Amount carried to Reserves: Amount carried to any reserves, by whatever name called. c) Provisions: Amounts set aside to provisions for meeting liabilities other than ascertained liabilities. 37 CU IDOL SELF LEARNING MATERIAL (SLM)

d) Provisions for losses of subsidiary companies: Amount of provision for losses of subsidiary companies. e) Dividends: Amount of dividends paid or proposed; or f) Expenditure relatable to exempt income: Amount of expenditure relatable to any income to which section 10 or sections 11 or 12 apply. g) Expenditure relatable to share of an assessee in the income of an AOP or BOI: Amount of expenditure relatable to income, being share of the assessee in the income of an AOPs or BOIs, on which no income-tax is payable in accordance with the provisions of section 86; h) Expenditure relatable to income accruing to foreign company: The amount or amounts of expenditure relatable to income accruing or arising to an assessee, being a foreign company, from – A. the capital gains arising on transactions in securities; or B. the interest, royalty, or fees for technical services chargeable to tax at the rate or rates specified in Chapter XII i.e., section 115A if the income-tax payable thereon in accordance with the provisions of the Act, other than the provisions of this Chapter, is at a rate less than 15%. i) Notional loss on the units of business trust: The amount representing- • notional loss on transfer of a capital asset, being share of a special purpose vehicle to a business trust in exchange of units allotted by that trust; or • notional loss resulting from any change in carrying amount of said units or • loss on transfer of such units j) Amount of expenditure relatable to income referred under section 115BBF: The amount or amounts of expenditure relatable to income by way of royalty in respect of patent chargeable to tax under section 115BBF. k) Depreciation: The amount of depreciation. l) Deferred tax: The amount of deferred tax and provision, therefore. m) Provision for diminution in the value of any asset: The amount set aside as provision for diminution in the value of any asset. n) Amount standing in the revaluation reserve: The profit shall also be increased by the amount standing in revaluation reserve relating to the revalued asset on the retirement or disposal of such asset, in case the same is not credited to the profit and loss account. o) Amount of gain arise on transfer units of business trust: When units of business trust are actually transferred, the amount of gain on such transfer has to be added to compute 38 CU IDOL SELF LEARNING MATERIAL (SLM)

the book profit, since notional gains on transfer of share of a special purpose vehicle to a business trust in exchange for the units of the business trust and notional gains resulting from change in carrying amount of such units would have been deducted to compute book profit. The amount of gain on such transfer, if any, credited to statement of profit and loss in the year of transfer will also be reduced. In a case where the shares are carried at cost: The amount of gain has to be computed by taking into consideration the cost of shares exchanged with the units of the business trust. In a case where the shares are carried at a value other than the cost through statement of profit and loss: The carrying amount of shares at the time of exchange would be taken into consideration for computing the amount of gain. The profit shall be reduced by the following amounts: a) Amount withdrawn from any reserve: The amount withdrawn from any reserve or provision, if any such amount is credited to the statement of profit and loss. However, the amount withdrawn from reserves/provisions shall not be reduced from the book profit unless the book profit of that year has been increased by those reserves/ provisions. b) Exempt income: Amount of income to which section 10 or sections 11 or 12 apply, if such amount is credited to the statement of profit and loss. c) Depreciation: The amount of depreciation debited to the statement of profit and loss (excluding the claim of depreciation on account of revaluation of assets); d) Amount withdrawn from the revaluation reserve: The amount withdrawn from the revaluation reserve and credited to the statement of profit and loss, to the extent it does not exceed the amount of depreciation on revaluation of assets. e) Share of the assessee in the income of an AOPs or BOIs: The amount of income, being the share of the assessee in the income of an AOPs or BOIs, on which no income-tax is payable in accordance with the provisions of section 86, if any such amount is credited to the statement of profit and loss; f) Income accruing to foreign company: The amount of income accruing or arising to an assessee, being a foreign company, from, - i) the capital gains arising on transactions in securities; or ii) the interest, royalty, or fees for technical services chargeable to tax at the rate or rates specified in Chapter XII i.e., section 115A, if such income is credited to the statement of profit and loss and the income-tax payable thereon in accordance with the provisions of the Income-tax Act, 1961, other than the provisions of Chapter XII-B, is at a rate less than 15%; g) Notional gain on the units of business trust: The amount representing – 39 CU IDOL SELF LEARNING MATERIAL (SLM)

i. the notional gain on transfer of a capital asset, being a share of a SPV to a business trust in exchange of units allotted by the business trust; ii. notional gain resulting from any change in carrying amount of said units; iii. gain on transfer of such units, if any, credited to statement of profit and loss; h) Loss on transfer of units: The amount of loss on transfer of units acquired in exchange of shares of SPV computed by taking into account the cost of the shares exchanged with the units, where the shares are carried at cost. In case shares are carried at a value other than cost through statement of profit and loss, the amount of loss on transfer of such units has to be computed by taking into account the carrying amount of the shares at the time of exchange; i) Income by way of royalty taxable under section 115BBF: The amount of income by way of royalty in respect of patent chargeable to tax under section 115BBF; j) Brought forward loss and unabsorbed depreciation: Aggregate amount of unabsorbed depreciation and loss brought forward in case of a – i) company, and its subsidiary and the subsidiary of such subsidiary, where, the Tribunal, on an application moved by the Central Government under section 241 of the Companies Act, 2013 has suspended the Board of Directors of such company and has appointed new directors who are nominated by the Central Government under section 242 of the said Act; ii) company against whom an application for corporate insolvency resolution process has been admitted by the Adjudicating Authority under section 7 or section 9 or section 10 of the Insolvency and Bankruptcy Code, 2016. It may be noted that loss does not include depreciation. A company would be a subsidiary of another company if such other company holds more than half in the nominal value of equity share capital of the company. k) Brought forward loss or unabsorbed depreciation in case of other companies: Amount of brought forward loss or unabsorbed depreciation, whichever is less, in case of other companies as per books of account. The loss shall not include depreciation; if either the figure of brought forward loss or unabsorbed depreciation is “NIL”, no deduction will be allowed from the book profit of the relevant year; l) Profits of sick industrial company: The number of profits of a sick industrial company (BIFR company) commencing from the previous year in which the company became sick and ending with the assessment year during which the entire net worth of such company becomes equal to or exceeds the accumulated losses. For this purpose, 40 CU IDOL SELF LEARNING MATERIAL (SLM)

“net worth” shall have the same meaning as assigned under section 3(1) (ga) of the Sick Industrial Companies (Special Provisions) Act, 1985. m) Deferred tax: The amount of deferred tax, if any such amount is credited to the statement of profit and loss. Illustration 1 A domestic company, ABC Ltd., furnishes the following particulars in respect of Assessment Year 2021-22 and seeks your opinion on the application of section 115JB. You are also required to compute the total income and tax payable. 1 Profits as per Statement of profit and loss as per the ₹ 215 Lakhs Companies Act, 2013 2 Statement of Profit and Loss includes: ₹ 20 Lakhs a) Credits: ₹ 30 Lakhs Dividend income from Indian Companies ₹ 100 Lakhs Excess realized on sale of land held as investment ₹ 60 Lakhs b) Debits: Depreciation on straight line method basis Provision for loss of subsidiary company 3 Depreciation allowable as per the Income-tax Rules, ₹ 150 Lakhs 1962 4 Short term capital gains on sale of land mentioned ₹ 40 Lakhs above as computed under Income-tax Act, 1961 5 Losses brought forward as per books of account and as per Income-tax Act, 1961: Business loss ₹ 50 Lakhs Unabsorbed depreciation ₹ 60 Lakhs Table 2.1 41 CU IDOL SELF LEARNING MATERIAL (SLM)

You will have to deal with this issue assuming that ABC Ltd. is not required to comply with the Indian Accounting Standards. Ignore the provisions of section 115BAA. Note - The turnover of ABC Ltd. for the P.Y. 2018-19 was ₹ 390 crore. I. Computation of Total Income as per the normal provisions of the Income-tax Act, 1961 Particulars ₹ in Lakhs Net profit as per statement of profit and loss 100 215 Add: 60 Depreciation debited to statement of profit and loss 160 Provision for losses of subsidiary company 20 375 Less: 30 Dividend income from Indian companies 200 Excess realized on sale of land (considered separately) 150 175 Depreciation allowable as per Income-tax Rules, 1962 50 Business Income 125 Less: Set-off of brought forward business loss 40 20 Capital gains (Short term capital gains) Income from other sources (Dividend income chargeable to tax in the hands of shareholders) Less: Set-off of unabsorbed depreciation 185 Total Income as per Income-tax Act, 1961 60 125 Table 2.2 42 CU IDOL SELF LEARNING MATERIAL (SLM)

II. Computation of book profit under section 115JB Particulars ₹ in Lakhs Net profit as per statement of profit and loss 215 Add: 60 100 Provision for loss of subsidiary 375 Depreciation 150 225 Less: Depreciation 100 Business loss which is less than unabsorbed depreciation 50 Book profit Table 2.3 III. Computation of Tax liability under the normal provisions of the Income-tax Act, 1961 Total income as per the Income-tax Act, 1961 is ₹ 125 lakhs, Particulars ₹ in Lakhs Tax payable ₹ 125 lakhs @ 25% since the turnover of the company for the previous year 2018-19 does not exceed ₹ 400 crore. 31,25,000 Add: Surcharge @ 7% Add: Health and education cess @4% 2,18,750 Total Tax Payable 33,43,750 1,33,750 34,77,500 Table 2.4 IV. Computation of Minimum Alternate Tax 43 CU IDOL SELF LEARNING MATERIAL (SLM)

Particulars ₹ in Lakhs Tax @ 15% of book profit of ₹ 225 lakhs Add: Surcharge @ 7% 33,75,000 2,36,250 Add: Health and education cess@4% 36,11,250 Minimum Alternate Tax payable 1,44,450 37,55,700 Table 2.5 Since 15% of book profit exceeds the tax payable as per normal provisions of the Income-tax Act, 1961, the book profit of ₹ 225 lakhs would be deemed to be the total income and the tax payable on such total income shall be 15% thereof i.e., ₹ 33,75,000 plus surcharge @7% being ₹ 2,36,250 plus health and education cess @4% (of tax and surcharge) being ₹ 1,44,450. Total tax liability would be ₹ 37,55,700. 2.4 SET-OFF OF CREDIT OF TAX PAID UNDER SECTION 115JB [SECTION 115JAA] (1) This section provides that where tax is paid in any assessment year in relation to the deemed income under section 115JB (1), the excess of tax so paid over and above the tax payable under the other provisions of the Income-tax Act, 1961, will be allowed as tax credit in the subsequent years. However, no interest would be payable on the tax credit allowed. (2) The tax credit is, therefore, the difference between the tax paid under section 115JB (1) and the tax payable on the total income computed in accordance with the other provisions of the Act. (3) This tax credit is allowed to be carried forward for 15 assessment years succeeding the assessment year in which the credit became allowable. (4) Such credit is allowed to be set off against the tax payable on the total income in an assessment year in which the tax is computed in accordance with the provisions of the Act, other than 115JB, to the extent of excess of such tax payable over the tax payable on book profits in that year. Example 44 CU IDOL SELF LEARNING MATERIAL (SLM)

PY MAT as per Tax as per MAT Credit Actual Tax MAT Credit 2018-19 section regular Adjustment Paid Balance 2019-20 2020-21 115JB provisions 4,50,000 3,95,000 - 4,50,000 55,000 4,70,000 4,10,000 - 4,70,000 1,15,000 3,80,000 4,00,000 20,000 3,80,000 95,000 Table 2.6 Example of tax payable on book profits in that year. (5) Where as a result of order passed, the amount of tax payable is reduced or increased, the amount of tax credit allowed shall also be reduced or increased accordingly. (6) In case of conversion of a private company or unlisted public company into an LLP, the tax credit under section 115JAA for MAT paid by the company under section 115JB would not be allowed to the successor LLP. (7) Where the amount of tax credit in respect of any income-tax paid in any country or specified territory outside India, under section 90 or section 90A or section 91, allowed against the tax payable under the provisions of section 115JB(1) exceeds the amount of such tax credit admissible against the tax payable by the assessee on its income in accordance with the other provisions of this Act, then, while computing the amount of credit under this sub- section, such excess amount shall be ignored. In other words, the amount of tax credit in respect of MAT shall not be allowed to be carried forward to subsequent year to the extent such credit relates to the difference between the amount of foreign tax credit (FTC) allowed against MAT and FTC allowable against the tax computed under regular provisions of Act other than the provisions relating to MAT. Example Particulars Tax as per MAT as per regular section 115JB provisions Tax amount 1,50,000 1,75,000 FTC 1,60,000 1,60,000 45 CU IDOL SELF LEARNING MATERIAL (SLM)

Deduction in respect of FTC, being lower of tax 1,50,000 1,60,000 payable in India and FTC 10,000 25,000 Excess FTC allowed against MAT under section 15,000 115JB MAT credit MAT Credit as reduced by excess FTC allowable against MAT liability (₹ 25,000 – ₹ 10,000) Table 2.7 Example of Comparison of Tax and MAT 2.5 FRINGE BENEFIT TAX Introduction Fringe Benefit Tax (FBT) was introduced as part of Finance Act, 2005 as an additional income-tax and came into force from April 1, 2005. The term Fringe Benefits means ‘any consideration for employment provided by way of any privilege, service, facility or amenity provided by the employer to the employees. Fringe Benefit Tax is to be levied on the employer in respect of fringe benefits provided/deemed to be provided by the employer to his employees during any financial year commencing on or after 1.4.2005. Fringe Benefit Tax is payable at the rate of 30% of the value of fringe benefits computed in the manner prescribed under the Section 115WC. In the year 2009, the Finance Act abolished the fringe benefit tax in India and the abolishment became effective from FY 2010-11. Salient Features of FBT Some of the features of FBT are listed as follows: a) Fringe Benefit Tax is payable by an employer is in respect of perquisites or fringe benefits provided or deemed to have been provided by the employer to his employees in addition to the cash salary or wages paid during the year. b) Fringe Benefit Tax is levied in addition to the Income-Tax charged. c) Fringe Benefit Tax is payable at the specified rate on the value of fringe benefits provided to the employees. The value of fringe benefits is calculated in accordance with the provisions of Section 115WC of the Income-Tax Act, 1961. 46 CU IDOL SELF LEARNING MATERIAL (SLM)

d) An employer has to pay Fringe Benefit Tax even if no Income-Tax is payable on the total income. e) Like any other direct tax, Fringe Benefit Tax is not an allowable expenditure for the purpose of computation of taxable income. Characteristics Of FBT Some of the characteristics of FBT are: • It is a tax on expenditure, not income. • It is a tax on employer, not employees. • It is a surrogate tax on employers. • It cannot be recovered from the employees. • It is to tax, benefits that are usually enjoyed collectively by the employees and cannot be attributed to individual employees. • A combination of presumptive and non-presumptive approaches has been adopted. Employers and Non-Employers Under FBT Under FBT, an Employer is defined as any of the following: • Company • Firm • Association of Persons or a Body of Individuals (except Fund or Trust or institution eligible for exemption under section 10(23C) or registered under section 12AA) • Local Authority • Every Artificial judicial person, not falling within any of the above Note: Under FBT, they are considered as Employer even if the Taxable Income is NIL. The following are not included as Employer under FBT: • An Individual (i.e., Proprietorship concern) • Hindu Undivided Family • Association of Persons or a Body of Individuals exempt under section 10(23C) or registered under section 12AA 47 CU IDOL SELF LEARNING MATERIAL (SLM)

• Central Government • State Government Direct Fringe Benefit Direct Fringe Benefit as classified under section 115(WB) (1) means: • Any privilege, service, facility or amenity, which is directly or indirectly provided by an employer to his employees (including former employee or employees). • Any free or concessional tickets provided by the employer for private journeys to employees or their family members. • Any contribution by the employer towards an approved superannuation fund for employees. • Any reimbursement, which is directly or indirectly made by the employer to employees for any purpose. Deemed Fringe Benefit The Fringe Benefits are deemed to have been provided if the employer incurs any expenditure or makes any payment in the course of business or profession. This includes any activity whether or not such activity is carried on with the object of deriving income, profits or gains. Any expenditure incurred or payment made for the following constitutes deemed fringe benefit. • Entertainment • Hospitality • Conference • Sales promotion including publicity • Employee welfare • Conveyance, tours and travel • Hotel, boarding, lodging • Repair, running and maintenance of cars • Repair, running and maintenance of aircraft • Use of telephone • Maintenance of any accommodation in the nature of guest house 48 CU IDOL SELF LEARNING MATERIAL (SLM)

• Festival celebrations • Health Club • Any other club • Gifts • Scholarship to employees’ children • Consumption of fuel other than industrial fuel 2.6 SUMMARY • Minimum Alternate Tax (MAT) is a tax effectively introduced in India by the Finance Act of 1987, vide Section 115J of the Income Tax Act, 1961 • MAT is an attempt to reduce tax avoidance. • MAT was first introduced in India vide Section 80VVA of the IT Act through the Finance Act of 1983. • Section 80VVA was omitted by the Finance Act, 1987 (from the assessment year 1988-89), which instead introduced section 115J in a modified form. • Section 115J was, again made inoperative from Assessment Year 1991-92 when government widened the tax base and attempted a rationalization. • The MAT provisions were subsequently reintroduced in 1996 by the Finance Act (No. 2) of 1996, through Section 115JA; and then by the Finance Act of 2000, which replaced Section 115JA with Section 115JB. • Fringe Benefit Tax (FBT) was introduced as part of Finance Act, 2005 as an additional income-tax and came into force from April 1, 2005. • Some of the characteristics of FBT are: • It is a tax on expenditure, not income. • It is a tax on employer, not employees. • It is a surrogate tax on employers. • It cannot be recovered from the employees. • It is to tax, benefits that are usually enjoyed collectively by the employees and cannot be attributed to individual employees. • A combination of presumptive and non-presumptive approaches has been adopted. • FBT was Levied @30% of the value of fringe benefits • The Finance Act abolished the fringe benefit tax in India and the abolishment became effective from FY 2010-11. 49 CU IDOL SELF LEARNING MATERIAL (SLM)

2.7 KEYWORDS • MAT – Minimum Alternate Tax • AOP – Association of Persons • BOI – Body of Individuals • FTC – Foreign Tax Credit • FBT – Fringe Benefit Tax 2.8 LEARNING ACTIVITY 1. Learn about Alternate Minimum Tax (AMT) and compare the same with Minimum Alternate Tax (MAT). ___________________________________________________________________________ _____________________________________________________________________ 2. Visit Income Tax Website and download Form 29B, check out various fields provided for availing MAT Credit. ___________________________________________________________________________ _____________________________________________________________________ 2.9 UNIT END QUESTIONS A. Descriptive Questions Short Questions 1. What is MAT and why it was introduced? 2. When MAT is applicable and what is the applicable MAT rate? 3. Profit as per Profit and loss statement is ₹ 19 Lakhs. Brought forward business loss is ₹ 8.5 Lakhs and the unabsorbed depreciation is ₹ 2.3 Lakhs. Compute the book profit under section 115JB and the MAT credit to be carried forward. 4. Explain about Fringe benefit Tax Long Questions 1. Briefly explain the concept of Book profit. 50 CU IDOL SELF LEARNING MATERIAL (SLM)