CAPITAL GAINS TAX,Direct Dividend Tax,Property Tax,Minimum Alternate Tax,Alternative Minimum Tax,SPECIAL ASSESMENT TAX

 

CAPITAL GAINS TAX:

• Capital gains tax is levied on the profits made on sale of capital assets.  
• Capital assets covers real estate, gold, stocks, mutual funds, and various other financial and non-financial assets.
• Capital gain is any profit or gain that arises from the sale of a ‘capital asset’ 
• Capital gains tax can be both short-term or long-term.

Long-term Capital Gains Tax: 

It is a levy on the profits from the sale of assets held for more than a year. 

Short-term Capital Gains Tax: 

It applies to assets held for a year or less and is taxed as ordinary income.

Direct Dividend Tax :

• The Finance Act, 2020 came up with the taxation of dividends.
• All dividends received by investors/shareholders from Indian companies are taxable in the hands of the recipient.

Property Tax: 

• Property Tax is imposed on real estate owners by the municipal authorities like panchayat, municipality or municipal corporation.
• Property Tax is used for maintenance and upkeep of the local civic amenities .

SPECIAL ASSESMENT TAX:

• Special assessment tax is imposed upon property owners so as to develop local infrastructure in the local vicnity.
•  Special assessment tax is applicable in USA and not in India.
• Special assessment tax can be compared with Property Tax in India.

Minimum Alternate Tax (“MAT”):

• Minimum Alternate Tax is a way of making companies pay minimum amount of tax.
• Minimum Alternate Tax is levied on the corporates.
• In the Indian Income-Tax Act, there are large number of exemptions, deductions which are permitted from the gross total income. 
• Such exemptions, deductions, and other incentives results in the emergence of zero tax companies. 
• Target of Minimum Alternate Tax are the zero tax companies.
• Minimum Alternate Tax targets companies that show profits on their books and declare dividends, but pay minimal or no tax. 
• Income tax is paid on total income while Minimum Alternate Tax is to be paid on Booked profit (Booked Profit = Revenues – Expenses). 

Alternative Minimum Tax (AMT):

• Alternative Minimum Tax (AMT) is Minimum Alternate Tax version for individuals.
• Minimum Alternate Tax is applicable for companies and Alternative Minimum Tax (AMT) is applicable to individuals. 
• The non-corporate taxpayers are entitled to Alternative Minimum Tax (AMT) provisions in a modified pattern. 

CUSTOM DUTY, DUMPING, ANTI DUMPING DUTY, Countervailing Duties, Anti Dumping Duty vs Countervailing duties, Safeguard duty

 

                              

CUSTOM DUTY---

• Custom Duty : Indirect tax 
• levied on imports and exports by the government. 
• Custom Duty is to protect the domestic industries from competition from abroad and to raise state revenues as well. 
• Customs Duties can be either specific tax or on ad valorem basis depending upon the product.

 DUMPING:

• Dumping takes place when the goods are exported by a country (exporting country) to another country (importing country) at a price lower than the price it normally charges in its own (exporting country) home market. 
• Dumping is an unfair trade practice which can have a distortive effect on international trade.
• Anti Dumping Duty (ADD) is an antidote imposed by Importing country to deal with the issue of  Dumping 

ANTI DUMPING DUTY :

• Imposition of Anti Dumping Duty (ADD) is a measure to deal with the situation arising out of the dumping of goods and its trade distortive effect thereafter.
• Anti Dumping Duty (ADD) is a protectionist tariff imposed by government imposes on foreign imports to deal with the situation of dumping.
• Anti Dumping Duty (ADD) as an instrument is allowed under the umbrella of World Trade Organisation.

Countervailing Duties:

• Countervailing duties (CVDs) are trade import tariffs imposed to nullify the adverse effects of subsidies, hence called as anti-subsidy duties
• Countervailing duties (CVDs) are allowed under World Trade Organisation (WTO) regime.
• Countervailing duties (CVDs) are levied when an importing country finds out that exporting country is subsidizing its exports thus harming its domestic suppliers.

Anti Dumping Duty (ADD) vs Countervailing duties (CVDs) :

*Anti Dumping Duty is a customs duty on imports providing a protection against the dumping of goods at prices substantially lower than the normal value whereas Countervailing duty is a customs duty on goods that have received government subsidies in the originating or exporting country.

Safeguard duty:

• Safeguard measures are the tariffs imposed by the importing countries to restrict entry of the imported product when it is observed that there is increased imports of particular products causing serious damage to the domestic industry.
• The provision is facilitated in GATT (General Agreement on Tariffs and Trade), 1994.
• In contrast to antidumping duties and countervailing duties, safeguard measures are, in principle, applied regardless of the exporting country.

INDIRECT TAX,SECURITIES TRANSACTION TAX, SPECIFIC TAX, ADVALOREM TAX, Angel Tax, CUSTOM DUTY

 

INDIRECT TAX: 

• Those taxes which are not directly levied on the Income of an Individual.
• This tax is indirectly levied on the Expenses incurred by the Individual.
• This tax is basically levied on the seller of goods but finally it is being paid by the end consumer.
• Examples: GST, custom duty

• In case of indirect taxes, Tax impact and Tax incidence are borne by different person through the process of Tax shifting.

EXAMPLES OF INDIRECT TAXES

SECURITIES TRANSACTION TAX: 

• Securities Transaction Tax (STT)is an Indirect Tax levied on the transaction of securities (Tax Laws & Rules > Acts > Securities Transaction Tax (incometaxindia.gov.in) 
• Securities Transaction Tax (STT) is imposed on a broker rather than the investor/trader directly. 
• Broker /Stock Exchange deposit it on the behalf of the investors.
• Securities Transaction Tax (STT) is currently imposed on equity and derivative transactions. 

ADVALOREM TAX: 

• The value of AD VALOREM Tax depends upon the value of a transaction. 
• AD VALOREM Tax is directly proportional to the value of the underlying asset
• AD VALOREM Tax is imposed at the time of transaction .
• The nature of AD VALOREM Tax is progressive in the sense that the value of tax will increase with increase in the price of the asset.
• AD VALOREM Tax is usually expressed in percentage. 
• Example GST in India.

SPECIFIC TAX:

• Specific Tax is per-unit tax, which is a fixed amount of tax imposed on the quantity of a particular good.
• Specific Tax does not depend upon the price of the goods, unlike the advalorem Tax which depends upon the price of a good.
• Specific tax is levied based on the volume of the item purchased.
• Specific Tax is regressive in nature.
• The tax is usually expressed in specific sums. 
• Example: Excise Duty on Petrol. 

Angel Tax:

• Angel tax is an income tax payable on capital raised by unlisted companies from investors .
• Unlisted companies raise money mostly from the angel investors
•  Angel tax is imposed on issue of shares if the sold share price is excess of the fair market value of the shares.
• The excess of share price over the fair market price is treated as income and it is taxed accordingly.

For instance:

• If the fair market value of share price of Zomato is Rs. 100 per share and the company raises fund at Rs. 250 per share which is significantly higher than its fair market value. In this case, the excess premium collected by the company (which is an unlisted company) over its fair market value i.e. Rs. 150 per share will be treated as income from other sources
• Consequently, tax shall be applicable on this surplus amount which is referred to as Angel Tax. 

DYNAMICS OF ANGEL TAX:

• The imposition of angel tax depends upon the fair market valuation of the company.
• Fair market valuation has been a bone of contention between startups and the income tax department. 
• The tax department goes by the rule book and calculates market value based on the net assets of the company.
• On the other hand, future growth prospects of the startup is a major factor in determining the fair market valuation of the startup. 
• Difference in calculation of the market value by the income tax department and the fair value by the investor of the startup results in Angel Tax.
• Angel tax wipes away a major part of the surplus of the startup which can be invested.
• Thus, Angel Tax hurts the growth prospects of the start- ups.

Budget 2024-25 has removed Angel Taxation.

CUSTOM DUTY---

• Custom Duty is an Indirect tax that is levied on imports (and, sometimes, on exports) by the government. 
• The objective of Custom Duty is to protect the domestic industries from predatory competition from abroad and to raise state revenues as well. 
• The rates of customs duties are either specific or on ad valorem basis, that is, it is based on the value of goods. 

Example:

Countervailing duties

Safeguard Duties

Anti-dumping duty

 

TAXATION SYSTEM : PROGRESSIVE TAXATION SYSTEM,PROPORTIONAL TAXATION SYSTEM,REGRESSIVE TAXATION SYTEM,DEGRESSIVE TAXATION SYSTEM

 

                   

TYPES OF TAXATION SYSTEM: 

Tax implication upon the citizens in a country depends upon the types of taxation system prevailing in the country.

Prominently There are four type of Taxation System :

PROGRESSIVE TAXATION SYSTEM:

• In a progressive taxation system, taxation rate is directly proportional to the taxable income.
• Tax Rate increases with the increase of the taxable amount ie the income.
• In a progressive taxation system, People with lower incomes pay a lower percentage of tax in comparison to the person with higher income.
• In India, we are having progressive taxation system as tax rates are directly proportional to the incomes of individual.

PROPORTIONAL TAXATION SYSTEM:

• In a proportional tax system, taxation rate remains irrespective of the income or wealth of the individual. 
• Proportional tax system is also said to be flat tax system as taxation rate does not depends upon income or wealth of the individual, rather remains constant.
• Taxpayers pay a set percentage of their income regardless of total income earned.
• For example, an income tax of 10% does not increase or decrease for individuals with different incomes. 

REGRESSIVE TAXATION SYTEM:

• In Regressive tax system, the tax rate is uniform irrespective of the income. 
• Tax rates being uniform, Low incomes earning individuals pay a higher percentage of that income in taxes  in comparison to the individuals who are having high-incomes. 
• Regressive taxation is just opposite to the progressive taxes. 
• For example, if there is  a sales tax of 7% on food items ,then it  has a greater burden on lower-income earners than it does on the wealthy because the ability to pay is not considered in case of indirect taxes. Many states follow Regressive Taxation in US.

DEGRESSIVE TAXATION SYSTEM:

• In degressive tax system, the tax rate decreases as the taxable amount of income increases. 
• Tax rate are higher when taxable income are lower.
• Tax rates are lower when taxable income are higher. 
• It is in contrast to a progressive tax system .
• Degressive taxation is antipoor in the sense that it redistribute the wealth of poor amongst riches.
• Degressive taxation was implemented in swiss but there federal court strike it down.

Surcharge , CESS, Tax Deduction at Source (TDS), Withholding Tax, TAX Collection at Source,

 

Surcharge:

• Surcharge is tax on tax .
• Surcharge is charged on the paid income tax and not on the taxable income
• Surcharge is normally paid by the taxpayers, who fall in a particular tax bracket. 
• Eg. Say you have an income of Rs 100, on which you have to pay Rs 30 as tax. So the surcharge will be 10% on the 30 rupees tax that you have to pay, i.e. Rs 3. 

CESS: 

• Cess is a form of tax which is an additional levy by the Central Government to raise funds for a specific purpose like education cess.
• Cess is imposed only when there is a need to meet the exclusive expenditure for public welfare.
• In India, GST compensation cess and Education Cess are examples of cess.

Tax Deduction at Source (TDS) /Withholding Tax:

• Tax Deduction at Source (TDS) is the tax which is deducted on a payment made by a company to an individual, 
• Tax Deduction at Source (TDS) is applicable when the payment amount exceeds a certain limit fixed by the Government.

Withholding Tax:

• Tax Deduction at Source (TDS) when deducted from the income of NRI is said to be Withholding tax.
• Nature of Tax Deduction at Source (TDS) and Withholding taxes are  similar, Tax Deduction at Source (TDS) becomes Withholding when applicable to NRI.

TAX Collection at Source (TCS):

• TAX Collection at Source (TCS) is the tax that some specified sellers are required to collect from their buyers on exceptional transactions.
• TAX Collection at Source (TCS) is not applicable to every items of use rather on the sale of specific goods.

Tax Deduction at Source (TDS) /Withholding Tax vs TAX  Collection at Source (TCS):

• Tax Deduction at Source (TDS) deduction is applicable on payments such as salaries, rent, professional fee, brokerage, commission, etc. 
• TAX  Collection at Source (TCS) deduction is applicable on sales of specific goods like timber, scrap, mineral wood, and Motor vehicles exceeding Rs. 10 lakhs .
• Tax Deduction at Source (TDS) is applicable only on payments that exceed a certain amount and is collected by the seller as a means to track buyers and minimize tax evasion.
• TDS is direct tax and is deposited by deductor on the behalf of deductee while deductee can claim as income tax paid at the time ITR filing.

MONEY LAUNDERING, money laundering process

 

MONEY LAUNDERING:

The process of making huge amounts of money generated by criminal activity – such as drug trafficking, terrorist funding, corruption, etc – appear as if it is generated from a legitimate source.

HOW MONEY LAUNDERING GOT THE NAME MONEY LAUNDERING:

• The process of money laundering is not new to the people as its a common tendency of people to hide money earned from illegitimate sources .
• But the term money laundering got its name "Money laundering" because of drug dealer Al Capone.
• Al-Capone in early 20th century used to invest the illegal money in  buying the laundries in cash invisible. 
• These laundries became the front for investment of his money earned from illegal activities.
•  And it was because of the investment of this illegal money by al Capino in laundries ,the process got its name "Money laundering" as if the dirty money was cleaned by the process of investment in Laundries.

The basic money laundering process has three steps:

Placement: 

• This is the first step of money laundering in which dirty money is initiated to get legitimate.
• In this, the launderer deposits the dirty money into a legitimate financial institution.
• This process of depositing the money is a repeated process and deposits are in the form of cash
• This is the most dangerous stage of the laundering process as large amounts of cash are visible
• The role of banks is very crucial in this stage as banks must be cautious of such high value cash transactions and report high-value transactions.

Layering: 

• This process is to change the form of deposited money in the first stage .
• Deposited Money is transacted through various financial instruments to change its form and make it difficult to track.
• Layering can include several bank-to-bank transfers, wire transfers between different accounts in different names in different countries
• These deposits and withdrawals at this stage constantly vary in terms of amount, currency of the money in an order to manipulate the system.
• This is the most complicated step in any laundering scheme, and it makes original dirty money as difficult to track it .

Integration: 

• This is the final stage of making dirty money to clean money.
• At this stage, the money appears to come from a legal transaction and enters the mainstream economy.
• The money finally is used for entering into mainstream economy by getting invested in any economic activity.
• This stage makes the illegal money the legal money as it is now part of mainstream Economy.
• The preferred economic activities where this money is invested are restaurants, nightclubs, charity trusts casinos art or jewelry etc .

Place of Effective Management (PoEM) ,PATENT BOX REGIME

 

Taxation of MNC's is very contentious issue . Residential status of a company is crucial in deciding of tax rates. Place of Effective Management (PoEM) is one such arrangement which defines the residential status of a company and thus taxability of a company .

Place of Effective Management (PoEM) : 

• Place of Effective Management (PoEM) is an internationally recognized test for determining the residential status of a company incorporated in foreign jurisdiction. 
• This concept is crucial for all the tax treaties entered into by India as it helps to implication of taxes on companies.

INDIA AND Place of Effective Management (PoEM):  

• Under Income Tax Act, 1961, it is very important to determine the residential status of any person as it helps in determining the scope of taxable income in India.
•  Until 2015, the concept of determination of residential status of foreign companies was very simplified and a company was considered as Indian resident if:

• It is incorporated in India; or 
• Its control and management is situated wholly in India. 
• Therefore, most of the companies used these simplified provisions as a loophole to prevent residential status in India by shifting insignificant or isolated events related to control and management outside India in tax havens.
• The objective of shifting residential status to outside India is merely to reduce tax liablity as Corporate tax in India is one of the highest rates in comparison to Tax havens.

NEED OF REVISITING THE DEFINITION OF Place of Effective Management (PoEM) : 

• The existing definition of Place of Effective Management (PoEM) was manipulated by companies.
• Companies having shell companies in tax havens have structured their operations in such a manner that  companies were present or active in a country without paying applicable taxes. 
• Company were having key managerial people stationed in India with substantial asset base and operations  in India but selling goods through a subsidiary in Tax haven.
• As per the definition of Place of Effective Management (PoEM) , companies claimed that it has no effective management in India and hence, it could end up paying very little tax.

REVISED DEFINITION OF Place of Effective Management (PoEM) :

The Finance Act, 2015 introduced the concept of Place of Effective Management (POEM) while determining residential status of companies in India and as per amended provisions, a company is considered as resident if:

• It is an Indian Company; or 
• Its place of effective Management in that year is in India

• So at present, if any company is having management and operations in India, along with shell company outside India (just to evade taxes), then as per Place of Effective Management (PoEM), company will be treated as resident of India and hence will be taxed as per tax laws of India.
• It will not be in a position of taking the tax benefits merely by having shell company in tax haven.

 

PATENT BOX REGIME:

• Patent Box regime was introduced in India by Finance Act, 2016 by enacting new Section 115BBF. 
• This box is applicable for all patents registered after April 1, 2016. 
• Under Patent Box regime, any company has to pay 10% tax on total income earned by the   commercialization of patents which are developed and registered in India. 
• The condition is that such patent must have been developed and registered in India under Patents Act, 1970.

NEED OF PATENT BOX REGIME:

• This is a concessional tax regime because otherwise, the 30% Income tax was applicable to income from patents/ royalty / intellectual property in the country. 
• In view of the high tax rates, companies register patent in tax havens.
• Thus the countries where these patents were developed were not benefitted by the patent development, even if the patent were developed in their country.
• Thus, with a view to retain the intellectual property in the country where it was developed and to promote innovation and research, many countries started to introduce beneficial taxation regime for income generated from such Intellectual Property.