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Tax system and procedures are different in different countries, Here, the tax system and

procedure in USA, UK, India are described :

Tax system & procedure in the United States of America (USA)

Taxation in the United States is a complex system which may involve payment to many different levelsof government and many methods of taxation. United States taxation includes local government, possiblyincluding one or more of municipal, township, district and county governments. It also includes regionalentities such as school and utility, and transit districts as well as including state and federal government. 

 History

The federal, state, and local tax systems in the United States have been marked by significantchanges over the years in response to changing circumstances and changes in the role of government. The types of taxes collected, their relative proportions, and the magnitudes of the

revenues collected are all far different than they were 50 or 100 years ago. Some of thesechanges are traceable to specific historical events, such as a war or the passage of the 16thAmendment to the Constitution that granted the Congress the power to levy a tax on personalincome. Other changes were more gradual, responding to changes in society, in our economy,and in the roles and responsibilities that government has taken unto itself.

Colonial Times 

For most of our nation's history, individual taxpayers rarely had any significant contact withFederal tax authorities as most of the Federal government's tax revenues were derived fromexcise taxes, tariffs, and customs duties. Before the Revolutionary War, the colonial government

had only a limited need for revenue, while each of the colonies had greater responsibilities andthus greater revenue needs, which they met with different types of taxes. For example, thesouthern colonies primarily taxed imports and exports, the middle colonies at times imposed aproperty tax and a "head" or poll tax levied on each adult male, and the New England coloniesraised revenue primarily through general real estate taxes, excises taxes, and taxes based onoccupation.

England's need for revenues to pay for its wars against France led it to impose a series of taxeson the American colonies. In 1765, the English Parliament passed the Stamp Act, which was thefirst tax imposed directly on the American colonies, and then Parliament imposed a tax on tea.Even though colonists were forced to pay these taxes, they lacked representation in the English

Parliament. This led to the rallying cry of the American Revolution that "taxation withoutrepresentation is tyranny" and established a persistent wariness regarding taxation as part of theAmerican culture.

The Post Revolutionary Era 

The Articles of Confederation, adopted in 1781, reflected the American fear of a strong centralgovernment and so retained much of the political power in the States. The national government

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had few responsibilities and no nationwide tax system, relying on donations from the States forits revenue. Under the Articles, each State was a sovereign entity and could levy tax as it pleased.

When the Constitution was adopted in 1789, the Founding Fathers recognized that nogovernment could function if it relied entirely on other governments for its resources, thus the

Federal Government was granted the authority to raise taxes. The Constitution endowed theCongress with the power to "…lay and collect taxes, duties, imposts, and excises, pay the Debtsand provide for the common Defense and general Welfare of the United States." Ever on guardagainst the power of the central government to eclipse that of the states, the collection of thetaxes was left as the responsibility of the State governments.

To pay the debts of the Revolutionary War, Congress levied excise taxes on distilled spirits,tobacco and snuff, refined sugar, carriages, property sold at auctions, and various legaldocuments. Even in the early days of the Republic, however, social purposes influenced whatwas taxed. For example, Pennsylvania imposed an excise tax on liquor sales partly "to restrainpersons in low circumstances from an immoderate use thereof." Additional support for such a

targeted tax came from property owners, who hoped thereby to keep their property tax rates low,providing an early example of the political tensions often underlying tax policy decisions.

Though social policies sometimes governed the course of tax policy even in the early days of theRepublic, the nature of these policies did not extend either to the collection of taxes so as toequalize incomes and wealth, or for the purpose of redistributing income or wealth. As ThomasJefferson once wrote regarding the "general Welfare" clause:

To take from one, because it is thought his own industry and that of his father has acquired toomuch, in order to spare to others who (or whose fathers) have not exercised equal industry andskill, is to violate arbitrarily the first principle of association, "to guarantee to everyone a free

exercise of his industry and the fruits acquired by it."

With the establishment of the new nation, the citizens of the various colonies now had properdemocratic representation, yet many Americans still opposed and resisted taxes they deemedunfair or improper. In 1794, a group of farmers in southwestern Pennsylvania physically opposedthe tax on whiskey, forcing President Washington to send Federal troops to suppress theWhiskey Rebellion, establishing the important precedent that the Federal government wasdetermined to enforce its revenue laws. The Whiskey Rebellion also confirmed, however, thatthe resistance to unfair or high taxes that led to the Declaration of Independence did notevaporate with the forming of a new, representative government.

During the confrontation with France in the late 1790's, the Federal Government imposed thefirst direct taxes on the owners of houses, land, slaves, and estates. These taxes are called directtaxes because they are a recurring tax paid directly by the taxpayer to the government based onthe value of the item that is the basis for the tax. The issue of direct taxes as opposed to indirecttaxes played a crucial role in the evolution of Federal tax policy in the following years. WhenThomas Jefferson was elected President in 1802, direct taxes were abolished and for the next 10years there were no internal revenue taxes other than excises.

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To raise money for the War of 1812, Congress imposed additional excise taxes, raised certaincustoms duties, and raised money by issuing Treasury notes. In 1817 Congress repealed thesetaxes, and for the next 44 years the Federal Government collected no internal revenue. Instead,the Government received most of its revenue from high customs duties and through the sale of public land.

The Civil War 

When the Civil War erupted, the Congress passed the Revenue Act of 1861, which restoredearlier excises taxes and imposed a tax on personal incomes. The income tax was levied at 3percent on all incomes higher than $800 a year. This tax on personal income was a new directionfor a Federal tax system based mainly on excise taxes and customs duties. Certain inadequaciesof the income tax were quickly acknowledged by Congress and thus none was collected until thefollowing year.

By the spring of 1862 it was clear the war would not end quickly and with the Union's debt

growing at the rate of $2 million daily it was equally clear the Federal government would needadditional revenues. On July 1, 1862 the Congress passed new excise taxes on such items asplaying cards, gunpowder, feathers, telegrams, iron, leather, pianos, yachts, billiard tables, drugs,patent medicines, and whiskey. Many legal documents were also taxed and license fees werecollected for almost all professions and trades.

The 1862 law also made important reforms to the Federal income tax that presaged importantfeatures of the current tax. For example, a two-tiered rate structure was enacted, with taxableincomes up to $10,000 taxed at a 3 percent rate and higher incomes taxed at 5 percent. Astandard deduction of $600 was enacted and a variety of deductions were permitted for suchthings as rental housing, repairs, losses, and other taxes paid. In addition, to assure timely

collection, taxes were "withheld at the source" by employers.

The need for Federal revenue declined sharply after the war and most taxes were repealed. By1868, the main source of Government revenue derived from liquor and tobacco taxes. Theincome tax was abolished in 1872. From 1868 to 1913, almost 90 percent of all revenue wascollected from the remaining excises.

The 16th Amendment 

Under the Constitution, Congress could impose direct taxes only if they were levied inproportion to each State's population. Thus, when a flat rate Federal income tax was enacted in1894, it was quickly challenged and in 1895 the U.S. Supreme Court ruled it unconstitutionalbecause it was a direct tax not apportioned according to the population of each state.

Lacking the revenue from an income tax and with all other forms of internal taxes facing stiff resistance, from 1896 until 1910 the Federal government relied heavily on high tariffs for itsrevenues. The War Revenue Act of 1899 sought to raise funds for the Spanish-American Warthrough the sale of bonds, taxes on recreational facilities used by workers, and doubled taxes on

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beer and tobacco. A tax was even imposed on chewing gum. The Act expired in 1902, so thatFederal receipts fell from 1.7 percent of Gross Domestic Product to 1.3 percent.

While the War Revenue Act returned to traditional revenue sources following the SupremeCourt's 1895 ruling on the income tax, debate on alternative revenue sources remained lively.

The nation was becoming increasingly aware that high tariffs and excise taxes were not soundeconomic policy and often fell disproportionately on the less affluent. Proposals to reinstate theincome tax were introduced by Congressmen from agricultural areas whose constituents feared aFederal tax on property, especially on land, as a replacement for the excises.

Eventually, the income tax debate pitted southern and western Members of Congressrepresenting more agricultural and rural areas against the industrial northeast. The debateresulted in an agreement calling for a tax, called an excise tax, to be imposed on businessincome, and a Constitutional amendment to allow the Federal government to impose tax onindividuals' lawful incomes without regard to the population of each State.

By 1913, 36 States had ratified the 16th Amendment to the Constitution. In October, Congresspassed a new income tax law with rates beginning at 1 percent and rising to 7 percent fortaxpayers with income in excess of $500,000. Less than 1 percent of the population paid incometax at the time. Form 1040 was introduced as the standard tax reporting form and, thoughchanged in many ways over the years, remains in use today.

One of the problems with the new income tax law was how to define "lawful" income. Congressaddressed this problem by amending the law in 1916 by deleting the word "lawful" from thedefinition of income. As a result, all income became subject to tax, even if it was earned byillegal means. Several years later, the Supreme Court declared the Fifth Amendment could not beused by bootleggers and others who earned income through illegal activities to avoid paying

taxes. Consequently, many who broke various laws associated with illegal activities and wereable to escape justice for these crimes were incarcerated on tax evasion charges.

Prior to the enactment of the income tax, most citizens were able to pursue their privateeconomic affairs without the direct knowledge of the government. Individuals earned theirwages, businesses earned their profits, and wealth was accumulated and dispensed with little orno interaction with government entities. The income tax fundamentally changed this relationship,giving the government the right and the need to know about all manner of an individual orbusiness' economic life. Congress recognized the inherent invasiveness of the income tax into thetaxpayer's personal affairs and so in 1916 it provided citizens with some degree of protection byrequiring that information from tax returns be kept confidential.

World War I and the 1920's 

The entry of the United States into World War I greatly increased the need for revenue andCongress responded by passing the 1916 Revenue Act. The 1916 Act raised the lowest tax ratefrom 1 percent to 2 percent and raised the top rate to 15 percent on taxpayers with incomes inexcess of $1.5 million. The 1916 Act also imposed taxes on estates and excess business profits.

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Driven by the war and largely funded by the new income tax, by 1917 the Federal budget wasalmost equal to the total budget for all the years between 1791 and 1916. Needing still more taxrevenue, the War Revenue Act of 1917 lowered exemptions and greatly increased tax rates. In1916, a taxpayer needed $1.5 million in taxable income to face a 15 percent rate. By 1917 ataxpayer with only $40,000 faced a 16 percent rate and the individual with $1.5 million faced a

tax rate of 67 percent.

Another revenue act was passed in 1918, which hiked tax rates once again, this time raising thebottom rate to 6 percent and the top rate to 77 percent. These changes increased revenue from$761 million in 1916 to $3.6 billion in 1918, which represented about 25 percent of GrossDomestic Product (GDP). Even in 1918, however, only 5 percent of the population paid incometaxes and yet the income tax funded one-third of the cost of the war.

The economy boomed during the 1920s and increasing revenues from the income tax followed.This allowed Congress to cut taxes five times, ultimately returning the bottom tax rate to 1percent and the top rate down to 25 percent and reducing the Federal tax burden as a share of 

GDP to 13 percent. As tax rates and tax collections declined, the economy was strengthenedfurther.

In October of 1929 the stock market crash marked the beginning of the Great Depression. As theeconomy shrank, government receipts also fell. In 1932, the Federal government collected only$1.9 billion, compared to $6.6 billion in 1920. In the face of rising budget deficits which reached$2.7 billion in 1931, Congress followed the prevailing economic wisdom at the time and passedthe Tax Act of 1932 which dramatically increased tax rates once again. This was followed byanother tax increase in 1936 that further improved the government's finances while furtherweakening the economy. By 1936 the lowest tax rate had reached 4 percent and the top rate wasup to 79 percent. In 1939, Congress systematically codified the tax laws so that all subsequent

tax legislation until 1954 amended this basic code. The combination of a shrunken economy andthe repeated tax increases raised the Federal government's tax burden to 6.8 percent of GDP by1940.

World War II 

Even before the United States entered the Second World War, increasing defense spending andthe need for monies to support the opponents of Axis aggression led to the passage in 1940 of two tax laws that increased individual and corporate taxes, which were followed by another taxhike in 1941. By the end of the war the nature of the income tax had been fundamentally altered.Reductions in exemption levels meant that taxpayers with taxable incomes of only $500 faced abottom tax rate of 23 percent, while taxpayers with incomes over $1 million faced a top rate of 94 percent. These tax changes increased federal receipts from $8.7 billion in 1941 to $45.2billion in 1945. Even with an economy stimulated by war-time production, federal taxes as ashare of GDP grew from 7.6 percent in 1941 to 20.4 percent in 1945. Beyond the rates andrevenues, however, another aspect about the income tax that changed was the increase in thenumber of income taxpayers from 4 million in 1939 to 43 million in 1945.

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Another important feature of the income tax that changed was the return to income taxwithholding as had been done during the Civil War. This greatly eased the collection of the taxfor both the taxpayer and the Bureau of Internal Revenue. However, it also greatly reduced thetaxpayer's awareness of the amount of tax being collected, i.e. it reduced the transparency of thetax, which made it easier to raise taxes in the future.

Developments after World War II 

Tax cuts following the war reduced the Federal tax burden as a share of GDP from its wartimehigh of 20.9 percent in 1944 to 14.4 percent in 1950. However, the Korean War created a needfor additional revenues which, combined with the extension of Social Security coverage to self-employed persons, meant that by 1952 the tax burden had returned to 19.0 percent of GDP.

In 1953 the Bureau of Internal Revenue was renamed the Internal Revenue Service (IRS),following a reorganization of its function. The new name was chosen to stress the service aspectof its work. By 1959, the IRS had become the world's largest accounting, collection, and forms-

processing organization. Computers were introduced to automate and streamline its work and toimprove service to taxpayers. In 1961, Congress passed a law requiring individual taxpayers touse their Social Security number as a means of tax form identification. By 1967, all business andpersonal tax returns were handled by computer systems, and by the late 1960s, the IRS haddeveloped a computerized method for selecting tax returns to be examined. This made theselection of returns for audit fairer to the taxpayer and allowed the IRS to focus its auditresources on those returns most likely to require an audit.

Throughout the 1950s tax policy was increasingly seen as a tool for raising revenue and forchanging the incentives in the economy, but also as a tool for stabilizing macroeconomicactivity. The economy remained subject to frequent boom and bust cycles and many

policymakers readily accepted the new economic policy of raising or lowering taxes andspending to adjust aggregate demand and thereby smooth the business cycle. Even so, however,the maximum tax rate in 1954 remained at 87 percent of taxable income. While the income taxunderwent some manner of revision or amendment almost every year since the majorreorganization of 1954, certain years marked especially significant changes. For example, theTax Reform Act of 1969 reduced income tax rates for individuals and private foundations.

Beginning in the late 1960s and continuing through the 1970s the United States experiencedpersistent and rising inflation rates, ultimately reaching 13.3 percent in 1979. Inflation has adeleterious effect on many aspects of an economy, but it also can play havoc with an income taxsystem unless appropriate precautions are taken. Specifically, unless the tax system's parameters,i.e. its brackets and its fixed exemptions, deductions, and credits, are indexed for inflation, arising price level will steadily shift taxpayers into ever higher tax brackets by reducing the valueof those exemptions and deductions.

During this time, the income tax was not indexed for inflation and so, driven by a rising inflation,and despite repeated legislated tax cuts, the tax burden rose from 19.4 percent of GDP to 20.8percent of GDP. Combined with high marginal tax rates, rising inflation, and a heavy regulatory

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burden, this high tax burden caused the economy to under-perform badly, all of which laid thegroundwork for the Reagan tax cut, also known as the Economic Recovery Tax Act of 1981.

The Evolution of Social Security and Medicare 

The Social Security system remained essentially unchanged from its enactment until 1956.However, beginning in 1956 Social Security began an almost steady evolution as more and morebenefits were added, beginning with the addition of Disability Insurance benefits. In 1958,benefits were extended to dependents of disabled workers. In 1967, disability benefits wereextended to widows and widowers. The 1972 amendments provided for automatic cost-of-livingbenefits.

In 1965, Congress enacted the Medicare program, providing for the medical needs of personsaged 65 or older, regardless of income. The 1965 Social Security Amendments also created theMedicaid programs, which provides medical assistance for persons with low incomes andresources.

Of course, the expansions of Social Security and the creation of Medicare and Medicaid requiredadditional tax revenues, and thus the basic payroll tax was repeatedly increased over the years.Between 1949 and 1962 the payroll tax rate climbed steadily from its initial rate of 2 percent to 6percent. The expansions in 1965 led to further rate increases, with the combined payroll tax rateclimbing to 12.3 percent in 1980. Thus, in 31 years the maximum Social Security tax burden rosefrom a mere $60 in 1949 to $3,175 in 1980.

Despite the increased payroll tax burden, the benefit expansions Congress enacted in previousyears led the Social Security program to an acute funding crises in the early 1980s. Eventually,Congress legislated some minor programmatic changes in Social Security benefits, along with an

increase in the payroll tax rate to 15.3 percent by 1990. Between 1980 and 1990, the maximumSocial Security payroll tax burden more than doubled to $7,849.

The Tax Reform Act of 1986 

Following the enactment of the 1981, 1982, and 1984 tax changes there was a growing sense thatthe income tax was in need of a more fundamental overhaul. The economic boom following the1982 recession convinced many political leaders of both parties that lower marginal tax rateswere essential to a strong economy, while the constant changing of the law instilled in policymakers an appreciation for the complexity of the tax system. Further, the debates during thisperiod led to a general understanding of the distortions imposed on the economy, and the lost jobs and wages, arising from the many peculiarities in the definition of the tax base. A new andbroadly held philosophy of tax policy developed that the income tax would be greatly improvedby repealing these various special provisions and lowering tax rates further. Thus, in his 1984State of the Union speech President Reagan called for a sweeping reform of the income tax so itwould have a broader base and lower rates and would be fairer, simpler, and more consistentwith economic efficiency.

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The culmination of this effort was the Tax Reform Act of 1986, which brought the top statutorytax rate down from 50 percent to 28 percent while the corporate tax rate was reduced from 50percent to 35 percent. The number of tax brackets was reduced and the personal exemption andstandard deduction amounts were increased and indexed for inflation, thereby relieving millionsof taxpayers of any Federal income tax burden. However, the Act also created new personal and

corporate Alternative Minimum Taxes, which proved to be overly complicated, unnecessary, andeconomically harmful.

The 1986 Tax Reform Act was roughly revenue neutral, that is, it was not intended to raise orlower taxes, but it shifted some of the tax burden from individuals to businesses. Much of theincrease in the tax on business was the result of an increase in the tax on business capitalformation. It achieved some simplifications for individuals through the elimination of suchthings as income averaging, the deduction for consumer interest, and the deduction for state andlocal sales taxes. But in many respects the Act greatly added to the complexity of businesstaxation, especially in the area of international taxation. Some of the over-reaching provisions of the Act also led to a downturn in the real estate markets which played a significant role in the

subsequent collapse of the Savings and Loan industry.

Seen in a broader picture, the 1986 tax act represented the penultimate installment of anextraordinary process of tax rate reductions. Over the 22 year period from 1964 to 1986 the topindividual tax rate was reduced from 91 to 28 percent. However, because upper-incometaxpayers increasingly chose to receive their income in taxable form, and because of thebroadening of the tax base, the progressivity of the tax system actually rose during this period.

The 1986 tax act also represented a temporary reversal in the evolution of the tax system.Though called an income tax, the Federal tax system had for many years actually been a hybridincome and consumption tax, with the balance shifting toward or away from a consumption tax

with many of the major tax acts. The 1986 tax act shifted the balance once again toward theincome tax. Of greatest importance in this regard was the return to references to economicdepreciation in the formulation of the capital cost recovery system and the significant newrestrictions on the use of Individual Retirement Accounts.

Between 1986 and 1990 the Federal tax burden rose as a share of GDP from 17.5 to 18 percent.Despite this increase in the overall tax burden, persistent budget deficits due to even higherlevels of government spending created near constant pressure to increase taxes. Thus, in 1990 theCongress enacted a significant tax increase featuring an increase in the top tax rate to 31 percent.Shortly after his election, President Clinton insisted on and the Congress enacted a second majortax increase in 1993 in which the top tax rate was raised to 36 percent and a 10 percent surchargewas added, leaving the effective top tax rate at 39.6 percent. Clearly, the trend toward lowermarginal tax rates had been reversed, but, as it turns out, only temporarily.

The Taxpayer Relief Act of 1997 made additional changes to the tax code providing a modest taxcut. The centerpiece of the 1997 Act was a significant new tax benefit to certain families withchildren through the Per Child Tax credit. The truly significant feature of this tax relief, however,was that the credit was refundable for many lower-income families. That is, in many cases thefamily paid a "negative" income tax, or received a credit in excess of their pre-credit tax liability.

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Though the tax system had provided for individual tax credits before, such as the Earned IncomeTax credit, the Per Child Tax credit began a new trend in federal tax policy. Previously tax relief was generally given in the form of lower tax rates or increased deductions or exemptions. The1997 Act really launched the modern proliferation of individual tax credits and especiallyrefundable credits that are in essence spending programs operating through the tax system.

The years immediately following the 1993 tax increase also saw another trend continue, whichwas to once again shift the balance of the hybrid income tax-consumption tax toward theconsumption tax. The movement in this case was entirely on the individual side in the form of aproliferation of tax vehicles to promote purpose-specific saving. For example, Medical SavingsAccounts were enacted to facilitate saving for medical expenses. An Education IRA and theSection 529 Qualified Tuition Program was enacted to help taxpayers pay for future educationexpenses. In addition, a new form of saving vehicle was enacted, called the Roth IRA, whichdiffered from other retirement savings vehicles like the traditional IRA and employer-based401(k) plans in that contributions were made in after-tax dollars and distributions were tax free.

Despite the higher tax rates, other economic fundamentals such as low inflation and low interestrates, an improved international picture with the collapse of the Soviet Union, and the advent of aqualitatively and quantitatively new information technology led to a strong economicperformance throughout the 1990s. This, in turn, led to an extraordinary increase in the aggregatetax burden, with Federal taxes as a share of GDP reaching a postwar high of 20.8 percent in2000.

The Bush Tax Cut 

By 2001, the total tax take had produced a projected unified budget surplus of $281 billion, witha cumulative 10 year projected surplus of $5.6 trillion. Much of this surplus reflected a rising tax

burden as a share of GDP due to the interaction of rising real incomes and a progressive tax ratestructure. Consequently, under President George W. Bush's leadership the Congress halted theprojected future increases in the tax burden by passing the Economic Growth and Tax Relief andReconciliation Act of 2001. The centerpiece of the 2001 tax cut was to regain some of theground lost in the 1990s in terms of lower marginal tax rates. Though the rate reductions are tobe phased in over many years, ultimately the top tax rate will fall from 39.6 percent to 33percent.

The 2001 tax cut represented a resumption of a number of other trends in tax policy. Forexample, it expanded the Per Child Tax credit from $500 to $1000 per child. It also increased theDependent Child Tax credit. The 2001 tax cut also continued the move toward a consumption taxby expanding a variety of savings incentives. Another feature of the 2001 tax cut that isparticularly noteworthy is that it put the estate, gift, and generation-skipping taxes on course foreventual repeal, which is also another step toward a consumption tax. One novel feature of the2001 tax cut compared to most large tax bills is that it was almost devoid of business taxprovisions.

The 2001 tax cut will provide additional strength to the economy in the coming years as moreand more of its provisions are phased in, and indeed one argument for its enactment had always

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been as a form of insurance against an economic downturn. However, unbeknownst to the BushAdministration and the Congress, the economy was already in a downturn as the Act was beingdebated. Thankfully, the downturn was brief and shallow, but it is already clear that the tax cutsthat were enacted and went into effect in 2001 played a significant role in supporting theeconomy, shortening the duration of the downturn, and preparing the economy for a robust

recovery.

One lesson from the economic slowdown was the danger of ever taking a strong economy forgranted. The strong growth of the 1990s led to talk of a "new" economy that many assumed wasvirtually recession proof. The popularity of this assumption was easy to understand when oneconsiders that there had only been one very mild recession in the previous 18 years.

Taking this lesson to heart, and despite the increasing benefits of the 2001 tax cut and the earlysigns of a recovery, President Bush called for and the Congress eventually enacted an economicstimulus bill. The bill included an extension of unemployment benefits to assist those workersand families under financial stress due to the downturn. The bill also included a provision to

providing a temporary but significant acceleration of depreciation allowances for businessinvestment, thereby assuring that the recovery and expansion will be strong and balanced.Interestingly, the depreciation provision also means that the Federal tax on business has resumedits evolution toward a consumption tax, once again paralleling the trend in individual taxation.

Federal tax code

The Federal tax law is administered primarily by the Internal Revenue Service, a bureau of theTreasury. The U.S. tax code is known as the Internal Revenue Code of 1986 (title 26 of theUnited States Code). The Code's complexity generally arises from two factors: the use of the taxcode for purposes other than raising revenue, and the feedback process of amending the code.

While the main intent of the law is to provide revenue for the federal government, the tax code isfrequently used for public policy reasons i.e., to achieve social, economic, and political goals.For example, to encourage home ownership, the tax law provides a deduction for mortgageinterest expense on debt secured by primary residences. In addition, the law does not allow adeduction for renters for rent paid to offset the advantage of non-recognition of exclusion of imputed owner occupied rent. An income tax system that favors neither renting nor owninghomes would not allow the mortgage interest deduction and would tax the imputed rent forowners who live in their own homes.

Because the government uses the tax code as an instrument of social policy, the code as a whole

appears to some critics to lack a coherent organizing principle. The purported lack of a coherentorganizing principle arguably has become magnified over time, due to the interplay betweensuccessive legislative amendments and regulatory changes to the law and the private sectorresponses to those amendments and changes. For instance, suppose that Congress enacts a taxcredit to encourage a particular type of activity. In response, a group of taxpayers who are not theintended beneficiaries of the credit re-order their affairs, or the superficial aspects of their affairs,to qualify for the credit. Congress responds by amending the code to add restrictions and targetthe credit more effectively. Certain taxpayers manage to use this change to claim additional

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benefits, so Congress acts again, and so on. The result is a feedback loop of enactment andresponse, which, over an extended period of time, produces significant complexity.

Tax distribution

As of 2007, there are about 138 million taxpayers in the United States. The Treasury Departmentin 2006 reported, based on Internal Revenue Service (IRS) data, the share of federal incometaxes paid by taxpayers of various income levels. The data shows the progressive tax structure of the U.S. federal income tax system on individuals that reduces the tax incidence of people withsmaller incomes, as they shift the incidence disproportionately to those with higher incomes - thetop 0.1% of taxpayers by income pay 17.4% of federal income taxes (earning 9.1% of theincome), the top 1% with gross income of $328,049 or more pay 36.9% (earning 19%), the top5% with gross income of $137,056 or more pay 57.1% (earning 33.4%), and the bottom 50%with gross income of $30,122 or less pay 3.3% (earning 13.4%). If the federal taxation rate iscompared with the wealth distribution rate, the net wealth (not only income but also includingreal estate, cars, house, stocks, etc) distribution of the United States does almost coincide with

the share of income tax - the top 1% pay 36.9% of federal tax (wealth 32.7%), the top 5% pay57.1% (wealth 57.2%), top 10% pay 68% (wealth 69.8%), and the bottom 50% pay 3.3% (wealth2.8%).

Other taxes in the United States with a less progressive structure or a regressive structure, andlegal tax avoidance loopholes change the overall tax burden distribution. For example, thepayroll tax system (FICA), a 12.4% Social Security tax on wages up to $106,800 (for 2009) anda 2.9% Medicare tax (a 15.3% total tax that is often split between employee and employer) iscalled a regressive tax on income with no standard deduction or personal exemptions but ineffect is forced savings which return to the payer in the form of retirement benefits and healthcare. The Center on Budget and Policy Priorities states that three-fourths of U.S. taxpayers pay

more in payroll taxes than they do in income taxes.

The National Bureau of Economic Research has concluded that the combined federal, state, andlocal government average marginal tax rate for most workers to be about 40% of income.

United States Department of Justice Tax Division

The United States Department of Justice Tax Division is responsible for the prosecution of both civiland criminal cases arising under the Internal Revenue Code and other tax laws of the United States. TheDivision began operation in 1934, under United States Attorney General Homer Stille Cummings, who

charged it with primary responsibility for supervising all federal litigation involving internal revenue(following an executive order from President Franklin Delano Roosevelt).

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Responsibilities

The Tax Division works closely with public schools and corporations of the state and theCriminal Investigation Division and other units of the Internal Revenue Service to develop andcoordinate federal tax policy. Among the Division's duties are:

  Participating in the President's Corporate Fraud Task Force  Working with the Securities and Exchange Commission to promote corporate

integrity  Pursuing criminal tax investigations and prosecutions of corporate executives  Handling criminal investigations and prosecutions of terrorist financing cases  Fighting abusive and fraudulent tax promotions  Seeking civil injunctions against promoters of abusive tax schemes  Handling criminal prosecutions of major tax fraud promoters  Working with the Federal Trade Commission to combat internet fraud schemes  Using both civil and criminal tools to put tax fraud promoters out of business

  Enforcing IRS summonses for records of corporate tax shelters  Attacking the use of foreign bank accounts to evade taxes  Enforcing IRS summonses for records of offshore credit card transactions  Initiating criminal investigations of suspects in offshore tax evasion cases  Combating schemes that cheat the IRS through abuse of the bankruptcy system  Enhancing policy coordination between the Tax Division and the IRS.

Leadership

The current head of the Tax Division is Acting Assistant Attorney General John A. DiCicco,who is also the Deputy Assistant Attorney General for the Civil Matters Branch of the Tax

Division.

Organization

The head of the Tax Division is an Assistant Attorney General, who is appointed by thePresident of the United States. The Assistant Attorney General is assisted by four DeputyAssistant Attorneys General, who are each career attorneys, who each oversee a different branchof the Tax Division's sections.

  Assistant Attorney General for Tax Division

  Deputy Assistant Attorney General for Policy and Planning

  Office of Legislation, Policy and Management  Office of Training and Career Development  Office of Management and Administration

  Deputy Assistant Attorney General for Criminal Matters

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  Northern Criminal Enforcement Section  Southern Criminal Enforcement Section  Western Criminal Enforcement Section  Criminal Appeals and Tax Enforcement Policy Section

  Deputy Assistant Attorney General for Review and appellate

  Civil Appellate Section  Office of Review

  Deputy Assistant Attorney General for Civil Matters

  Central Civil Trail Section  Eastern Civil Trail Section  Northern Civil Trail Section  Southern Civil Trail Section  Southwestern Civil Trail Section  Western Civil Trail Section  Court of Federal Claims Section

 List of taxes

Taxes and fees imposed by federal, state or local laws.

  Alternative minimum tax (AMT).  U.S. capital gains tax.  Corporate income tax.  U.S. estate tax. 

U.s. excise tax.  U.S. federal income tax.  Federal unemployment tax.  FICA tax (including social security tax& related programs).  Gasoline tax.  Generation skipping tax.  Gift tax.  IRS penalties.  Local income tax.  Luxury taxes.  Property tax.  Real estate tax.  Recreational vehicle tax.  Rental car tax.  Resort tax.  Road usage taxes.  School tax.  State income tax.  State unemployment tax.

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  Tariffs.  Telephone federal excise tax.  Vehicle sales tax.  Workers compensation tax.

 Alternative Minimum Tax

Alternative Minimum Tax (AMT) is part of the Federal income tax system of the UnitedStates. There is an AMT for those who owe personal income tax, and another for corporationsowing corporate income tax. Only the AMT for those owing personal income tax is describedhere.

The AMT operates as a parallel tax system to the regular tax system with its own definition of taxable income, exemptions, and tax rates. It was originally called the "millionaire's tax", in thatit targeted only the wealthiest households. The income triggers were not indexed for inflation soas incomes rose the AMT touched more of the middle class. Without periodic Congressional

action to temporarily raise the income limits that trigger the AMT, almost a quarter of the UnitedStates' 90 million taxpayers could be required to pay the tax.

In practice, taxpayers must compute tax owed under the "regular" and AMT systems and areliable for whichever is higher. The AMT system has in general a broader definition of taxableincome, a larger exemption, and lower tax rates than the regular system. For taxpayers subject tothe AMT, it means that a portion of their itemized deductions are effectively eliminated, andthereby increases the tax they owe the federal government vs. the regular tax system.

History and current controversies of AMT

The AMT was introduced by the Tax Reform Act of 1969 and became operative in 1970. It wasintended to target 155 high-income households that had been eligible for so many tax benefitsthat they owed little or no income tax under the tax code of the time. However, the AMT hasevolved significantly in many ways since then, with substantial changes in 1978, 1982, 1986,1990, and 1993, among others. According to the Congressional Joint Committee on Taxation, theAMT provisions enacted in the Tax Equity and Fiscal Responsibility Act of 1982 are thefoundation for the present individual alternative minimum tax: these provisions included thedisallowal of state and local taxes, the deduction for personal exemptions, the standarddeduction, and the deduction for interest on home equity loans. 

A further shift, involving many definitional changes and extensive reorganization, occurred withthe Tax Reform Act of 1986. 

However both participation and revenues from the AMT temporarily plummeted after the 1986changes. Further significant changes occurred as a result of the Omnibus Budget ReconciliationActs of 1990 and 1993, which raised the AMT rate to 24%, and to 26%/28% respectively, fromthe prior level of 21%. Now many taxpayers who do not have high incomes or participate in anyspecial tax shelter activities have to pay AMT. 

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The AMT is imposed under 26 U.S.C. § 55 and disallows many deductions and exemptionsallowable in computing "regular" tax liability. (Regular tax liability is defined in 26U.S.C. § 55(c)(1), with reference to 26 U.S.C. § 26(b), and does not include AMT and variousother categories of taxes imposed under Chapter 1 of Subtitle A of the Internal Revenue Code.)The AMT currently sets a minimum tax rate of either 26% or 28% (depending on the amount of 

the taxpayer's "alternative minimum taxable income," as adjusted) on amounts above a largeexemption so that taxpayers cannot use certain types of deductions to lower their tax below acertain minimum. Affected taxpayers are those who have what are known as "tax preferenceitems". These include state and local income, sales and property taxes, accelerated depreciation, a portion of otherwise deductible medical expenses, miscellaneous itemized deductions, thebargain element in exercised incentive stock options, percentage depletion, certain tax-exemptincome, certain credits, personal exemptions and the standard deduction. In addition, due to adifferent system of exemption phase outs, items such as long-term capital gains may result inAMT. 

In recent years, the AMT has been under increased attention. Because the AMT is not indexed toinflation and because of recent tax cuts, an increasing number of middle-income taxpayers have

been finding themselves subject to this tax. The lack of indexing produces bracket creep. Therecent tax cuts in the regular tax have the effect of causing many taxpayers to pay some AMT,reducing or eliminating the benefit from the reduction in regular rates. (In all such cases,however, the overall tax payable will not increase. In 2006, the IRS's National TaxpayerAdvocate's report highlighted the AMT as the single most serious problem with the tax code.The Advocate noted that the AMT punishes taxpayers for having children or living in a high-taxstate and that the complexity of the AMT leads to most taxpayers who owe AMT not realizing ituntil preparing their returns or being notified by the IRS. 

A brief issued by the Congressional Budget Office (CBO) (No. 4, April 15, 2004), concludes:

"Over the coming decade, a growing number of taxpayers will become liable for theAMT. In 2010, if nothing is changed, one in five taxpayers will have AMT liability andnearly every married taxpayer with income between $100,000 and $500,000 will owe thealternative tax. Rather than affecting only high-income taxpayers who would otherwisepay no tax, the AMT has extended its reach to many upper-middle-income households.As an increasing number of taxpayers incur the AMT, pressures to reduce or eliminatethe tax are likely to grow."

However, CBO's rules state that it must use current law in its analysis, and at the time the abovetext was written, the AMT threshold was set to expire in 2006 and be reset to far lower values. 

For years, Congress has passed one-year patches aimed at minimizing the impact of the tax. Forthe 2007 tax year, a patch was passed on 12/20/2007, but only after the IRS had already designedits forms for 2007. The IRS had to reprogram its forms to accommodate the law change.

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 AMT Taxable Income (AMTI)

In addition to the normal tax code calculations, the AMT system uses a different set of rules fordetermining taxable income and allowable deductions. The "tax preference items" are addedback, then an AMT Exemption is subtracted to compute AMT Taxable Income (AMTI). The

AMT Exemption is phased out at 25 cents per dollar of AMTI above $150,000 on joint returns.Criticism often focuses on the fact that the $150,000 phase-out threshold has never been adjustedfor inflation since its enactment in 1986. AMT Exemption has been changed by a series of short-term legislative "patches" over the years, as shown in the table below. The most recent "patch"was extended through 2009.

AMT Exemption Amounts

1986-1992

1993-2000

2001-2002

2003-2005

2006 2007 20082009only

Married Filing Jointly 40000 45000 49000 58000 62550 66250 69950 70950

Single or Head of Household

30000 33750 35750 40250 42500 44350 46200 46700

Example of level of TMT (in absolute and relative terms on top and bottom) in 2000 and 2004(orange and blue respectively) for a married couple who are filing jointly. The dashed line on thetop show the narrow margin between the TMT and current 2004 tax rate, which means that notmany deductions are needed before the AMT must be paid. The TMT is the minimum amount of 

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tax a person will end up paying, if it is less than the usual tax, there is no AMT. If it is more thanthe usual tax, the AMT makes up the difference.

Tentative Minimum Tax (TMT)

Applying a 26/28% rate schedule to the AMTI gives the "Tentative Minimum Tax" (TMT).TMT is 26% of AMTI up to $175,000, plus 28% of the rest of the AMTI, if any. The TMT iscompared to the income-tax amount calculated for the taxpayer. If the regular income-taxamount is greater than the TMT, no special action is required. If the TMT is greater than the taxcalculated using the regular rules, the difference between the TMT and the regular tax is added tothe regular tax amount, so the taxpayer pays the full amount of the TMT. In effect, the taxliability (before application of credits) is the greater of the regular income tax amount and theTMT.

AMT Exemption Phase-out and Effective Marginal Rates

For 2007, the AMT Exemption is not fully phased out until AMTI surpasses $415,000 for jointreturns. Like any deduction that phases out with income, the AMT Exception increases theeffective marginal tax rate within the phase out range. Within the $150,000 to $415,000 range,the TMT rates of 26% and 28% are effectively multiplied by 1.25, becoming 32.5% and 35%(See note below). The TMT rate for capital gains becomes 21.5% to 22% rather than 15%,because each dollar of capital gain causes 25 cents more of ordinary income to be taxed at 26%or 28%. These are the true marginal federal tax rates for most taxpayers owing AMT. Thesemarginal rates for TMT exceed regular tax rates at the lower end of this income range. ThereforeAMT liability (the excess of TMT over regular tax) typically increases as income increasesabove $150,000. Non-deductibility of state income tax under the TMT exacerbates this problem.Advice to accelerate income when you will be liable for AMT is therefore exactly backwards for

most taxpayers.

AMT Credit

A portion of the tax that is considered AMT may be available in later years as a "Minimum TaxCredit", reducing the tax due in later years, but usually not below the taxpayer's TMT level inthose later years. A full description of the AMT Credit is The Fairmark web site has a guide toAMT Credit.

Transfer taxes

The transfer tax generates roughly 1.5% ($30 billion) of the federal government's annual revenue($2 trillion). It consists of the gift tax, the estate tax and the generation-skipping transfer tax("GSTT"). Opponents of the transfer tax label these taxes "death taxes". The term "death tax"was popularized by Frank Luntz, a Republican political consultant, but its use goes back to atleast the 19th century.

The gift tax is a tax levied on wealth transfers during the transferor's life while the estate tax islevied on transfers made after the transferor's death. The GSTT is a tax in addition to the gift and

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estate tax and is levied (in rough terms) on transfers made during life or after death to individualsremoved by more than one generation from the transferor, for example, from a grandmother to agrandson. Usually transfer tax liabilities are paid by the transferor or the transferor's estate. Payment of transfer taxes by the transferor when the liability is due from the recipient is also ataxable gift.

As of December 2002, tax rates for gift and estate taxes begin at 18% and rise to 50% for giftsover $12,000 or taxable estates over $2.5 million under the Unified Transfer Tax Rate Schedule.The GSTT is a flat 50%. Each individual is granted a Unified Credit (currently $345,800) theeffect of which exempts estates under $1 million. Each individual is also granted an annualexclusion amount the effect of which exempts total gifts to any one individual during the year upto the annual exclusion amount (As of 2009, $13,000 per person per year). If the transferor doesnot elect to pay the gift tax on the value of gifts totaling more than the annual exclusion amount,the individual is deemed to have used a portion of his Unified Credit. An exemption (currently$1.1 million) for transfers subject to the GSTT is also granted to each individual during hislifetime. The Unlimited Marital Deduction allows (non-foreign) spouses to transfer any amount

of wealth with no transfer tax consequences.

Social Security tax

The next largest tax is Social Security tax formally known as the Federal Insurance andContributions Act (FICA). This contribution or tax is 6.2% of an employees' income paid by theemployer, and 6.2% paid by the employee (12.4% total). Self-employed workers must pay bothhalves of the Social Security tax because they are their own employers. This tax is paid only onearned income and, as noted above, only up to a threshold income for calendar year 2009 of $106,800 called the "Social Security Wage Base" (SSWB), for an maximum individualcontribution of $6,621.60 ($13,243.20 combined). The SSWB increases every year according to

the national index average of wages which also indexes the bend points in the Primary InsuranceAmount (PIA) computations. Unearned income like interest from bonds, money market and bank accounts, dividends from REITs and common stocks, rents, and royalties are not subject to theSocial Security tax. Wages are defined in the United States Code 42 USC Section 409. Thus, bysimple arithmetic, higher earners pay a lower average tax rate than those with earned income atthe upper end, making this an extremely regressive tax. Thus, earners above the SSWB pay amuch lower combined marginal federal tax rate, when including Social Security and Medicaretaxes, than those at the SSWB.

City and county tax

Cities and counties in the individual states may levy additional taxes, for instance to improveparks or schools, or pay for police, fire departments, local roads, and other services. As in thecase of the IRS, they generally require a tax payment account number. Other local governmentalagencies may also have the power to tax, notably independent school districts.

Local government usually collect property taxes but may also collect sales taxes and incometaxes. Some cities collect income tax on not only residents but non-residents employed in thecity. This tax can even be incurred when a non-resident works temporarily in the city. For

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example, in 1992 the city of Philadelphia began enforcing the collection of city wage taxes onvisiting baseball players who played games in Philadelphia. At least some counties levy anOccupational Privilege Tax (OPT), usually for a small amount, in some cases less than $100/yr.

Corporate income tax

In the United States, the federal corporate income rate for the year 2006 varies between 15 and39% depending on taxable income. But since 1999, when Treasury announced the "check thebox" system many corporations can elect to be treated as a pass-through entity, thereby skippingthe entity level 35% tax and having all income pass through to the shareholders. This is the taxtreatment that the much discussed "S" corporations receive; but now many more types of state-law corporations may avoid double taxation by "checking the box". Dividends are also subject toa lower rate of income tax in the United States.

Capital gains tax

In the United States, individuals and corporations pay income tax on the net total of all theircapital gains just as they do on other sorts of income. Capital gains are generally taxed at apreferential rate in comparison to ordinary income. This is intended to provide incentives forinvestors to make capital investments and to fund entrepreneurial activity. The amount aninvestor is taxed depends on both his or her tax bracket, and the amount of time the investmentwas held before being sold. Short-term capital gains are taxed at the investor's ordinary incometax rate, and are defined as investments held for a year or less before being sold. Long-term

capital gains, which apply to assets held for more than one year, are taxed at a lower rate thanshort-term gains. In 2003, this rate was reduced to 15%, and to 5% for individuals in the lowesttwo income tax brackets. These reduced tax rates were passed with a sunset provision and areeffective through 2010; if they are not extended before that time, they will expire and revert tothe rates in effect before 2003, which were generally 20%.

The reduced 15% tax rate on qualified dividends and long term capital gains, previouslyscheduled to expire in 2008, was extended through 2010 as a result of the Tax Reconciliation Actsigned into law by President George W. Bush on May 17, 2006. As a result:

  In 2008, 2009, and 2010, the tax rate on qualified dividends and long term capital gains is

0% for those in the 10% and 15% income tax brackets.  After 2010, dividends will be taxed at the taxpayer's ordinary income tax rate, regardless

of his or her tax bracket.  After 2010, the long-term capital gains tax rate will be 20% (10% for taxpayers in the

15% tax bracket).  After 2010, the qualified five-year 18% capital gains rate (8% for taxpayers in the 15%

tax bracket) will be reinstated.

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Capital Gains Taxation in the United States from 2003 forward 

2003 - 2010 2011 -

2003 - 2007 2008 - 2010 2011 -

OrdinaryIncomeTax Rate

Short-

termCapitalGains

Tax Rate

Long-term

CapitalGains

Tax Rate

Short-

termCapitalGains

Tax Rate

Long-term

CapitalGains

Tax Rate

OrdinaryIncomeTax Rate

Short-

termCapitalGains

Tax Rate

Long-term

CapitalGains

Tax Rate

10% 10% 5% 10% 0%15%  15% 10%

15% 15% 5% 15% 0%

25% 25% 15% 25% 15% 28%  28% 20%

28% 28% 15% 28% 15% 31%  31% 20%

33% 33% 15% 33% 15% 36%  36% 20%

35% 35% 15% 35% 15% 39.6%  39.6% 20%

When the taxable gain or loss resulting from the sale of an asset is calculated, its cost basis isused rather than its actual purchase price. The cost basis is an adjustment of the purchase pricethat takes into account factors such as fees paid (brokerage fees, certain legal fees, sales fees),taxes paid (including sales tax, excise taxes, real estate taxes, etc.), and depreciation. 

The United States is unlike other countries in that its citizens are subject to U.S. tax regardless of where in the world they reside. U.S. citizens therefore find it difficult to take advantage of personal tax havens. Although there are some offshore bank accounts that advertise as taxhavens, U.S. law requires reporting of income from those accounts and failure to do soconstitutes tax evasion. 

 History of capital gains tax in the U.S.

From 1913 to 1921, capital gains were taxed at ordinary rates, initially up to a maximum rate of 7 percent. In 1921 the Revenue Act of 1921 was introduced, allowing a tax rate of 12.5 percentgain for assets held at least two years. From 1934 to 1941, taxpayers could exclude percentagesof gains that varied with the holding period: 20, 40, 60, and 70 percent of gains were excluded onassets held 1, 2, 5, and 10 years, respectively. Beginning in 1942, taxpayers could exclude 50percent of capital gains on assets held at least six months or elect a 25 percent alternative tax rateif their ordinary tax rate exceeded 50 percent. Capital gains tax rates were significantly increasedin the 1969 and 1976 Tax Reform Acts. In 1978, Congress reduced capital gains tax rates byeliminating the minimum tax on excluded gains and increasing the exclusion to 60 percent,thereby reducing the maximum rate to 28 percent. The 1981 tax rate reductions further reducedcapital gains rates to a maximum of 20 percent.

The Tax Reform Act of 1986 repealed the exclusion of long-term gains, raising the maximumrate to 28 percent (33 percent for taxpayers subject to phase-outs). When the top ordinary taxrates were increased by the 1990 and 1993 budget acts, an alternative tax rate of 28 percent was

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provided. Effective tax rates exceeded 28 percent for many high-income taxpayers, however,because of interactions with other tax provisions. The new lower rates for 18-month and five-year assets were adopted in 1997 with the Taxpayer Relief Act of 1997. In 2001, PresidentGeorge W. Bush signed the Economic Growth and Tax Relief Reconciliation Act of 2001, intolaw as part of a $1.35 trillion tax cut program.

Tax rates for 2009

*Note: the dollar amount refers to taxable income, not adjusted gross income (AGI).

MarginalOrdinaryIncome

TaxRate[3] 

Single

Married FilingJointly orQualified

Widow(er)

Married FilingSeparately

Head of Household

10% $0 – $8,350 $0 – $16,700 $0 – $8,350 $0 – $11,950

15% $8,351 – $33,950 $16,701 – $67,900 $8,351 – $33,950 $11,951 – $45,500

25% $33,951 – $82,250 $67,901 – $137,050 $33,951 – $68,525 $45,501 – $117,450

28% $82,251 – $171,550$137,051 –  

$208,850$68,525 – $104,425

$117,451 –  $190,200

33%$171,551 –  

$372,950$208,851 –  

$372,950$104,426 –  

$186,475$190,201 - $372,950

35% $372,951+ $372,951+ $186,476+ $372,951+

Short-term capital gains are taxed as ordinary income rates as listed above. Long-term capital

gains have lower rates corresponding to an individual‘s marginal ordinary income tax rate, withspecial rates for a variety of capital goods.

OrdinaryIncome

Rate

Long-term

CapitalGain Rate

Short-term

CapitalGain Rate

Long-term Gain

on RealEstate*

Long-termGain on

Collectibles

Long-term Gainon Certain SmallBusiness Stock

10% 0% 10% 10% 10% 10%

15% 0% 15% 15% 15% 15%

25% 15% 25% 25% 25% 25%

28% 15% 28% 25% 28% 28%

33% 15% 33% 25% 28% 28%

35% 15% 35% 25% 28% 28%

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Corporate tax

Corporate tax or company tax refers to a tax imposed on entities that are taxed at the entity

level in a particular jurisdiction. Such taxes may include income or other taxes. The tax systemsof most countries impose an income tax at the entity level on certain type(s) of entities (companyor corporation). Many systems additionally tax owners or members of those entities on dividendsor other distributions by the entity to the members. The tax generally is imposed on net taxableincome. Net taxable income for corporate tax is generally financial statement income withmodifications, and may be defined in great detail within the system. The rate of tax varies by jurisdiction. The tax may have an alternative base, such as assets, payroll, or income computed inan alternative manner.

Most income tax systems provide that certain types of corporate events are not taxabletransactions. These generally include events related to formation or reorganization of the

corporation. In addition, most systems provide specific rules for taxation of the entity and/or itsmembers upon winding up or dissolution of the entity.

In systems where financing costs are allowed as reductions of the tax base (tax deductions), rulesmay apply that differentiate between classes of member-provided financing. In such systems,items characterized as interest may be deductible, subject to interest limitations, while itemscharacterized as dividends are not. Some systems limit deductions based on simple formulas,such as a debt-to-equity ratio, while other systems have more complex rules.

Some systems provide a mechanism whereby groups of related corporations may obtain benefitfrom losses, credits, or other items of all members within the group. Mechanisms include

combined or consolidated returns as well as group relief (direct benefit from items of anothermember).

Most systems also tax company shareholders on distribution of earnings as dividends. A fewsystems provide for partial integration of entity and member taxation. This is often accomplishedby "imputation systems" or franking credits. In the past, mechanisms have existed for advancepayment of member tax by corporations, with such payment offsetting entity level tax.

Many systems (particularly sub-country level systems) impose a tax on particular corporateattributes. Such non-income taxes may be based on capital stock issued or authorized (either bynumber of shares or value), total equity, net capital, or other measures unique to corporations.

Corporations, like other entities, may be subject to withholding tax obligations upon makingcertain varieties of payments to others. These obligations are generally not the tax of thecorporation, but the system may impose penalties on the corporation or its officers or employeesfor failing to withhold and pay over such taxes

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Taxation of corporations

Corporations may be taxed on their incomes, property, or existence by various jurisdictions.Many jurisdictions impose a tax based on the existence or equity structure of the corporation. Forexample, Maryland imposes a tax on corporations organized in that state based on the number of 

shares of capital stock issued and outstanding. Many jurisdictions instead impose a tax based onstated or computed capital, often including retained profits.

Most jurisdictions tax corporations on their income. Generally, this tax is imposed at a specificrate or range of rates on taxable income as defined within the system. Some systems have aseparate body of law or separate provisions relating to corporate taxation. In such cases, the lawmay apply only to entities and not to individuals operating a trade. Such laws may differentiatebetween broad types of income earned by corporations and tax such types of income differently.Generally, however, most such systems tax all income of a corporation in the same manner.

Some systems (e.g., Canada and the United States) tax corporations under the same framework 

of tax law as individuals. In such systems, there are normally taxation differences related todifferences between the inherent natures of corporations and individuals or unincorporatedentities. For example, individuals are not formed, amalgamated, or acquired, and corporations donot generally incur medical expenses except by way of compensating individuals.

Many systems allow tax credits for specific items. Such direct reductions of tax are commonlyallowed for foreign taxes on the same income and for withholding tax. Often these credits are thesame as those available to individuals or for members of flow through entities such aspartnerships.

Most systems tax both domestic and foreign corporations. Often, domestic corporations are taxed

on worldwide income while foreign corporations are taxed only on income from sources withinthe jurisdiction. Many jurisdictions imposing an income tax impose such tax income from apermanent establishment within the jurisdiction.

Corporations are also subject to property tax, payroll tax, withholding tax, excise tax, customsduties, value added tax, and other common taxes, generally in the same manner as othertaxpayers. These, however, are rarely referred to as ―corporate tax.‖ 

Corporate tax rates

Corporate tax rates generally are the same for differing types of income. However, many systems

have graduated tax rate systems under which corporations with lower levels of income pay alower rate of tax. Some systems impose tax at different rates for different types of corporations.Tax rates vary by jurisdiction. In addition, some countries have sub-country level jurisdictionsthat also impose corporate income tax. Some jurisdictions also impose tax at a different rate onan alternative tax base (see below). Note that some entities may be eligible for tax exemption onpart or all of their income in some jurisdictions

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United States: Federal 15% to 35%. States: 0% to 10%, deductible in computing Federal taxableincome. Some cities: up to 9%, deductible in computing Federal taxable income. The FederalAlternative Minimum Tax of 20% is imposed on regular taxable income with adjustments.

Tax returns

Most systems require that corporations file an annual income tax return. Some systems (such asthe Canadian and United States systems) require that taxpayers self assess tax on the tax return.Other systems provide that the government must make an assessment for tax to be due. Somesystems require certification of tax returns in some manner by accountants licensed to practice inthe jurisdiction, often the company's auditors.

Tax returns can be fairly simple or quite complex. The systems requiring simple returns oftenbase taxable income on financial statement profits with few adjustments, and may require thataudited financial statements be attached to the return. Returns for such systems generally requirethat the relevant financial statements be attached to a simple adjustment schedule. By contrast,

United States corporate tax returns require both computation of taxable income from componentsthereof and reconciliation of taxable income to financial statement income.

Many systems require forms or schedules supporting particular items on the main form. Some of these schedules may be incorporated into the main form. For example, the Canadian corporatereturn, Form T-2, an 8 page form, incorporates some detail schedules but has nearly 50additional schedules that may be required.

Some systems have different returns for different types of corporations or corporations engagedin specialized businesses. The United States has 13 variations on the basic Form 1120 for Scorporations, insurance companies, Domestic international sales corporations, foreign

corporations, and other entities. The structure of the forms and imbedded schedules vary by typeof form.

Preparation of non-simple corporate tax returns can be time consuming. For example, the U.S.Internal Revenue Service states in the instructions for Form 1120 that the average time needed tocomplete form is over 56 hours, not including record keeping time and required attachments.

Tax return due dates vary by jurisdiction, fiscal or tax year, and type of entity. In self assessmentsystems, payment of taxes is generally due no later than the normal due date, though advance taxpayments may be required. Canadian corporations must pay estimated taxes monthly. In eachcase, final payment is due with the corporation tax return.

 Luxury tax

A luxury tax is a tax on luxury goods -- products not considered essential. A luxury tax may bemodeled after a sales tax or VAT, charged as a percentage on all items of particular classes,except that it mainly affects the wealthy because the wealthy are the most likely to buy luxuriessuch as expensive cars, jewelry, etc. It may also be applied only to purchases over a certainamount, for instance, some U.S. states charge luxury tax on real estate transactions over a limit.

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A luxury good may be a Veblen good, which is a type of good for which demand increases asprice increases. Therefore the effect of a luxury tax may be to increase demand for certain luxurygoods. In general, however, since a luxury good has a high income elasticity of demand bydefinition, both the income effect and substitution effect will decrease demand sharply as the taxrises.

History

In the United States, many states used to collect state sales tax through the use of "luxury taxtokens" instead of calculating a percentage to be paid in cash like the modern-day practice.Tokens could be purchased from the state and then used at checkout instead of rendering thesales tax in cash. Presumably, the purpose of the practice was to remove the incentive for storesand businesses to avoid reporting income. Some tokens were copper or base metal while somewere even plastic. 

Impact

When a luxury tax is imposed, typically there is little to no outcry from the majority of thepopulation as most people are not in a position to pay the tax. Over time, what is viewed as"luxury" might change, resulting in more and more people being affected by the tax. Despite theanimosity that ensues, the government may view the income from the luxury tax as essential andwill not restrict or rescind it. So it may happen over time that goods considered "ordinary" mightalso incur luxury tax. An example of this can be seen with various commodities in the country of Norway, where at the beginning of last century, cars and chocolate were viewed as luxury goods.Thus, additional taxes were levied upon these goods. Today few Norwegians consider cars orchocolate a luxury, but the luxury taxes on these goods remain. In Ireland, many personalhygiene products are within the luxury tax bracket.

In addition, this can lead to decreased exchange of luxury goods due to the higher price, resultingin luxury good manufacturers and employees bearing the brunt of the tax and the governmentfacing substantially lower tax revenue. This effect, including the economic damage that it entails,led to the repeal of the luxury tax in the United States.

 Medicare tax

The Medicare tax funds the Medicare program, a health insurance program for the elderly anddisabled. 1.45% of the employee's income is paid by the employer as Medicare tax, and 1.45% ispaid by the employee. Unlike Social Security, there is no cap on the Medicare tax.

For Self-Employed people, Medicare taxes are fixed at 2.9% on all earnings (can be offset byincome tax provisions.)

As in FICA, unearned income is not subject to the Medicare contribution.

Together, Social Security and Medicare taxes compose the payroll tax. These taxes are based onincome, but unlike the Federal income tax, they are set aside for their specific purposes. That is,

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there is a statutory requirement that expenditures on these programs Medicare and SocialSecurity come out of current taxes or accumulated trust funds, so if they go broke, the SocialSecurity Administration and Medicare would be without the authority to pay benefits. UnlikeCongress, they cannot borrow on the federal government's creditworthiness to fund operationsfrom the credit markets.

 Estate tax

The estate tax in the United States is a tax imposed on the transfer of the "taxable estate" of adeceased person, whether such property is transferred via a will, according to the state laws of intestacy or otherwise made as an incident of the death of the owner, such as a transfer of property from an intestate estate or trust, or the payment of certain life insurance benefits orfinancial account sums to beneficiaries. The estate tax is one part of the Unified Gift and Estate

Tax system in the United States. The other part of the system, the gift tax, imposes a tax ontransfers of property during a person's life; the gift tax prevents avoidance of the estate taxshould a person want to give away his/her estate.

In addition to the federal government, many states also impose an estate tax, with the stateversion called either an estate tax or an inheritance tax. Since the 1990s, opponents of the taxhave used the pejorative term "death tax." The equivalent tax in the United Kingdom has alwaysbeen referred to as "death duties."

If an asset is left to a spouse or a charitable organization, the tax usually does not apply.

Federal estate tax

The Federal estate tax is imposed "on the transfer of the taxable estate of every decedent who is

a citizen or resident of the United States." The starting point in the calculation is the "grossestate." Certain deductions (subtractions) from the "gross estate" amount are allowed in arrivingat a smaller amount called the "taxable estate."

The "gross estate"

The "gross estate" for Federal estate tax purposes often includes more property than that includedin the "probate estate" under the property laws of the state in which the decedent lived at the timeof death. The gross estate (before the modifications) may be considered to be the value of all theproperty interests of the decedent at the time of death. To these interests are added the followingproperty interests generally not owned by the decedent at the time of death:

  the value of property to the extent of an interest held by the surviving spouse as a "dower orcurtesy";

  the value of certain items of property in which the decendent had, at any time, made a transferduring the three years immediately preceding the date of death (i.e., even if the property was nolonger owned by the decedent on the date of death), other than certain gifts, and other thanproperty sold for full value;

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  the value of certain property transferred by the decedent before death for which the decedentretained a "life estate", or retained certain "powers";

  the value of certain property in which the recipient could, through ownership, have possession orenjoyment only by surviving the decedent;

  the value of certain property in which the decedent retained a "reversionary interest", the value of which exceeded five percent of the value of the property

  the value of certain property transferred by the decedent before death where the transfer wasrevocable;

  the value of certain annuities;  the value of certain jointly owned property, such as assets passing by operation of law or

survivorship, i.e. joint tenants with rights of survivorship or tenants by the entirety, with specialrules for assets owned jointly by spouses.;

  the value of certain "powers of appointment";  the amount of proceeds of certain life insurance policies.

The above list of modifications is not comprehensive.

As noted above, life insurance benefits may be included in the gross estate (even though theproceeds arguably were not "owned" by the decedent and were never received by the decedent).Life insurance proceeds are generally included in the gross estate if the benefits are payable tothe estate, or if the decedent was the owner of the life insurance policy or had any "incidents of ownership" over the life insurance policy (such as the power to change the beneficiarydesignation). Similarly, bank accounts or other financial instruments which are "payable ondeath" or "transfer on death" are usually included in the taxable estate, even though such assetsare not subject to the probate process under state law.

Deductions and the taxable estateOnce the value of the "gross estate" is determined, the law provides for various "deductions" (inPart IV of Subchapter A of Chapter 11 of Subtitle B of the Internal Revenue Code) in arriving atthe value of the "taxable estate." Deductions include but are not limited to:

  Funeral expenses, administration expenses, and claims against the estate;  Certain charitable contributions;  Certain items of property left to the surviving spouse.  Beginning in 2005, inheritance or estate taxes paid to states or the District of Columbia.

Of these deductions, the most important is the deduction for property passing to (or in certainkinds of trust, for) the surviving spouse, because it can eliminate any federal estate tax for amarried decedent. However, this unlimited deduction does not apply if the surviving spouse (notthe decedent) is not a U.S. citizen. A special trust called a Qualified Domestic Trust or QDOTmust be used to obtain an unlimited marital deduction for otherwise disqualified spouses.

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Tentative tax

The tentative tax is based on the tentative tax base, which is the sum of the taxable estate and the"adjusted taxable gifts" (i.e., taxable gifts made after 1976). The federal estate tax is repealed forone year in 2010 and will return to 2001 rates and rules in 2011. For decedents dying after

December 31, 2010, the tentative tax will be calculated by applying the following tax rates:

  For amounts not greater than $10,000, the tax liability is 18% of the amount.  For amounts over $10,000 but not over $20,000, the tentative tax is $1,800 plus 20% of 

the excess over $10,000.  For amounts over $20,000 but not over $40,000, the tentative tax is $3,800 plus 22% of 

the excess over $20,000.  For amounts over $40,000 but not over $60,000, the tentative tax is $8,200 plus 24% of 

the excess over $40,000.  For amounts over $60,000 but not over $80,000, the tentative tax is $13,000 plus 26% of 

the excess over $60,000.

  For amounts over $80,000 but not over $100,000, the tentative tax is $18,200 plus 28%of the excess over $80,000.

  For amounts over $100,000 but not over $150,000, the tentative tax is $23,800 plus 30%of the excess over $100,000.

  For amounts over $150,000 but not over $250,000, the tentative tax is $38,800 plus 32%of the excess over $150,000.

  For amounts over $250,000 but not over $500,000, the tentative tax is $70,800 plus 34%of the excess over $250,000.

  For amounts over $500,000 but not over $750,000, the tentative tax is $155,800 plus 37%of the excess over $500,000.

  For amounts over $750,000 but not over $1,000,000, the tentative tax is $248,300 plus

39% of the excess over $750,000.  For amounts over $1,000,000 but not over $1,250,000, the tentative tax is $345,800 plus

41% of the excess over $1,000,000.  For amounts over $1,250,000 but not over $1,500,000, the tentative tax is $448,300 plus

43% of the excess over $1,250,000.  For amounts over $1,500,000 but not over $2,000,000, the tentative tax is $555,800 plus

45% of the excess over $1,500,000.  For amounts over $2,000,000 but not over $2,500,000, the tentative tax is $780,800 plus

49% of the excess over $2,000,000.  For amounts over $2,500,000 but not over $3,000,000, the tentative tax is $1,025,800

plus 53% of the excess over $2,500,000. 

For amounts over $3,000,000, the tentative tax is $1,290,800 plus 55% of the excess over$3,000,000.

Additionally, estates of decedents that die after December 31, 2010, will be subject to a 5%surcharge on the excess of their estate over $10,000,000.

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The tentative tax is reduced by gift tax that would have been paid on the adjusted taxable gifts,based on the rates in effect on the date of death (which means that the reduction is notnecessarily equal to the gift tax actually paid on those gifts).

Although the above tax table looks like a system of progressive tax rates, there is a unified credit

against the tentative tax which effectively eliminates any tax on the first $3,500,000 of the estate(or the first $3,500,000 on a combination of taxable gifts during lifetime and a taxable estate atdeath), so the federal estate tax is effectively a flat tax of 45% once the unified credit exclusionamount has been exhausted.

 Property tax

Property tax, or millage tax, is an ad valorem tax that an owner is required to pay on the valueof the property being taxed. Property tax can be defined as "generally, tax imposed bymunicipalities upon owners of real property within their jurisdiction based on the value of suchproperty." There are three species or types of property: Land, Improvements to Land (immovable

manmade objects; i.e., buildings), and Personal (movable manmade objects). Real estate, realproperty or realty are all terms for the combination of land and improvements. The taxingauthority requires and/or performs an appraisal of the monetary value of the property, and tax isassessed in proportion to that value. Forms of property tax used vary between countries and jurisdictions.

The special assessment tax may often be confused with the property tax. These are two distinctforms of taxation: one (ad valorem tax) relies upon the fair market value of the property beingtaxed for justification, and the other (special assessment) relies upon a special enhancementcalled a "benefit" for its justification.

The property tax rate is often given as a percentage. It may also be expressed as a permille(amount of tax per thousand currency units of property value), which is also known as a millagerate or mill levy. (A mill is also one-thousandth of a currency unit.) To calculate the propertytax, the authority will multiply the assessed value of the property by the mill rate and then divideby 1,000. For example, a property with an assessed value of US $50,000 located in amunicipality with a mill rate of 20 mills would have a property tax bill of US $1,000 per year. Inmore familiar terms, dividing the mills by 10 (moving the decimal point to the left by one) yieldsthe percentage rate –  20 mills = 2.0%. Symbolically, 20‰ = 2% – cancel a '0'.

In the United States,  property tax on real estate is usually levied by local government, at themunicipal or county level.

The assessment is made up of two components — the improvement or building value, and theland or site value. In some states, personal property is also taxed. A tax assessor is a publicofficial who determines the value of real property for the purpose of apportioning the tax levy.An appraiser may work for government or private industry and may determine the value of realproperty for any purpose. (Contrast with a land value tax.)

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When assessing a residence, the appraiser investigates the selling prices of all other similarhouses in the area, the cost of replacing it if it gets destroyed, and the most appropriate price thatthe house should sell for. In some areas, the view and/or natural surroundings may be alsoevaluated (see View tax). Then, the appraiser assigns a value which typically lies within thiscalculated range.

Tax assessor offices maintain inventory information about improvements to real estate. Theyalso create and maintain tax maps. This is accomplished with the help of surveyors. On tax maps,individual properties are shown and given unique parcel identifiers (commonly called Assessor'sParcel Numbers - APNs, or Property Identification Numbers - PINs). The tax maps help toensure that no properties are omitted from the tax rolls and that no properties are taxed more thanonce. Real property taxes are usually collected by an official other than the assessor. Oneexample of proposed reform is to create a "two-rate" property and land value tax. 

The assessment of an individual piece of real estate may be according to one or more of thenormally accepted methods of valuation (i.e. income approach, market value or replacement

cost). Assessments may be given at 100 percent of value or at some lesser percentage. In most if not all assessment jurisdictions, the determination of value made by the assessor is subject tosome sort of administrative or judicial review, if the appeal is instituted by the property owner.

Ad valorem (of value) property taxes are based on fair market property values of individualestates. A local tax assessor then applies an established assessment rate to the fair market value.By multiplying the tax rate x against the assessed value of the property, a tax due is calculated.

Property taxes are imposed by counties, municipalities, and school districts, where the millagerate is usually determined by county commissioners, city council members, and school boardmembers, respectively. The taxes fund budgets for schools, police, fire stations, hospitals,

garbage disposal, sewers, road and sidewalk maintenance, parks, libraries, and miscellaneousexpenditures.

Relatively recently, US property tax rates increased well above similar rates in other countries],and exceeded 5% in some US states, thus becoming the main dwelling expense afterconstruction.

Property taxes were once a major source of revenue at the state level, particularly prior to 1900,which was before states switched to relying upon income tax and sales tax as their main sourcesof revenue.

After determining a budget at the municipal level, a legislative appropriation determines how themonies will be collected and distributed. After that, a tax authority levies the tax. An appeal ispermitted. Equalization is then considered by a board of equalizers to assure fair treatment. Thena tax rate is determined by dividing the municipal budget by the assessment role of thatmunicipality. Multiplying tax rate by the assessed value of one's property determines one's taxbill.

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Some jurisdictions have both ad valorem and non-ad valorem property taxes (better known asspecial assessments). The latter come in the form of a fixed charge (regardless of the value of theunderlying property) for items such as street lighting and storm sewer control. In some districts,some veterans of the armed services pay less than others.

In the United States, another form of  property tax is the  personal property tax, which can target

  automobiles, boats, aircraft and other vehicles;   other valuable durable goods such as works of art (most household goods and personal

effects are usually exempt);  business inventory;   Intangible assets such as stocks and bonds. 

In some states, it is permissible to separate the real estate tax into two separate taxes — one theland value and one on the building value. (See Land Value Taxation.)

Personal property taxes can be assessed at almost any level of government, though they areperhaps most commonly assessed by states. 

Some exemptions are available to homeowners in certain counties. In California, some counties,such as Los Angeles, Ventura, and San Diego, offer a homeowners exemption for propertyowners that live in the home.

In Texas, property taxes are used to fund public school districts. 

 Payroll tax

Payroll tax generally refers to two different kinds of similar taxes. The first kind is a tax thatemployers are required to withhold from employees' pay, also known as withholding tax, pay-as-you-earn tax (PAYE), or pay-as-you-go tax (PAYG). The second kind is a tax that is paid fromthe employer's own funds and that is directly related to employing a worker, which can consist of a fixed charge or be proportionally linked to an employee's pay.

In the United States, payroll taxes are assessed by the Federal government, most of the 50 states,the District of Columbia, and numerous cities. These taxes are imposed on employers andemployees and on various compensation bases and are collected and paid to the taxing jurisdiction by the employers. Most jurisdictions imposing payroll taxes require reportingquarterly and annually in most cases, and electronic reporting is generally required for all but

small employers. A video tutorial is available online from the Internal Revenue Service (IRS)explaining various aspects of employer compliance.

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 Excise tax

Excise tax, sometimes called an excise duty, is a type of tax. In the United States, the term"excise" means: (A) any tax other than a property tax or capitation (i.e., an indirect tax, or excise,in the constitutional law sense), or (B) a tax that is simply called an excise in the language of the

statute imposing that tax (an excise in the statutory law sense). An excise under definition (A) isnot necessarily the same as an excise under definition (B). Excise taxes are often seen as a tax onitems like gasoline, tobacco and alcohol (sometimes referred to as sin taxes). The tax is usually aflat amount for a certain quantity of the item (for example, the state of Pennsylvania charges$1.60 for a pack of 20 cigarettes, which is on top of the federal cigarette excise of $1.01). 

Gift tax

In economics, a gift tax is the tax on money or property that one living person gives to another.The United States Internal Revenue Service says a gift is "Any transfer to an individual, eitherdirectly or indirectly, where full consideration (measured in money or money's worth) is not

received in return." Many gifts are not subject to tax, or are exempted from taxation underFederal law. 

For the purposes of taxable income, courts have defined a "gift" as the proceeds from a"detached and disinterested generosity." See Commissioner v. Duberstein (quotingCommissioner v. LoBue, 351 U.S. 243 (1956)). Gifts are often given out of "affection, respect,admiration, charity or like impulses. Duberstein at 285 (quoting  Robertson v. United States, 343U.S. 711, 714 (1952).

The Gift Tax is a back stop to the United States Estate Tax. Without the Gift Tax, large estatescould be reduced by simply giving the money away prior to death, and thus escape any potential

estate tax. Gifts above the annual exemption amount act to reduce to the lifetime Gift Taxexclusion.

Sales tax

A sales tax is a consumption tax charged at the point of purchase for certain goods and services.The tax amount is usually calculated by applying a percentage rate to the taxable price of a sale.A portion of the sale may be exempt from the calculation of tax, because sales tax laws usuallycontain a list of exemptions. Laws governing the tax may require it to be included in the price(tax-inclusive) or added to the price at the point of sale.

Most sales taxes are collected from the buyer by the seller, who remits the tax to a governmentagency. Sales taxes are commonly charged on sales of goods, but many sales taxes are alsocharged on sales of services. Ideally, a sales tax would have a high compliance rate, be difficultto avoid, and be simple to calculate and collect.

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Types of Sales Tax

A conventional or retail sales tax is charged only on the sale of an item to its final end user. Toachieve this, a purchaser who is not an end user is usually required to provide the seller with a"resale certificate," which states that the seller is purchasing an item to resell it. The tax is

charged on each item sold to purchasers who do not provide such a certificate.

Other types of sales taxes, or similar taxes, include:

  Gross receipts taxes, levied on all sales of a business. This tax has been criticized for its"cascading" or "pyramiding" effect, in which an item is taxed more than once as it makesits way from production to final retail sale.

  Excise taxes, applied to a narrow range of products, such as gasoline or alcohol, usuallyimposed on the producer or wholesaler rather than the retail seller.

  Use tax, imposed directly on the consumer of goods purchased without sales tax,generally items purchased from a vendor in another state and delivered to the purchaser

by mail or common carrier. Use taxes are commonly imposed by states with a sales tax,but are difficult to enforce on consumers, except for large items such as automobiles andboats.

  Securities turnover excise tax, a tax on the trade of securities.  Value added taxes, in which tax is charged on all sales, thus avoiding the need for a

system of resale certificates. Tax cascading is avoided by applying the tax only to thedifference ("value added") between the price paid by the first purchaser and the price paidby each subsequent purchaser of the same item.

  FairTax, a proposed federal sales tax, intended to replace the U.S. federal income tax.  Turnover tax, similar to a sales tax, but applied to intermediate and possibly capital goods

as an indirect tax. 

Most countries in the world have sales taxes or value-added taxes at all or several of the national,state, county or city government levels. Countries in Western Europe, especially in Scandinaviahave some of the world's highest valued-added taxes. Norway, Denmark and Sweden have thehighest VATs at 25%, although reduced rates are used in some cases, as for groceries, art, booksand newspaper.

In some countries, there are multiple levels of government which each impose a sales tax. Forexample, sales tax in Chicago (Cook County), IL is 10.25% — consisting of 6.25% state, 1.25%city, 1.75% county and 1% regional transportation authority, Chicago also has the Metropolitan

Pier and Exposition Authority tax on food and beverage of 1% (which means eating out is taxedat 11.25%). For Baton Rouge, Louisiana, the tax is 9%, consisting of 4% state and 5% local rate.

Until 2010, there had never been a federal sales tax in the United States; however, the 2010health care reform law now imposes a 10% federal sales tax on indoor tanning services.

The trend has been for conventional sales taxes to be replaced by more broadly based valueadded taxes, and the United States is now one of the few countries to retain conventional sales

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taxes. VAT has been adopted by the European Union, Mexico, Australia, Canada (Goods andServices Tax) and many other countries.

Sales tax planning

Businesses can reduce the impact of sales tax for themselves and their customers by proactivelyplanning for the tax consequences of all activities. Sales tax planning should include thefollowing:

  Designing invoices to reduce the taxable portion of a sale transaction. In Maryland, forexample, a delivery charge is exempt from the tax when stated separately from handlingand other taxable charges.

  New facilities. Jurisdictions with no sales tax or broad exemptions for certain types of business operations would be an obvious consideration in selecting a site for a newmanufacturing plant, warehouse or administrative office.

  Delivery location. For a businesses operating in several jurisdictions, choosing the best

location in which to take delivery can reduce or eliminate the sales tax liability. This isparticularly important for an item to be sold or used in another jurisdiction with a lowertax rate or an exemption for that item. Businesses should consider whether a temporarystorage exemption applies to merchandise initially accepted in a jurisdiction with a highertax rate.

  Review of company purchases to determine whether tax was paid in error for equipmentand supplies qualifying for exemptions, especially in jurisdictions with broadmanufacturing exemptions. Some jurisdictions allow refunds as long as three or even fouryears after the tax was paid.

  Periodic review of record-keeping procedures related to sales and use tax. Propersupporting detail, including exemption and resale certificates, invoices and other records

must be available to defend the company in the event of a sale and use tax audit. Withoutproper documentation, a seller can be held liable for tax not collected from a buyer.

 Federal Insurance Contributions Act tax

The Federal Insurance Contributions Act (FICA) tax is a United States payroll (oremployment) tax imposed by the federal government on both employees and employers to fundSocial Security and Medicare — federal programs that provide benefits for retirees, the disabled,and children of deceased workers. Social Security benefits include old-age, survivors, and

disability insurance (OASDI); Medicare provides hospital insurance benefits. The amount thatone pays in payroll taxes throughout one's working career is indirectly tied to the social securitybenefits annuity that one receives as a retiree. This has led some to claim that the payroll tax isnot a tax because its collection is tied to a benefit. The United States Supreme Court decided inFlemming v. Nestor  (1960) that no one has an accrued property right to benefits from SocialSecurity.

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History 

Prior to the Great Depression, the following presented difficulties for working-class Americans:

  The U.S. had no federal-government-mandated retirement savings; consequently, for

those people who had not voluntarily saved money throughout their working lives, theend of their work careers was the end of all income.

  Similarly, the U.S. had no federal-government-mandated disability income insurance toprovide for citizens disabled by injuries (of any kind — work-related or non-work-related);consequently, for most people, a disabling injury meant no more income (since mostpeople have little to no income except earned income from work).

  In addition, there was no federal-government-mandated disability income insurance toprovide for people unable to ever work during their lives, such as anyone born withsevere mental retardation. 

  Further, the U.S. had no federal-government-mandated health insurance for the elderly;consequently, for many people, the end of their work careers was the end of their ability

to pay for medical care.  Finally, the U.S. had no federal-government-mandated health insurance for all those who

are not elderly; consequently, many people, especially those with pre-existing conditions,have no ability to pay for medical care.

In the 1930s, the New Deal introduced Social Security to rectify the first three problems(retirement, injury-induced disability, or congenital disability). It introduced the FICA tax as themeans to pay for Social Security.

In the 1960s, Medicare was introduced to rectify the fourth problem (health care for the elderly).The FICA tax was increased in order to pay for this expense.

How the tax is calculated

Overview

The Center on Budget and Policy Priorities states that three-fourths of taxpayers pay more inpayroll taxes than they do in income taxes.[5] The FICA tax is considered a regressive tax onincome (with no standard deduction or personal exemption deduction) and is imposed (for theyears 2009 and 2010) only on the first $106,800 of gross wages. The tax is not imposed oninvestment income (such as interest and dividends).

"Regular" employees (most wage-earners)

For 2008, the employee's share of the Social Security portion of the tax is 6.2% of grosscompensation up to a limit of $102,000 of compensation (resulting in a maximum of $6,324.00in tax). For 2009 and 2010, the employee's share is 6.2% of gross compensation up to a limit of 

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$106,800 of compensation (resulting in a maximum tax of $6,621.60). This limit, known as theSocial Security Wage Base, goes up each year based on average national wages and, in general,at a faster rate than the Consumer Price Index (CPI-U). The employee's share of the Medicareportion is 1.45% of wages with no limit.

The employer is also liable for separate 6.2% and 1.45% Social Security and Medicare taxes,respectively, making the total Social Security tax 12.4% and the total Medicare tax 2.9% of wages. (Self-employed people are responsible for the entire FICA percentage of 15.3% (= 12.4%+ 2.9%), since they are both the employer and the employed; however, see the section on self-employed people for more details.)

If a worker starts a new job halfway through the year and has already earned the wage base limitfor Social Security, the new employer is not allowed to stop withholding it until the wage baselimit has been earned with them. There are some limited cases, such as a successor-predecessortransfer, in which the payments that have already been withheld can be counted toward the year-to-date total.

If a worker has overpaid toward Social Security by having more than one job or by havingswitched jobs during the year, that worker can file to have that overpayment counted as tax paidwhen they file their Federal income tax return. If the taxpayer is due a refund, then the FICAoverpayment becomes part or all of the refund.

Self-employed people

A tax similar to the FICA tax is imposed on the earnings of self-employed individuals, such asindependent contractors and members of a partnership. This tax is imposed not by the FederalInsurance Contributions Act but instead by the Self-Employment Contributions Act of 1954, 

which is codified as Chapter 2 of Subtitle A of the Internal Revenue Code, 26 U.S.C. § 1401through 26 U.S.C. § 1403 (the "SE Tax Act"). Under the SE Tax Act, self-employed people areresponsible for the entire percentage of 15.3% (= 12.4% [Soc. Sec.] + 2.9% [Medicare]);however, the 15.3% multiplier is applied to 92.35% of the business's net earnings from self-

employment , rather than 100% of the gross earnings; the difference, 7.65%, is half of the 15.3%,and makes the calculation fair in comparison to that of regular (non-self-employed) employees. Itdoes this by adjusting for the fact that employees' 7.65% share of their SE tax is multipliedagainst a number (their gross income) that does not include the putative "employer's half" of theself-employment tax. In other words, it makes the calculation fair because employees don't gettaxed on their employers' contribution of the second half of FICA, therefore self-employedpeople shouldn't get taxed on the second half of the self-employment tax. Similarly, self-

employed people also deduct half of their self-employment tax (schedule SE) from their grossincome on the way to arriving at their adjusted gross income (AGI). This levels the amount paidby self-employed persons in comparison to regular employees, who don't pay general income taxon their employers' contribution of the second half of FICA, just as they didn't pay FICA tax onit either.

These calculations are made on Schedule SE: Self-Employment Tax, although that is not readilyapparent to novice self-employed taxpayers, owing to the schedule's rather opaque name, which

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makes it sound like it is part of the general federal income tax. Some taxpayers have complainedthat Schedule SE's title should be changed to something such as "Self-Employment FICA Tax",so that its separateness from the general income tax is apparent, perhaps not realizing that the SEtax is not imposed by the Federal Insurance Contributions Act (FICA) at all, and that neither SEtaxes nor FICA taxes are "income taxes" imposed under Chapter 1 of the Internal Revenue Code.

Exemption for certain full-time students

A special case in FICA regulations includes exemptions for student workers. Students enrolled atleast half-time in a university and working part-time for the same university are exempted fromFICA payroll taxes, so long as their relationship with the university is primarily an educationalone. 

 Federal telephone excise tax

The federal telephone excise tax is a statutory federal excise tax imposed under the Internal

Revenue Code in the United States under 26 U.S.C. § 4251 on amounts paid for certain"communications services." The tax was to be imposed on the person paying for thecommunications services (such as a customer of a telephone company) but, under 26U.S.C. § 4291, is collected from the customer by the "person receiving any payment for facilitiesor services" on which the tax is imposed (i.e., is collected by the telephone company, which filesa quarterly Form 720 excise return and forwards the tax to the Internal Revenue Service).

 Road taxRoad tax, known by various names around the world, is a tax which has to be paid on a motor vehiclebefore using it on a public road. 

Each state requires an annual registration fee which varies from state to state.

For example, in Massachusetts, the excise tax is billed separately from registration fees, by thetown or city in which the vehicle is registered, and was set at a fixed rate of 2.5% statewide by a1980 law called Proposition 2. Within some states, the fees may vary from county to county, assome counties have surcharges per vehicle. An example of this is Virginia's personal propertytax. The state of New York, on the other hand, charges a tax based on the vehicle's weight, ratherthan on its value, which is charged at the time of registration renewal.

In California, the registration tax is calculated by the current value of the vehicle. If it is an oldand low price vehicle, the registration tax is very low. However, if it is a brand new and

expensive vehicle, the registration will cost a few hundreds of US Dollar.

State income tax

State income tax is an income tax in the United States that is levied by each individual state. Seven states impose no income tax. These states are Alaska, Florida, Nevada, South Dakota, Texas, Washington, and Wyoming. Additionally, New Hampshire and Tennessee limit their stateincome taxes to only dividends and interest income. These states (such as Tennessee) raise

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primary revenue through alternate taxation methods, such as higher sales taxes. As of May of 2009, the highest rate of state income tax is that of Hawaii, with a maximum rate of 11%. Of those states which impose an income tax, the lowest maximum rate is that of Illinois, whichlevies a flat tax of 3%. Most states (34) have a progressive income tax, where the rates rise as theincome grows higher. In California, for instance, the rate for a single person begins at 1% at

$6,622 in income and rises to 9.3% over $44,814. In 2005, California added a mental health taxof 1% on incomes greater than $1 million, making the marginal income tax rate in that state10.3% at the extreme income ranges.

State income taxes are on top of the federal income tax, which currently tops out at 35%, as wellas payroll taxes (contributions to Social Security and Medicare). Therefore, the maximum totalrate is 35% of income in the states of Florida, Texas, and Washington, but 44.5% of income inVermont and 45.3% in Californian addition to payroll taxes. However, these figures do notreflect the fact that some state and local taxes (including state income taxes) are deductible forfederal tax purposes. Due to Alternative Minimum Tax, or AMT, itemization may not yieldmuch, if any, tax savings on the federal return. For those not affected by AMT, the federal

government effectively subsidizes a portion of an individual's state income tax, but only forindividuals whose total deductions are greater than the standard deduction, which means thesubsidy falls almost entirely to middle class payers.

In addition, some states allow cities and/or counties to impose income taxes above and beyondthe federal and state income taxes. An example is New York City, where there is both a stateincome tax of up to 6.85%, (8.97% for 2010) and a city income tax, up to 3.648%. Themaximum rate in the city limits of New York City (as of 2007) including federal, state, and citytaxes is therefore 45.498%, or 1.3 times the 35.0% rate inside "federal income tax only" citiessuch as Seattle, Houston, Dallas, and Miami. 

U.S. States without a personal income tax

  Alaska – no personal tax, but has a state corporate income tax.  Florida – no personal income tax, but has a corporate income tax (at a 5% rate). The state

once had a tax on "intangible personal property" held on the first day of the year (stocks,bonds, mutual funds, money market funds, etc.), but it was abolished at the start of 2007.

  Nevada – has no personal or corporate income tax. Nevada gets most of its revenue fromgaming and sales taxes.

  New Hampshire – has an Interest and Dividends Tax of 5%, and a Business Profits Taxof 8.5%.

  South Dakota – no personal income tax, but has a state corporate income tax on financial

institutions.  Tennessee – does have tax on income (at a 6% rate) received from stocks and bonds not

taxed ad valorem (Tenn Const Art II, §28). In 1932, the Tennessee Supreme Court struck down a broad-based personal income tax that had passed the General Assembly [Evans v.McCabe]. However, a number of Attorneys General have recently opined that, if properlyworded, an income tax would be found constitutional by today's court. This is due to a1971 constitutional amendment. (see Tenn. AG Op #99-217, Paul G. Summers) 

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  Texas – no personal income tax or corporate income tax. In May 2007, the legislaturereplaced the franchise tax with a gross margins tax on businesses (sole proprietorshipsand some partnerships were automatically exempt; corporations with receipts below acertain level were also exempt), which was amended in 2009 to increase the exemptionlevel. The Texas Constitution places severe restrictions on passage of a personal income

tax and use of its proceeds.  Washington – no personal tax, but has a Business and Occupation Tax (B&O) on gross

receipts, applied to "almost all businesses located or doing business in Washington." Itvaries from 0.138% for splitting dried peas to 1.6% for bigtime gambling.

  Wyoming – has no personal or corporate income taxes.

 Income tax in the United States

The democratically elected federal government of the United States imposes a progressive tax onthe taxable income of individuals, partnerships, companies, corporations, trusts, decedents' estates, and certain bankruptcy estates. Some state and municipal governments also impose

income taxes. The first Federal income tax was imposed (under Article I, section 8, clause 1 of the U.S. Constitution) during the Civil War, then again in the 1890s, and again after theSixteenth Amendment was ratified in 1913. Current income taxes are imposed under theseconstitutional provisions and various sections of Subtitle A of the Internal Revenue Code of 1986, as amended, including 26 U.S.C. § 1 (imposing income tax on the taxable income of individuals, estates and trusts) and 26 U.S.C. § 11 (imposing income tax on the taxable incomeof corporations).

U.S. States with a flat rate personal income tax

The following states have a flat rate personal income tax: 

  Colorado - 4.63%  Illinois - 3%  Indiana - 3.4%  Massachusetts - 5.3%  Michigan - 4.35%  Pennsylvania - 3.07%  Utah - 5%

Income tax basics

While U.S. income tax law is very complex, the underlying idea is relatively easy to understand.Simplifying greatly, gross income is all income from all sources (§ 61) less any exclusions (§101 et seq.). An exclusion is something that Congress has effectively said a taxpayer need notinclude in his or her income for tax purposes, such as employer-paid health insurance (§ 106) orinterest from tax-exempt bonds (§ 103). Exclusions, often referred to as deductions, are a matterof legislative grace; that is, taxpayers may not exclude, or deduct, from gross income any itemwhich Congress has not specifically allowed.

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For individuals, Adjusted Gross Income (AGI) is gross income less any above-the-linedeductions (§ 62). Above-the-line deductions are listed in § 62 and include trade or businessdeductions, alimony (§ 215), and moving expenses (§ 217). Taxable income is AGI less (1)itemized deductions or the applicable standard deduction, whichever is greater, and (2) adeduction for any allowable personal exemptions for the taxpayer, the taxpayer's spouse (if filing

 jointly), and the taxpayer's dependents. (In certain cases involving higher income taxpayers, theallowed personal exemptions may be reduced or even eliminated.)

Non-itemizers take the standard deduction. Itemized deductions include any deduction not listedin § 62 such as charitable contributions (§ 170) and certain medical expenses (§ 213). Taxableincome is then multiplied by the appropriate tax rate to arrive at the tax due. Tax credits such asthe Earned Income Tax Credit (§ 32) or the Child Tax Credit (§ 24) lower the tax owed on adollar-for-dollar basis. This means tax credits are more valuable than deductions of the sameamount, because deductions are applied before the tax rate, while credits are applied after. Forinstance, with a 35% tax rate, a deduction of $100 would save only $35 of taxes, while a $100credit would save $100 worth of taxes.

Types of income

For tax purposes, income can be divided in a variety of ways. The first division is betweenordinary income and capital gains. Ordinary income includes compensation for personal servicessuch as wages and salaries, business profit, dividends from stock shares, and interest incomefrom invested funds while capital gain generally comes from the sale of investment property.Congress has typically shown a preference for long-term investment by having a capital gains taxrate lower than the ordinary income rate. However, only long-term capital gains get preferentialtreatment; short-term capital gains (from property held for one year or less) are taxed at the samerate as ordinary income. Added complications come from various distinctions within each

category. For instance, qualified dividends, which were previously taxed at ordinary incomerates (as non-qualified dividends currently are), can be currently taxed at long-term capital gainrates until 2011 under the Jobs and Growth Tax Relief Reconciliation Act of 2003, and withinlong-term capital gains, gains on certain real estate, collectibles, and small business stock eachhave their own tax rates. The rules for offsetting capital losses with gains (whether capital orordinary) add further complications. In ordinary usage, when someone speaks of their "tax rate",they typically are referring to their marginal tax rate for ordinary income.

Another important distinction in types of income is income from passive activities versus non-passive activities (§ 469), an attempt to curb tax shelters used by taxpayers not directly involvedwith an activity other than as an investor ("passive").

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Year 2009 income brackets and tax rates

MarginalTax Rate

Single

Married FilingJointly orQualified

Widow(er)

Married FilingSeparately

Head of Household

10% $0 – $8,350 $0 – $16,700 $0 – $8,350 $0 – $11,950

15% $8,351 – $33,950 $16,701 – $67,900 $8,351 – $33,950 $11,951 – $45,500

25% $33,951 – $82,250 $67,901 – $137,050 $33,951 – $68,525 $45,501 – $117,450

28% $82,251 – $171,550$137,051 –  

$208,850$68,525 – $104,425

$117,451 –  $190,200

33%$171,551 –  

$372,950$208,851 –  

$372,950$104,426 –  

$186,475$190,201 - $372,950

35% $372,951+ $372,951+ $186,476+ $372,951+

Year 2010 income brackets and tax rates

MarginalTax Rate

Single

Married FilingJointly orQualified

Widow(er)

Married FilingSeparately

Head of Household

10% $0 – $8,375 $0 – $16,750 $0 – $8,375 $0 – $11,950

15% $8,376 – $34,000 $16,751 – $68,000 $8,376 – $34,000 $11,951 – $45,55025% $34,001 – $82,400 $68,001 – $137,300 $34,001 – $68,650 $45,551 – $117,650

28% $82,401 – $171,850$137,301 –  

$209,250$68,651 – $104,625

$117,651 –  $190,550

33%$171,851 –  

$373,650$209,251 –  

$373,650$104,626 –  

$186,825$190,551 - $373,650

35% $373,651+ $373,651+ $186,826+ $373,651+

An individual's marginal income tax bracket depends upon his income and his tax-filing

classification. As of 2008, there are six tax brackets for ordinary income (ranging from 10% to35%) and four classifications: single, married filing jointly (or qualified widow or widower),married filing separately, and head of household. 

An individual pays tax at a given bracket only for each dollar within that bracket's range. Forexample, a single taxpayer who earned $10,000 in 2009 would be taxed 10% of each dollarearned from the 1st dollar to the 8,350th dollar (10% × $8,350 = $835.00), then 15% of eachdollar earned from the 8,351st dollar to the 10,000th dollar (15% × $1,650 = $247.50), for a total

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of $1,082.50. Notice this amount ($1,082.50) is lower than if the individual had been taxed at15% on the full $10,000 (for a tax of $1,500). This is because the individual's marginal rate (thepercentage tax on the last dollar earned, here 15%) has no effect on the income taxed at a lowerbracket (here the first $8,350 of income taxed at 10%). This ensures that every rise in a person'spre-tax salary results in an increase of his after-tax salary.

However, taxpayers are not taxed on every dollar they make. For 2009, single and married filingseparate taxpayers are allowed a standard deduction of $5,700. Married filing jointly andsurviving widow(er)s are allowed $11,340 and head of household taxpayers are allowed $8,350.Taxpayers over 65 or blind are given an additional $1,100 standard deduction ($2,200 if over 65and blind). A taxpayer may choose to take the standard deduction or they may itemize theirdeductions if the amount of itemized deductions is greater than the standard deduction.

Taxpayers are also allowed a personal exemption depending on their filing status. The personalexemption amount in 2009 is $3,650 per person.

Claiming deductions may reduce an individual's tax liability by a rate equal to the marginal taxrate of their particular tax bracket, with a corresponding reduction in returns as the individualcrosses in to a lower tax bracket. For example, if an individual is able to increase the amount of their deduction by $1000 with a last-minute donation to a charitable organization, and theindividual's adjusted gross income is $500 into the 25% marginal tax bracket, the donation willreduce the tax liability of the individual by ($500 × 25%) + ($500 × 15%) = $200.

The effective tax rates corresponding to the definitions above are shown in the accompanyinggraph.

Short-term capital gains are taxed as ordinary income rates as listed above. Long-term capital

gains have lower rates corresponding to an individual‘s marginal ordinary income tax rate, withspecial rates for a variety of capital goods.

OrdinaryIncome

Rate

Long-term

CapitalGain Rate

Short-term

CapitalGain Rate

Long-term Gain

on RealEstate*

Long-termGain on

Collectibles

Long-term Gainon Certain SmallBusiness Stock

10% 0% 10% 10% 10% 10%

15% 0% 15% 15% 15% 15%

25% 15% 25% 25% 25% 25%

28% 15% 28% 25% 28% 28%33% 15% 33% 25% 28% 28%

35% 15% 35% 25% 28% 28%

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Filing income taxes

April 15 is the deadline for individual taxpayers who are required to file income tax forms to doso. The IRS has reached agreements with various private companies allowing taxpayers whoearn less than $56,000 to file taxes electronically for free. These companies may charge to file

state income tax returns. In 2008, 57% of taxpayers filed electronically, significantly reducingthe last-minute rush at post offices.

History of federal income tax

The federal income tax rates in the United States have varied widely since 1913. For example, in1954 the Congress imposed a federal income tax on individuals, with the tax imposed in layersof 24 income brackets at tax rates ranging from 20% to 91% (for a chart, see Internal RevenueCode of 1954). Here is a partial history of changes in the U.S. federal income tax rates forindividuals (and the income brackets) since 1913: 

Partial History of U.S. Federal Marginal Income Tax Rates

Since 1913

ApplicableYear

Incomebrackets

Firstbracket

Topbracket

Source

1913-1915 - 1% 7% IRS

1916 - 2% 15% IRS

1917 - 2% 67% IRS

1918 - 6% 77% IRS

1919-1920 - 4% 73% IRS

1921 - 4% 73% IRS

1922 - 4% 56% IRS

1923 - 3% 56% IRS

1924 - 1.5% 46% IRS

1925-1928 - 1.5% 25% IRS

1929 - 0.375% 24% IRS

1930-1931 - 1.125% 25% IRS

1932-1933 - 4% 63% IRS

1934-1935 - 4% 63% IRS

1936-1939 - 4% 79% IRS

1940 - 4.4% 81.1% IRS

1941 - 10% 81% IRS

1942-1943 - 19% 88% IRS

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1944-1945 - 23% 94% IRS

1946-1947 - 19% 86.45% IRS

1948-1949 - 16.6% 82.13% IRS

1950 - 17.4% 84.36% IRS

1951 - 20.4% 91% IRS1952-1953 - 22.2% 92% IRS

1954-1963 - 20% 91% IRS

1964 - 16% 77% IRS

1965-1967 - 14% 70% IRS

1968 - 14% 75.25% IRS

1969 - 14% 77% IRS

1970 - 14% 71.75% IRS

1971-1981 15 brackets 14% 70% IRS

1982-1986 12 brackets 12% 50% IRS1987 5 brackets 11% 38.5% IRS

1988-1990 3 brackets 15% 28% IRS

1991-1992 3 brackets 15% 31% IRS

1993-2000 5 brackets 15% 39.6% IRS

2001 5 brackets 15% 39.1% IRS

2002 6 brackets 10% 38.6% IRS

2003-2009 6 brackets 10% 35% Tax Foundation

Top U.S. Federal marginal income tax rate from 1913 to 2009.

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Sources of U.S. income tax laws

United States income tax law comes from a number of sources. These sources have been dividedinto three tiers as follows:

  Tier 1 o  United States Constitutiono  Internal Revenue Code (IRC) (legislative authority, written by the United States Congress

through legislation) o  Treasury regulationso  Federal court opinions (judicial authority, written by courts as interpretation of 

legislation)o  Treaties (executive authority, written in conjunction with other countries)

  Tier 2 o  Agency interpretative regulations (executive authority, written by the Internal Revenue

Service (IRS) and Department of the Treasury), including:  Final, Temporary and Proposed Regulations promulgated under IRC § 7805;

  Treasury Notices and Announcements;o  Public Administrative Rulings (IRS Revenue Rulings, which provide informal guidance

on specific questions and are binding on all taxpayers)  Tier 3 

o  Legislative Historyo  Private Administrative Rulings (private parties may approach the IRS directly and ask for

a Private Letter Ruling on a specific issue - these rulings are binding only on therequesting taxpayer).

Where conflicts exist between various sources of tax authority, an authority in Tier 1 outweighsan authority in Tier 2 or 3. Similarly, an authority in Tier 2 outweighs an authority in Tier 3.Where conflicts exist between two authorities in the same tier, the "last-in-time rule" is applied.

As the name implies, the "last-in-time rule" states that the authority that was issued later in timeis controlling.

Regulations and case law serve to interpret the statutes. Additionally, various sources of lawattempt to do the same thing. Revenue Rulings, for example, serves as an interpretation of howthe statutes apply to a very specific set of facts. Treaties serve in an international realm

State and territorial income taxes

Income tax may also be levied by individual U.S. states and are on top of the federal income tax.

In addition, some states allow individual cities to impose an additional income tax. However,state and local income taxes are deductible for federal tax purposes. Through this deduction, thefederal government effectively subsidizes a portion of an individual's state income tax if thetaxpayer itemizes deductions. Puerto Rico is treated as a separate taxing entity from the USA; itsincome tax rates are set independently, and only some residents there pay federal incometaxes[30] (though everyone must pay all other federal taxes).[31] Unincorporated Territories(Guam, American Samoa, and the Virgin Islands) all levy a mirror income tax at rates equal to

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the prevailing US federal tax; thus, to individual taxpayers these entities appear to be like theother states not having a local income tax.

 IRS penalties

Taxpayers in the United States may face various penalties for failures related to Federal, state,and local tax matters. The Internal Revenue Service (IRS) is primarily responsible for initiatingthese penalties at the Federal level. The IRS can impose only those penalties specified in Federaltax law. State and local rules vary widely, are administered by state and local authorities, and arenot discussed herein.

Penalties may be monetary, may involve forfeiture of property, or may even include jail time.Most monetary penalties are based on the amount of tax not properly paid. Penalties mayincrease with the period of nonpayment. Some penalties are fixed dollar amounts or fixedpercentages of some measure required to be reported. Some penalties may be waived or abated

where the taxpayer shows reasonable cause for the failure.

Penalties apply for failures to file income tax or information returns or filing incorrect returns.Some penalties may be very minor. Penalties apply for certain types of errors on tax returns, andmay be substantial. Some penalties are imposed as excise taxes on particular transactions.Certain other penalties apply for other types of failures. Willful failures generally carry muchhigher penalty, which may include jail. In addition, certain criminal acts may result in forfeitureof property of the taxpayer.

Under estimate and late payment penalties

Taxpayers are required to have withholding of tax or make quarterly estimated tax paymentsbefore the end of the tax year. Since accurate estimation requires accurate prediction of thefuture, taxpayers may underestimate the amount due. The penalty for paying too little estimatedtax or having too little tax withheld is computed like interest on the amount that should havebeen but was not paid. For 2009, this interest rate was 4%.

Where a taxpayer has filed an income or excise tax return that shows a balance due but does notpay that balance by the due date of the return (without extensions), a different charge applies.These charges has two components, first an interest charge, computed as described above, andsecond a penalty of 0.5% per month applied to the unpaid balance of tax and interest. The 0.5%penalty is capped at 25% of the total unpaid tax.

The under estimate penalty and interest on late payment are automatically assessed. Noreasonable cause exception applies for these penalties.

Late income tax return penalties 

If a taxpayer is required to file an income or excise tax return and fails to timely do so, analternate penalty may be assessed. The penalty is 5% of the amount of unpaid tax per month the

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return is late, up to a maximum of 25%. The 25% cap above applies to the 5% late filing penaltyand the 0.5% late payment penalty together. The late filing penalty may be waived or abated onshowing of reasonable cause for failure. A minimum penalty of $135 may apply for late filing of an income tax return.

Accuracy related penalties 

If amounts reported on an income tax return are later adjusted by the IRS and a tax increaseresults, an additional penalty may apply. This penalty of 20% or 40% of the increase in tax is duein the case of substantial understatement of tax, substantial valuation misstatements, transferpricing adjustments, or negligence or disregard of rules or regulations. Special rules apply foreach of these types of errors under which the penalty may be waived.

Late information return penalties 

Certain types of returns do not require payment of tax. These include forms filed by employers to

report wages (Form W-2) and businesses to report certain payments (Form 1099 seriesinstructions). The penalty for failures related to these forms is a small dollar amount per form nottimely filed, and the amount of penalty increases with the degree of lateness. The currentmaximum penalty for these forms is $50. Many of the forms must be filed electronically, andfiling on paper is considered non-filing.

Late filing of partnership returns can result in penalties of $195 per month per partner. Similarpenalties may apply to S corporation returns.

100% penalty on unpaid withholding taxes

Employers are required to withhold income and social security taxes from wages paid toemployees, and pay these amounts promptly to the government. A penalty of 100% of theamount not paid over (plus liability for paying the withheld amounts) may be collected without judicial proceedings from each and every person who had custody and control of the funds anddid not make the payment to the government. This applies to company employees and officers asindividuals, as well as to companies themselves. There have been reported cases of the IRSseizing houses of those failing to pay over employee taxes.

Penalties for failure to provide foreign information

Taxpayers who are shareholders of controlled foreign corporations must file Form 5471 withrespect to each such controlled foreign corporation. Penalties for failure to timely file are$10,000 to $50,000 per form, plus possible loss of foreign tax credits. U.S. corporations morethan 25% owned, directly or indirectly, by foreign persons must file Form 5472 to report suchownership and all transactions with related parties. Failure to timely file carries a $10,000penalty per required form. This penalty may be increased by $10,000 per month per form forcontinued failure to file. In addition, taxpayers who fail to report changes in foreign taxes used ascredits against Federal income tax may be subject to penalties.

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U.S. citizen or resident taxpayers (including entities) who are beneficiaries of a foreign trust ormake transfers of property to a foreign trust must report information about the transfer and thetrust or corporation. Failure to timely report on Form 3520 or Form 3520-A may result inpenalties of up to 35%. Similar transferors to foreign corporations failing to file Form 926 mayface penalties of 10% of the value of the transfer, up to $100,000. Penalties up to $500,000 plus

 jail time may apply for failure to file Treasury Department Form TD F 90-22.1 each year byowners of or signatories to foreign bank or securities accounts.

Tax fraud penalties 

Intentional filing of materially false tax returns is considered tax fraud, and is a criminal offence.Any person convicted of committing tax fraud, or aiding and abetting another in committing taxfraud, may be subject to forfeiture of property and/or jail time. Conviction and sentencing isthrough the court system. The U.S. Department of Justice, and not the Internal Revenue Service,is responsible for prosecution.

Penalties may be assessed against tax protesters who raise arguments that income tax laws arenot valid or for filing frivolous returns or court petitions.

Tax adviser penalties 

Penalties also apply to persons who promote tax shelters or who fail to maintain and discloselists of reportable transactions their customers or clients for those transactions. These monetarypenalties can be severe.

Judicial appeal of penalties

Most penalties are subject to judicial review. However, the courts rarely modify assessment of the penalties and interest for under estimate or late payment. No criminal penalties may beimposed by the IRS or Department of Justice except by order of a court upon conviction at trial.Convictions may be appealed within the court system. Prosecution for tax crimes is undertakenin the U.S. District Court having jurisdiction over the taxpayer. Appeal of other tax penaltiesmay be in that district court, in the United States Tax Court, or in the Court of Claims.

 Federal tax revenue by state

This is a table of the total Federal tax revenue by state collected by the U.S. Internal Revenue

Service in 2007.

Gross collections indicate the total Federal tax revenue collected by the IRS from each U.S.state, the District of Columbia, and Puerto Rico. The figure includes all individual and corporateincome taxes, estate taxes, gift taxes, and excise taxes. This table does not include Federal taxrevenue data from U.S. Armed Forces personnel stationed overseas, U.S. territories other thanPuerto Rico, and U.S. citizens and legal residents living abroad, even though they may berequired to pay Federal taxes.

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Rank   State  

Gross collections

(2007)

Population

(2007)

Revenue per

capita  

1 California  $313,998,874,000 36,553,215 $8,590.18

2 New York   $244,672,914,000 19,297,729 $12,678.84

3 Texas   $225,390,904,000 23,904,380 $9,428.85

4 Florida  $136,476,423,000 18,251,243 $7,477.65

5 Illinois  $135,458,089,000 12,852,548 $10,539.40

6 New Jersey $121,678,423,000 8,685,920 $14,008.70

7 Pennsylvania   $112,368,286,000 12,432,792 $9,038.06

8 Ohio  $105,772,774,000 11,466,917 $9,224.17

9 Minnesota  $78,697,313,000 5,197,621 $15,141.03

10 North Carolina   $75,903,684,000 9,061,032 $8,376.94

11 Georgia  $75,217,980,000 9,544,750 $7,880.56

12 Massachusetts   $74,782,325,000 6,449,755 $11,594.60

13 Michigan  $69,923,907,000 10,071,822 $6,942.53

14 Virginia  $61,989,886,000 7,712,091 $8,038.01

15 Washington  $57,449,739,000 6,468,424 $8,881.57

16 Connecticut  $54,235,851,000 3,502,309 $15,485.74

17 Maryland  $53,705,070,000 5,618,344 $9,558.88

18 Missouri  $48,568,138,000 5,878,415 $8,262.11

19 Tennessee   $47,746,721,000 6,156,719 $7,755.22

20 Colorado 

$45,404,194,000 4,861,515 $9,339.5221 Wisconsin $43,778,325,000 5,601,640 $7,815.27

22 Indiana  $42,668,067,000 6,345,289 $6,724.37

23 Arizona $35,485,237,000 6,338,755 $5,598.14

24 Louisiana  $33,676,593,000 4,293,204 $7,844.16

25 Oklahoma   $29,324,569,000 3,617,316 $8,106.72

26 Arkansas   $27,340,140,000 2,834,797 $9,644.48

27 Alabama  $24,149,102,000 4,627,851 $5,218.21

28 Oregon  $23,466,608,000 3,747,455 $6,262.01

29 Kentucky $23,150,555,000 4,241,474 $5,458.1430 Kansas   $22,311,231,000 2,775,997 $8,037.20

31 South Carolina  $20,499,446,000 4,407,709 $4,650.82

District of Columbia

$20,393,510,000 588,292 $34,665.63

32 Nevada  $19,619,012,000 2,565,382 $7,647.60

33 Nebraska   $19,043,258,000 1,774,571 $10,731.19

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34 Iowa  $18,436,557,000 2,988,046 $6,170.10

35 Delaware  $16,857,669,000 864,764 $19,493.95

36 Utah  $15,063,650,000 2,645,330 $5,694.43

37 Rhode Island   $11,966,818,000 1,057,832 $11,312.59

38 Mississippi $10,868,707,000 2,918,785 $3,723.7139 New Hampshire   $9,304,200,000 1,315,828 $7,070.98

40 Idaho  $9,024,822,000 1,499,402 $6,018.95

41 New Mexico   $8,346,154,000 1,969,915 $4,236.81

42 Hawaii  $7,666,494,000 1,283,388 $5,973.64

43 West Virginia   $6,521,950,000 1,812,035 $3,599.24

44 Maine $6,289,216,000 1,317,207 $4,774.66

45 South Dakota   $4,765,559,000 796,214 $5,985.27

46 Wyoming  $4,724,678,000 522,830 $9,036.74

47 Montana $4,522,680,000 957,861 $4,721.6548 Alaska  $4,287,200,000 683,478 $6,272.62

49 Vermont  $3,806,110,000 621,254 $6,126.50

50 North Dakota   $3,659,740,000 639,715 $5,720.89

Puerto Rico   $3,548,466,000 3,941,459 $888.39

TOTAL  $2,674,007,818,000  305,562,616 $8,528.22 (US

Avg.)

Tax policy

Tax policy is the government's approach to taxation, both from the practical and normative side of thequestion.

Policymakers debate the nature of the tax structure they plan to implement (i.e., how progressiveor regressive) and how they might affect individuals and businesses (i.e., tax incidence).

The reason for such focus is economic efficiency as advisor to the Stuart King of EnglandRichard Petty had noted that the government does not want to kill the goose that lays the goldenegg. The paradigmatic efficient taxes are either those which are nondistortionary or lump sum.However, readers must be cautioned about the economist's definition of distortion only considers

the substitution effect because anything which does not change relative prices is defined asnondistortionary. One must also consider the income effect, which for tax policy purposes oftenneeds to be assumed to cancel out in the aggregate. The efficiency loss is depicted on the demandcurve and supply curve diagrams as the area inside Harberger's Triangle. 

National Insurance in the United Kingdom and Social Security in the United States are forms of social welfare funded outside their national income tax systems, paid for through workercontributions, something labeled a stealth tax by critics.

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The implementation of tax policy has always been a tricky business. For example, in pre-revolutionary colonial America, the argument "No taxation without representation" resulted fromthe tax policy of the British Crown, which taxed the settlers but offered no say in theirgovernment. A more recent American example is President George H. W. Bush's famous taxpolicy quote, "Read my lips: no new taxes." 

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Tax system and procedure in United Kingdom (UK)

Taxation in the United Kingdom may involve payments to a minimum of two different levels of 

government: The central government (Her Majesty's Revenue and Customs) and local

government. Central government revenues come primarily from income tax, National Insurance

contributions, value added tax, corporation tax and fuel duty. Local government revenues come

primarily from grants from central government funds, business rates in England and Wales, 

Council Tax and increasingly from fees and charges such as those from on-street parking. In the

fiscal year 2007-08, total government revenue was 39.2 per cent of GDP, with net taxes and

National Insurance contributions standing at 36.9 per cent of GDP — approximately

£606,661,000,000 (using 2008 nominal GDP measured in dollars, and converting using 2009

conversion rate).

Income tax forms the bulk of revenues collected by the government. The second largest source of 

government revenue is National Insurance Contributions. The third largest source of government

revenues is value added tax (VAT), and the fourth-largest is corporation tax. 

 Institute of Indirect Taxation

The Institute of Indirect Taxation is a professional body in the United Kingdom. Its membersspecialise in the study and practice of indirect taxes. The body was formed in July 1991 andformally launched in October 1991. It gained permission to call itself an institute in December of the same year. It operates as a company limited by guarantee. 

Entry to the Institute is normally gained by taking up to four professional examinations inindirect taxation. There are two routes through the exams, the Value Added Tax route and thecustoms route which reflect two of the most major areas that indirect taxation is applied to in theUnited Kingdom. It is possible to gain exemptions from some of the exams through possessingother suitable qualifications which include those from various British accountancy professionalbodies, the Chartered Institute of Taxation and HM Revenue and Customs. 

The four papers are:

  I: Legal, Business and Professional Ethics  II: optional paper which is dependent on whether the VAT or customs route through the

qualification is being taken  III: Other Indirect Taxes  IV: Stamp Taxes, Direct Taxes and Interaction of all Taxes

Those who have passed the examinations and been accepted into membership are entitled to usethe designator letters AIIT (Associate of the Institute of Indirect Taxation). Upon submission of athesis to the institute it is possible to become a Fellow of the Institute of Indirect Taxation whichallows for the use of the designator letters FIIT. Other categories of member, which are without

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designator letters, are student members and affiliate members. It is also possible to be made anhonorary member or fellow.

Chartered Institute of Taxation

The Chartered Institute of Taxation (CIOT) is a registered charity (number 1037771) and theleading professional body in the United Kingdom concerned solely with taxation. The CIOTdeals with all aspects of direct and indirect taxation. Its primary purpose is to promote educationin and the study of the administration and practice of taxation. One of its key aims is to achieve abetter, more efficient, tax system for all affected by it - taxpayers, advisers and the authorities.The CIOT‘s comments and recommendations on tax issues are made solely in order to achieve

its aims: it is entirely apolitical in its work.

Membership is awarded on passing the Institute's examination and completing 3 years' practicalUK taxation experience. Members may use the letters CTA (Chartered Tax Adviser), formerly

ATII (Associate of the Taxation Institute Incorporated). The CIOT describes its qualifications asthe ' gold standard'.

Fellowship is available following the submission of a thesis or a body of work. Fellow membersmay use the letters CTA(Fellow), formerly FTII, after their name to indicate fellowship.

 Income tax

Income tax forms the bulk of revenues collected by the government. Each person has an incometax personal allowance, and income up to this amount in each tax year is free of tax for everyone.For 2010-11 the tax allowance for fewer than 65s is £6,475. This reduces by £1 for every £2 of 

taxable income above £100,000.

Above this amount there are a number of tax bands — each taxed at a different rate (as of 2010-11):

RateDividendincome

Savingsincome

Other income (incemployment)

Band (above any personalallowance)

Lower rate N/A 10% N/A

£0 - £2440 applies only if total income falls in

 this band  

Basic rate 10% 20% 20% £0 - £37,400

Higher rate 32.5% 40% 40% over £37,400

Additionalrate

N/A 50% 50% over £150,000

This table reflects the removal of the 10% starting rate from April 2008, which also saw the 22%income tax rate drop to 20%.  Alistair Darling announced in the 2009 budget (22 April 2009)

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that, from April 2010 there would be a new 50% income tax rate for those earning more than£150,000.

The taxpayer's income is assessed for tax according to a prescribed order, with income fromemployment using up the personal allowance and being taxed first, followed by savings income

(from interest or otherwise unearned) and then dividends.

 History

The income tax was first implemented in Britain by William Pitt the Younger in his budget of December 1798 to pay for weapons and equipment in preparation for the Napoleonic Wars. Pitt'snew graduated (progressive) income tax began at a levy of 2 old pence in the pound (1/120) onincomes over £60 (the equivalent of £48,700 in 2007) and increased up to a maximum of 2shillings (10%) on incomes of over £200. Pitt hoped that the new income tax would raise £10million, but actual receipts for 1799 totalled just over £6 million.

Income tax was levied under five schedules — income not falling within those schedules was nottaxed. The schedules were:

  Schedule A (tax on income from UK land)  Schedule B (tax on commercial occupation of land)  Schedule C (tax on income from public securities)  Schedule D (tax on trading income, income from professions and vocations, interest, overseas

income and casual income)  Schedule E (tax on employment income)

Later a sixth Schedule, Schedule F (tax on UK dividend income) was added.

Pitt's income tax was levied from 1799 to 1802, when it was abolished by Henry Addingtonduring the Peace of Amiens. Addington had taken over as prime minister in 1801, after Pitt'sresignation over Catholic Emancipation. The income tax was reintroduced by Addington in 1803when hostilities recommenced, but it was again abolished in 1816, one year after the Battle of Waterloo. The UK income tax was reintroduced by Sir Robert Peel in the Income Tax Act 1842. Peel, as a Conservative, had opposed income tax in the 1841 general election, but a growingbudget deficit required a new source of funds. The new income tax, based on Addington's model,was imposed on incomes above £150 (the equivalent of £111,800 in 2007).

UK income tax has changed over the years. Originally it taxed a person's income regardless of who was beneficially entitled to that income, but now a person owes tax only on income to

which he or she is beneficially entitled. Most companies were taken out of the income tax net in1965 when corporation tax was introduced. Also the schedules under which tax is levied havechanged. Schedule B was abolished in 1988, Schedule C in 1996 and Schedule E in 2003. Forincome tax purposes, the remaining schedules were superseded by the Income Tax (Trading andOther Income) Act 2005, which also repealed Schedule F completely. The Schedular system andSchedules A and D still remain in force for corporation tax. The highest rate peaked in theSecond World War at 99.25% and remained at about 95% till the late 1970s.

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In 1974 the top-rate of income tax increased to its highest rate since the war, 83%. This appliedto incomes over £20,000, and combined with a 15% surcharge on 'un-earned' income(investments and dividends) could add to a 98% marginal rate of personal income tax. In 1974,as many as 750,000 people were liable to pay the top-rate of income tax. Margaret Thatcher, whofavored indirect taxation, reduced personal income tax rates during the 1980s. In the first budget

after her election victory in 1979, the top rate was reduced from 83% to 60% and the basic ratefrom 33% to 30%. The basic rate was also cut for three successive budgets - to 29% in the 1986budget, 27% in 1987 and to 25% in 1988. The top rate of income tax was cut to 40% in the 1988budget.

The Finance Act 2004 introduced an income tax regime known as "pre-owned asset tax" whichaims to reduce the use of common methods of inheritance tax avoidance. 

Exceptions

Many holdings and income from them are exempt for "historical reasons". These include

  Special, low tax arrangements for the monarchy, such as the arrangement used by the BritishRoyal Family to avoid inheritance taxation.

  Reduced income tax for special classes of person, such a non-doms, who claim to be resident inthe UK but not "domiciled".

  An Act of Parliament to protect the Earl of Abingdon and his ―heirs and assignees‖ from payingincome tax on the tolls on the Swinford Toll Bridge. 

  The income of charities is usually exempt from UK income tax.

 Inheritance tax

Estate duty was replaced in 1975 by Capital Transfer Tax, which was rebranded Inheritance

Tax (IHT) in 1986. Partly due to the simple and widely-used methods which are available toavoid it, Inheritance Tax accounts for about 0.8% of government income, raising around £2billion in 2001 and £3.6 billion in 2006.

For the 2010/2011 tax year, the IHT rate is 0% on the first £325,000 (the "nil-rate band), and40% on the rest of the value, at death, of an individual's tax estate. The nil rate band risesannually; tax is only payable on the value of an estate above the nil rate band. For example, allother things being equal, an individual whose estate is £354,000 (the mean London house pricein 2007) will pay IHT amounting to 0% of £325,000 plus 40% of £29,000 i.e. £11,600 in all.This is 40% of the amount over the nil rate band, but in this example, 3.2% of the total value of the estate. Those whose estates match the average nation-wide house price of £210,000 will payzero IHT.

In the 2007 budget report the Chancellor of the Exchequer announced that the nil rate band is torise to £350,000 by 2010. This is said to take into account the sharp rise in house prices in theUnited Kingdom over the past few years, although in fact it represents an increase below the rateof house price inflation. This increase was however cancelled by the Chancellor in December2009.

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Deductions

There are deductions for:

1.  All assets left to a UK-registered charity. 

2. 

Some political donations to major political parties. 3.  Gifts of up to £3,000 in total in a given year.4.  "Small gifts" of up to £250 made to separate individuals.5.  Some business assets (under Business Property Relief or "BPR").6.  Some farmland (under Agricultural Property Relief or "APR").7.  Gifts made out of income that does not affect the standard of living of the donor.8.  Gifts made in contemplation of a marriage or civil partnership. The allowance ranges from £5,000

to £1,000 according to the closeness of the relationship of the donor to the person marrying orentering into a civil partnership.

Council Tax

Council Tax is the system of local taxation used in England, Scotland and Wales topart fund the services provided by local government in each country. (In NorthernIreland, and Australia, the form of local taxation is rates.) It was introduced in 1993by the Local Government Finance Act 1992, as a successor to the unpopularCommunity Charge. The basis for the tax is residential property, with discounts forsingle people. As of 2008, the average annual levy on a property in England was£1,146. 

Organization

Council Tax is collected by the local authority (known as the collecting authority). However, itmay consist of components (precepts) levied and redistributed to other agencies or authorities(each known as a precepting authority).

Collecting authorities

The collecting authorities are the councils of the districts of England, principal areas of Walesand council areas of Scotland, i.e. the lowest tier of local government aside from parishes andcommunities.

Precepting authoritiesThe precepting authorities are councils from other levels of local government such as a county orparish councils and other agencies. In metropolitan counties where there is no county council, the joint boards are precepting authorities. There may be precepting authorities for special purposeswhich cover an area as small as a few streets or as large as an entire country.

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Strategic authorities  Greater London Authority, county councils 

Joint boards  passenger transport executives, police authorities, fire authorities 

Public-owned utilities  Scottish Water

Lowest-tier authorities  civil parishes

Special purpose authorities national park authorities, Olympic Delivery Authority 

These all set their precepts independently. Each of the levying authorities sets a precept (totalamount) to be collected for households in their area. This is then divided by the number of nominal Band D properties in the authority's area (county, district, national park, etc.) to reachthe Band D amount.

Calculation

Each dwelling is allocated to one of eight bands coded by letters A to H (A to I in Wales) on thebasis of its assumed capital value (as of 1 April 1991 in England and Scotland, 1 April 2003 inWales). Newly constructed properties are also assigned a nominal 1991 (2003 for Wales) value.Each local authority sets a tax rate expressed as the annual levy on a Band D property inhabitedby two liable adults. This decision automatically sets the amounts levied on all types of households and dwellings. The nominal Band D property total is calculated by adding togetherthe number of properties in each band and multiplying by the band ratio. So 100 Band D

properties will count as 100 nominal Band D properties, whereas 100 Band C properties willcount as 89 nominal Band D properties. Each collecting authority then adds together the Band Damounts for their area (or subdivisions of their area in the case, for example, of civil parishcouncil precepts) to reach a total Band D council tax bill. To calculate the council tax for aparticular property a ratio is then applied. A Band D property will pay the full amount, whereas aBand H property will pay twice that.

Revaluation

The government had planned to revalue all properties in England in 2007 (the first revaluationssince 1993) but, in September 2005, it was announced that the revaluation in England would be

postponed until "after the next election". At the same time, the terms of reference of the LyonsInquiry were extended and the report date pushed out to December 2006 (subsequently extendedto 2007). In Wales, tax bills based on the property revaluations done using 2003 prices wereissued in 2005. Because of the surge in house prices over the late 1990s and early 2000s, morethan a third of properties in Wales found themselves in a band higher than under the 1991valuation. Some properties were moved up three or even four bands with consequent largeincreases in the amount of council tax demanded. Some properties were moved into new Band Iat the top of the price range. Only 8% of properties were moved down in bands.

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However, a large shift of properties between bands will cause a shift in the allocation of thecharge between bands, and the tax levied for each particular band will then drop, as the totalamount collected will remain the same for each authority (see 'calculation of amount' above).Between the wholesale revaluations, a major change to a property (such as an extension, or somemajor blight causing loss of value) can trigger a revaluation to a new estimate of the value the

property would have reached if sold in 1991. If such a change would result in an increase invalue, then re-banding will only take effect when the property is sold or otherwise transferred.

Current bands

In England, the council tax bands are as follows:

Band  Value  Ratio Ratio as % Average 

A  up to £40,000  6/9  67%  £845 

B  £40,001 to £52,000  7/9  78%  £986 

C  £52,001 to £68,000  8/9  89%  £1,127 

D  £68,001 to £88,000  9/9  100%  £1,268 

E  £88,001 to £120,000  11/9  122%  £1,550 

F  £120,001 to £160,000 13/9  144%  £1,832 

G  £160,001 to £320,000 15/9  167%  £2,113 

H  £320,001 and above  18/9  200%  £2,536 

Exemptions

Some dwellings are exempt from paying Council Tax. The list outlined below broadly explainswhich types of properties may be exempt and where they will be exempt only for a specifiedlength of time. Unless specified, there is no period of time for how long the exemption can last.

Class  Description 

A Vacant dwellings where major repair works or structural alterations are required, underway or

recently complete (up to twelve months). 

B  Unoccupied (and furnished) dwellings owned by a charity (up to six month). 

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C  A vacant dwelling (i.e. empty and substantially unfurnished) (up to six months). 

D  A dwelling left unoccupied by people who are detained in prison. 

E An unoccupied dwelling which was previously the sole or main residence of a person who has

moved into a hospital or care home. 

F  Dwellings left unoccupied by deceased persons. 

G An unoccupied dwelling where the occupation is prohibited by law, however squatters can still be

charged normal rates if they are found to be residing there. 

H  Unoccupied clergy dwellings. 

I An unoccupied dwelling which was previously the sole or main residence of a person who is the

owner or tenant and has moved to receive personal care. 

J An unoccupied dwelling which was previously the sole or main residence of a person who is the

owner or tenant and has moved to provide personal care to another person. 

K An unoccupied dwelling where the owner is a student who last lived in the dwelling as their main

home. 

L  An unoccupied dwelling that has been taken into possession by a mortgage lender. 

M  A hall of residence provided predominantly for the accommodation of students. 

N A dwelling which is occupied only by students, the foreign spouses of students, or school and

college leavers. 

O  Armed forces' accommodation. 

P A dwelling where at least one person who would otherwise be liable has a relevant association with

a visiting force. 

Q An unoccupied dwelling where the person who would otherwise be liable is a trustee in

bankruptcy. 

R  Empty caravan pitches or boat moorings not in use. 

S  A dwelling occupied only by a person, or persons, aged under 18. 

T A dwelling which forms part of a single property which includes another dwelling and may not be

let separately from that dwelling, without a breach of planning control. 

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U 

A dwelling occupied only by a person, or persons, who is or are severely mentally impaired who

would otherwise be liable to pay council tax or only by a one or more severely mentally impaired

persons and one or more students, students' foreign spouses and school and college leavers. 

V  A dwelling in which at least one person who would otherwise be liable is a diplomat. 

W A dwelling which forms part of a single property including at least one other dwelling and which is

the sole or main residence of a dependant relative of a person who is resident in the other dwelling. 

Sales taxes and duties

Value added tax

The third largest source of government revenues is value added tax (VAT), charged at 17.5%(due to increase to 20% in January 2011) on supplies of goods and services. It is therefore a taxon consumer expenditure.

Certain goods and services are exempt from VAT, and others are subject to VAT at a lower rateof 5% (the reduced rate, such as domestic gas supplies) or 0% ("zero-rated", such as most foodand children's clothing). Exemptions are intended to relieve the tax burden on essentials whileplacing the full tax on luxuries, but disputes based on fine distinctions arise, such as thenotorious "Jaffa Cake Case" which hinged on whether Jaffa Cakes were classed as (zero-rated)cakes — as was eventually decided — or (fully-taxed) chocolate-covered biscuits. Until 2001,VAT was charged at the full rate on sanitary towels. 

On the 22nd June 2010, Chancellor George Osborne announced that from 4th January 2011 theUK VAT standard rate will increase from 17.5% to 20%.

Excise duties

Excise duties are charged on, amongst other things, motor fuel, alcohol, tobacco, betting andvehicles. 

Stamp duty

Stamp duty is charged on the transfer of shares and certain securities at a rate of 0.5%.

Modernised versions of stamp duty, stamp duty land tax and stamp duty reserve tax, are chargedrespectively on the transfer of real estate and shares and securities, at rates of up to 4% and 0.5%respectively.

Motoring taxation

Motoring taxes include: fuel duty (which itself also attracts VAT), and vehicle excise duty. Otherfees and charges include the London congestion charge, various statutory fees including that for

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the compulsory vehicle test and that for vehicle registration, and in some areas on-street parking(as well as associated charges for violations).

Capital gains tax 

Capital gains are subject to tax at the 18% (for individuals) or at the applicable marginal rate of corporation tax (for companies).

The basic principle is the same for individuals and companies - the tax applies only on thedisposal of a capital asset, and the amount of the gain is calculated as the difference between thedisposal proceeds and the "base cost", being the original purchase price plus allowable relatedexpenditure. However, from 6 April 2008, the rate and reliefs applicable to the chargeable gaindiffer between individuals and companies. Companies apply "indexation relief" to the base cost,increasing it in accordance with the Retail Prices Index so that (broadly speaking) the gain iscalculated on a post-inflation basis (with different rules apply for gains accrued prior to March1982). The gain is then subject to tax at the applicable marginal rate of corporation tax.

Individuals are taxed at a flat rate of 18%, with no indexation relief (but subject to a limitedrelief for the first £1m of gains for "entrepreneurs". 

 Rates (tax)

Rates are a type of taxation system in the United Kingdom, and in places with systems derivingfrom the British one, the proceeds of which are used to fund local government. Some othercountries have taxes with a more or less comparable role, for example France's taxe d'habitation.

The modern system of rates have their origin in the Poor Law Act 1601, for parishes to levy ratesto fund the Poor Law, although parishes often adopted property rates to fund earlier poor law

measures. Indeed, the Court of Appeal in 2001 called the rating an "ancient system", suggestingthat it had medieval origins.

In the United Kingdom, rates on residential property were based on the nominal rental value of the property. Whilst still levied in Northern Ireland, they were generally abolished in Scotland in1989 and England and Wales in 1990 and replaced with the Community Charge (so called "polltax"), a fixed tax per head that was the same for everyone. This was soon replaced with theCouncil Tax, a system based on the estimated market value of property assessed in bands of value, with a discount for people living alone.

As of 2007, domestic properties in Northern Ireland have moved to a rateable value based on the

capital value of properties (similar to the Council Tax) as they stood on 1 January 2005; non-domestic properties are still rated based on their rental value. Non-domestic properties arecurrently being revalued, so a new list with 2008 values will come into effect in 2010.

The Crown Estate Paving Commission still levies rates on residential property within its jurisdiction, in the area of Regent's Park, London, under the provisions of the Crown EstatePaving Act 1851. 

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Rates on non-residential property (business rates) are still charged, at a uniform rate set bycentral government. Rates are collected by local councils, but the moneys collected aredistributed nationally according to population.

Rating assessments (rateable values) are made on all non-domestic properties. As well as

business, this includes village halls and other non-business occupations. The exception to this iswhere a hereditament is exempt by virtue of Schedule 6 of the Local Government Finance Act1988 which specifies exempt classes.

The rateable value should represent the reasonable rental value of the occupation according tothe circumstances at the "Material Day" and according to rental values at the "AntecedentValuation Date". (For the compiled 2005 Rating List the "Material Day" is 1 April 2005 and the"Antecedent Valuation Date" is 1 April 2003).

Later physical changes will have a later Material Day but the Antecedent Valuation Date willstill be 1 April 2003 for the currency of the 2005 Rating List. The Rating List is a public

document.

 Motoring taxation in the UK 

Motoring taxation in the United Kingdom comes in a variety of forms. There are fuel taxes,motor vehicle ownership and use taxes and also a few localised tolls and road pricing schemes inoperation. There are proposals for a nationwide road tolling system.

Tax revenues in the UK are not normally hypothectated, and this is also the case with mostmotoring taxes. The exception is revenue raised from congestion charges and from parkingcharges, which is generally reserved to fund local transportation systems, which may include

some aspects of the road system.

The two major taxes applied to motorists today in the UK are both excise duties: hydrocarbon oilduty or fuel duty as it is more commonly known, and vehicle excise duty. 

Current taxes and charges

Fuel duty

Fuel duty (hydrocarbon oil duty) is an excise duty added to the price of motor fuel per unit of volume, rather than as a percentage of the selling price. Value added tax is applied in addition as

a percentage of the combined total. There is a fuel duty rebate available for bus operators. 

In May 2008, UK fuel taxes were the highest in Europe.

In 2006-07 the total Government receipts from duties levied directly on fuels, excluding VAT,was £23.6 billion.

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Vehicle excise duty

Vehicle excise duty is also an excise duty. Nearly all motorised vehicles in the United Kingdomare required to have a vehicle licence, which is more commonly known as a tax disc, on display.In most cases, the payment of an annual vehicle excise duty (also known as road tax, car tax or

road fund licence) is required to obtain the tax disc, although for some classes of vehicle there isno fee. The tax disc must be prominently displayed on the vehicle, however enforcement is nowmost often achieved via ANPR referencing a central computerised database, rather than throughvisual checking.

Since 1999, the duty has been levied according to the CO2 emissions, starting with a reducedrate of £50, the scheme was extended into a graded system in 2001, with the rates being changedin 2006.

In 2006-07 the total Government receipts from vehicle excise duties was £5.1 billion. 

 Business rates in UK 

Business rates are the commonly used name of non-domestic rates, a tax on the occupation of non-domestic property. Rates are a property tax with ancient roots that was formerly used to fundlocal services that was formalized with the Poor Law 1572 and superseded by the Poor Law of 1601]]. The Local Government Finance Act 1988 introduced business rates in England andWales from 1990, repealing its immediate predecessor, the General Rate Act 1967. The act alsointroduced business rates in Scotland, but as an amendment to the existing system which hadevolved separately to that in the rest of Great Britain. Since the establishment, in 1997, of a

Welsh Assembly Government able to pass secondary legislation, the English and Welsh systemshave been able to diverge.

The Local Government Finance Act 1988, with follow-up legislation, provided a freshadministrative framework for assessing and billing, but did not redefine the legal unit of property, the hereditament, that had been developed through rating case law. Properties areassessed in a rating list with a rateable value, a valuation of their annual rental value on a fixedvaluation date using assumptions fixed by statute. Rating lists are created and maintained by theValuation Office Agency, a UK Government Executive Agency. Rating lists can be altered eitherto reflect changes in properties, or as valuations are appealed against; new valuation lists arecreated every five years.

Billing and collection is the responsibility of the local authorities who are funded by the tax, butrather than receipts being retained directly, they are pooled centrally and then are redistributed.The rateable value is multiplied by a centrally-set fraction to produce the annual bill; a number of reliefs are available, such as those for charities and small businesses. In 2005/06, £19.9 billionwas collected in business rates, representing 4.35% of the total UK tax income. 

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 Income in the United Kingdom

The United Kingdom is a wealthy country in world terms, with virtually no people living on lessthan £4 a day. There were over 425,000 net worth Sterling Millionaires in Britain in 2005(source), and 383,000 Dollar Millionaires (financial assets only) in 2004 (source). There is

however significant income inequality with Britain having a Gini coefficient of 36. The mainsources for the statistics below are Her Majesty's Revenue and Customs (HMRC) and theInstitute for Fiscal Studies (IFS).

Taxable Income

Data from HMRC 2004-2005; incomes are before tax for individuals. The personal allowance orincome tax threshold was £4745 (people with incomes below this level did not pay income tax).The mean income was £22,800 per year with the average Briton paying £4060 in income tax.

range number of taxpayers (thousands)

£4745 to £6000 1,440

£6000 to £7000 1,160

£7000 to £8000 1,590

£8000 to 10,000 2,950

£10,000 to £12,000 2,760

£12,000 to £15,000 3,650

£15,000 to £20,000 4,950

£20,000 to £30,000 6,000

£30,000 to £50,000 4,090

£50,000 to £70,000 859

£70,000 to £100,000 410

£100,000 to £200,000 300

£200,000 to £500,000 89

£500,000 to £1Million 16

Over £1Million 6

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Income distribution across UK regions

UK Region Mean

Income 

% earning over £

50,000 

% of households receiving income related

benefits 

North EastEngland 

£19,127  2.78 %  31 % 

North West

England 

£20,483  3.99 %  27% 

Yorkshire £20,247  3.83 %  24% 

East Midlands £20,868  4.34 %  21 % 

West Midlands £20,530  3.94%  25% 

East of England £24,401  6.83%  20% 

London £29,947  9.49%  24% 

South East

England 

£26,328  8.50%  16% 

South West

England 

£20,954  4.47%  19% 

Wales £19,007  3.05%  24% 

Scotland £20,895  4.32%  26% 

Northern Ireland 

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Income Distribution by Job Type

Job Group (Socio Economic) Median Earnings

(£/year) 

Mean Earnings

(£/year) 

90th Percentile (top

ten) Earnings 

All Employees  19,943  24,908  42,902 

Managers and Executives  34,001  47,082  78,072 

Professionals (e.g. Doctors, Lawyers

etc.) 32,176  34,932  54,941 

Associate professional and technical

(e.g. Nurses, Police) 24,999  27,245  41,313 

Administrative & secretarial  15,452  16,135  26,205 

Skilled trades (e.g. builders,

carpenters, plumbers etc.) 21,871  22,607  34,835 

Personal service Jobs (e.g.

Hairdressing, Care Assistant) 11,461  12,226  20,370 

Sales  9,093  10,512  19,072 

Semi skilled operators  19,972  20,710  31,615 

Elementary Jobs  11,703  12,292  22,850 

Post Tax Household Income

The data below is taken from the Institute for Fiscal Studies and is based on a household withtwo adults and no children for 2006. This is taken from the Household income survey andincludes net income after all taxes and including any social security benefits (i.e. the amount of money people actually have to spend). These figures can be converted to match householdcomposition using an -equivalence scale

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Sources of Income

The Family Resources Survey is a document produced by the Department for Work andPensions. This details income amongst a representative sample of the British population. The2005-2006 report can be found here. This report tabulates sources of income as a percentage of total income.

Region 

Employme

nt (Salaries

& Wages) 

Self 

Employe

d

Investment

Income 

Workin

g tax

credit

State

Pensions

Occupation

al Pensions

Disability

Benefits 

Other

Social

SecurityBenefits 

Other

Income

Sources 

UK  64%  11%  2%  1%  6%  7%  2%  5%  2% 

Northern

Ireland 60%  11%  1%  2%  7%  5%  4%  7%  3% 

Scotland  66%  7%  2%  2%  7%  7%  3%  5%  2% 

Wales  60%  8%  2%  2%  8%  8%  4%  6%  1% 

England  64%  11%  2%  1%  6%  7%  2%  5%  2% 

North East

England 64%  5%  2%  2%  8%  6%  4%  7%  2% 

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North

West

England 

59%  13%  2%  2%  7%  7%  3%  6%  2% 

Yorkshire  64%  7%  2%  2%  7%  7%  2%  5%  3% 

East

Midlands 65%  9%  2%  1%  7%  6%  2%  5%  3% 

West

Midlands 62%  8%  3%  2%  8%  6%  2%  5%  3% 

Eastern

England 56%  22%  2%  1%  5%  7%  1%  3%  2% 

London  71%  10%  2%  1%  4%  4%  1%  5%  3% 

South East 66%  9%  4%  1%  7%  8%  1%  4%  2% 

South

West

England 

60%  9%  4%  1%  7%  10%  2%  4%  2% 

Other Social Security Benefits include: Housing Benefit, Income Support and Jobseeker'sAllowance. 

Starting rate of UK income tax

The starting rate of income tax, often known as the 10p rate, was the lowest rate of personalincome taxation imposed in the United Kingdom from 1999 to 2008. It was introduced by thenChancellor of the Exchequer, Gordon Brown, in his 1999 budget and abolished by him (in hislast budget as Chancellor) in 2007.

The starting rate was introduced in Gordon Brown's third budget as Chancellor. It applied toincome between £4,335 and £5,835 and was charged at 10%, replacing a previous 23% basicrate. By 2008 the starting rate had been raised to apply to income between £5,225 and £7,445.

The starting rate was the lowest rate of income tax, and as such was the only income tax paid by1.8 million of the lowest earners. Gordon Brown said of its introduction.

"The 10p rate is very important because it's a signal about the importance we attach about gettingpeople into work and it's of most importance to the low paid. This is not about gimmicks; this isabout tax reform that encourages work and families, on the families side it is replacing what wasan anomalous married couples' allowance and replace it with a child tax credit."

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Tax credit

Tax credits may be granted for various types of taxes (income tax, property tax, VAT, etc.) inrecognition of taxes already paid, as a subsidy, or to encourage investment or other behaviors.Tax credits may or may not be refundable to the extent they exceed the respective tax. Tax

systems may grant tax credits to businesses or individuals, and such grants vary by type of credit.This discussion is by no means comprehensive for any tax system.

Individual income tax credits

Income tax systems often grant a variety of credits to individuals. These typically include creditsavailable to all taxpayers as well as tax credits unique to individuals. Some credits may beoffered for a single year only.

Low income subsidies

Several income tax systems provide income subsidies to lower income individuals by way of credit. These credits may be based on income, family status, work status, or other factors. Oftensuch credits are refundable when total credits exceed tax.

In the United Kingdom, ‗child tax credit‘ and ‗working tax credit‘ are paid directly into theclaimant's bank account, post office account, or by giro. A minimum level of child tax credits ispayable to all individuals or couples with children, up to a certain income limit. The actualamount of child tax credits that a person may receive depends on factors such as the level of theirincome, the number of children they have, the age of the children they are claiming for and theeducation status of any children over 16. Working tax credit is paid to single low earners with or

without children who are aged 25 or over and are working over 30 hours per week and also tocouples without children, at least one of whom is over 25, provided they are working for 30hours a week combined and at least one of them is working for 16 hours a week. If the claimanthas children however, they may claim working tax credit from age 16 upward - provided thatthey are working at least 16 hours per week.

The U.S. system grants the following low income tax credits:

  Earned income credit: this refundable credit is granted for a percentage of income earnedby a low income individual. The credit is calculated and capped based on the number of qualifying children, if any. This credit is indexed for inflation and phased out for incomes

above a certain amount. For 2009, the maximum credit was $5,657.  Credit for the elderly and disabled: A nonrefundable credit up to $1,125  Retirement savings credit: a nonrefundable credit of up to 50% of contributions to IRAs

or similar plans, phased out at incomes above $16,000 ($24,000 for head of householdand $32,000 for joint returns).

  Mortgage interest credit: a nonrefundable credit that may be limited to $2,000, grantedunder specific mortgage programs.

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Family relief 

Some systems grant tax credits for families with children. These credits may be on a per childbasis or as a credit for child care expenses.

The U.S. system offers the following nonrefundable family related income tax credits (inaddition to a tax deduction for each dependent child):

  child credit: a credit up to $1,000 per qualifying child.  Child and dependent care credit: a credit up to $6,000, phased out at incomes above

$15,000.  Credit for adoption expenses: a credit up to $10,000, phased out at higher incomes.

Education, energy and other subsidies

Some systems indirectly subsidize education and similar expenses through tax credits.

The U.S. system has the following nonrefundable credits:

  Two mutually exclusive credits for qualified tuition and related expenses. The Hopecredit is 100% of the first $1,200 and 50% of the next $1,200 of qualified tuitionexpenses per year for up to two years. The Lifetime Learning credit is 20% of the first$10,000 of cumulative expenses. These credits are phased out at incomes above $50,000($100,000 for joint returns) in 2009. Expenses for which a credit is claimed are noteligible for tax deduction. 

  First time homebuyers credit up to $7,500.  Credits for purchase of certain nonbusiness energy property and residential energy

efficiency. Several credits apply with differing rules.

Business tax credits

Many systems offer various incentives for businesses to make investments in property or operatein particular areas. Credits may be offered against income or property taxes, and are generallynonrefundable to the extent they exceed taxes otherwise due. The credits may be offered toindividuals as well as entities.

U.S. income tax has numerous nonrefundable business credits. In most cases, any amount of these credits in excess of current year tax may be carried forward to offset future taxes, with

limitations. The credits include the following, available to individuals and businesses:

  Alternative motor vehicle credit: several credits are available for purchase of varyingtypes of non-gasoline powered vehicles.

  Alternative fuel credits: a credit based on the amount of production of certain non-petroleum fuels.

  Disaster relief credits

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  Credits for employing individuals in certain areas or those formerly on welfare or intargeted groups

  Credit for increasing research expenses  A variety of industry specific credits

Many sub-Federal jurisdictions (states, counties, cities, etc.) within the U.S. offer income orproperty tax credits for particular activities or expenditures. Examples include credits similar tothe Federal research and employment credits, property tax credits granted by cities (often calledabatements) for building facilities within the city, etc. These items often are negotiated between abusiness and a governmental body, and specific to a particular business and property.

Value added tax

Resellers or producers of goods or providers of services (collectively, providers) must collectvalue added tax (VAT) in some jurisdictions upon billing or being paid by customers. Wherethese providers use goods or services provided by others, they may have paid VAT to other

providers. Most VAT systems allow the amount of such VAT paid or considered paid to be usedto offset VAT payments due, generally referred to as an input credit. Some systems allow theexcess of input credits over VAT obligations to be refunded after a period of time.

Foreign tax credit

Income tax systems that impose tax on residents on their worldwide income tend to grant aforeign tax credit for foreign income taxes paid on the same income. The credit often is limitedbased on the amount of foreign income. The credit may be granted under domestic law and/ortax treaty. The credit is generally granted to individuals and entities, and is generallynonrefundable. See foreign tax credit for more comprehensive information on this complex

subject.

Credits for alternative tax bases

Several tax systems impose a regular income tax and, where higher, an alternative tax. The U.S.imposes an alternative minimum tax based on an alternative measure of taxable income. Mexicoimposes an IETU based on an alternative measure of taxable income. Italy imposes an alternativetax based on assets. In each case, where the alternative tax is higher than the regular tax, a creditis allowed against future regular tax for the excess. The credit is usually limited in a manner thatprevents circularity in the calculation.

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Tax system & procedure in India

Tax Authorities & Power

Income-Tax Authorities:

There shall be the following classes of income-tax authorities for the purposes of the Act 116, namely:-

(a) the Central Board of Direct Taxes constituted under the Central Boards of Revenue

Act, 1963 (54 of 1963), 

(b) Directors-General of Income-tax or Chief Commissioners of Income-tax, 

(c)  Directors of Income-tax or Commissioners of Income-tax or Commissioners of 

Income-tax (Appeals), 

(cc) Additional Directors of Income-tax or Additional Commissioners of Income-tax or

Additional Commissioners of Income-tax (Appeals), 

(cca)  Joint Directors of Income-tax or Joint Commissioners of Income-tax. 

(d)  Deputy Directors of Income-tax or Deputy Commissioners of Income-tax or Deputy

Commissioners of Income-tax (Appeals), 

(e)  Assistant Directors of Income-tax or Assistant Commissioners of Income-tax, 

(f)  Income-tax Officers, 

(g)  Tax Recovery Officers, 

(h) Inspectors of Income-tax.

Powers of the authorities:

For all purposes of the Income-tax Act, the IT authorities are vested with the various powers

which are vested in a Court of Law under the Code of Civil Procedure while trying a suit in

respect of any case. More particularly, the provisions of the Code of Civil procedure and the

powers granted to the tax authorities under the code would be in respect of :

1.  Discovery and inspection2.  enforcing the attendance, including any officer of a bank and examining him on oath3.  compelling the production of books of account and the documents

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4.  collection certain information [section 133B-inserted by the finance act, 1986]5.  Issuing commissions and summons

It shall be duty of every person who has been allotted permanent account number to quote such

number in all his returns or correspondence with income tax authorities, in all challans for the

payment of any sum, in all documents prescribed by the board in the interest of revenue.

Types of Assessments

Basically assessment is estimation for an amount assessed while paying Income Tax. It is acompulsory contribution that is required for the support of a government. It is generally of thefollowing types.

Self assessment: The assessee is required to make a self assessment and pay the tax on the basis of the returnsfurnished. Any tax paid by the assessee under self assessment is deemed to have been paidtowards regular assessment.

Regular assessment: On the basis of thereturn of income chargeable to tax furnished by the assessee an intimationshall be sent to the assessee informing him about the tax or interest payable or refundable to him.

Best judgment assessment: In a best judgment assessment the assessing officer should really base the assessment on his best judgment i.e. he must not act dishonestly or vindictively or capriciously. There are two types of  judgment assessment:

1.  Compulsory best judgment assessment made by the assessing officer in cases of non-co-operation on the part of the assessee or when the assessee is in default as regardssupplying information.

2.  Discretionary best judgment assessment is done even in cases where the assessing officeris not satisfied about the correctness or the completeness of the accounts of the assesseeor where no method of accounting has been regularly and consistently employed by theassessee

Income escaping assessment or re-assessment 

If the assessing officer has reason to believe that any income chargeable to tax has escapedassessment for any assessment year assess or reassess such income and also nay other incomechargeable to tax which has escaped assessment and which comes to his notice in course of theproceedings or any other allowance, as the case may be.

Precautionary assessment where it is not clear as to who has received the income, the assessing officer can commenceproceedings against the persons to determine the question as to who is responsible to pay the tax.

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Time limit for assessment

Time limit for completion of assessments and reassessments 

(1) No order of assessment shall be made under section 143 or section 144 at any time after theexpiry of-

(a) two years from the end of the assessment year in which the income was first assessable; or

(b) one year from the end of the financial year in which a return or a revised return relating to theassessment year commencing on the 1st day of April, 1988, or any earlier assessment year, isfiled under sub-section (4) or sub-section (5) of section 139,

whichever is later.

(2) No order of assessment reassessment or recomputation shall be made under section 147 afterthe expiry of one year from the end of the financial year in which the notice under section 148was served:

Provided that where the notice under section 148 was served on or before the 31st day of March,1987, such assessment, reassessment or recomputation may be made at any time up to the 31stday of March, 1990.

(2A) Notwithstanding anything contained in sub-sections (1) and (2), in relation to theassessment year commencing on the 1st day of April, 1971, and any subsequent assessment year,an order of fresh assessment in pursuance of an order under section 250, section 254, section 263

or section 264, setting aside or cancelling an assessment, may be made at any time before theexpiry of one year from the end of the financial year in which the order under section 250 orsection 254 is received by the Chief Commissioner or Commissioner or, as the case may be, theorder under section 263 or section 264 is passed by the Chief Commissioner or Commissioner:

Provided that where the order under section 250 or section 254 is received by the Chief Commissioner or Commissioner or, as the case may be, the order under section 263 or section264 is passed by the Chief Commissioner or Commissioner, on or after the 1st day of April, 1999but before the 1st day of April, 2000, such an order of fresh assessment may be made at any timeup to the 31st day of March, 2002.

(3) The provisions of sub-sections (1) and (2) shall not apply to the following classes of assessments, reassessments and recomputations which may, be completed at any time-

(ii) where the assessment, reassessment or recomputation is made on the assessee or any personin consequence of or to give effect to any finding or direction contained in an order under section250, section 254, section 260, section 262, section 263, or section 264 or in an order of any courtin a proceeding otherwise than by way of appeal or reference under this Act;

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(iii) where, in the case of a firm, an assessment is made on a partner of the firm in consequenceof an assessment made on the firm under section 147.

Explanation 1.-In computing the period of limitation for the purposes of this section-

(i) the time taken in reopening the whole or any part of the proceeding or in giving anopportunity to the assessee to be re-heard under the proviso to section 129, or

(ii) the period during which the assessment proceeding is stayed by an order or injunction of anycourt, or

The following clause (iia) shall be inserted after clause (ii) in Explanation 1 to sub-section (3) of section 153 by the Finance Act, 2002, w.e.f. 1-4-2003:

(iia) the period commencing from the date on which the Assessing Officer intimates the Central

Government or the prescribed authority, the contravention of the provisions of clause (21) or 

clause (22B) or clause (23A) or clause (23B) or sub-clause (iv) or sub-clause (v) or sub-clause(vi) or sub-clause (via) of clause (23C) of section 10, under clause (i) of the proviso to sub-

section (3) of section 143 and ending with the date on which the copy of the order withdrawing

the approval or rescinding the notification, as the case may be, under those clauses is received 

by the Assessing Officer; 

(iii) the period commencing from the date on which the Assessing Officer directs the assessee toget his accounts audited under sub-section (2A) of section 142 and ending with the the last dateon which the assessee is required to furnish a report of such audit under that sub-section, or

(iva) the period (not exceeding sixty days) commencing from the date on which the AssessingOfficer received the declaration under sub-section (1) of section 158A and ending with the dateon which the order under sub-section (3) of that section is made by him, or

(v) in a case where an application made before the Income-tax Settlement Commission undersection 245C is rejected by it or is not allowed to be proceeded with by it, the periodcommencing from the date on which such application is made and ending with the date on whichthe order under sub-section (1) of section 245D is received by the Commissioner under sub-section (2) of that section,shall be excluded.

Provided that where immediately after the exclusion of the aforesaid time or period, the period of limitation referred to in sub-sections (1), (2) and (2A) available to the Assessing Officer formaking an order of assessment, reassessment or recomputation, as the case may be, is less thansixty days, such remaining period shall be extended to sixty days and the aforesaid period of limitation shall be deemed to be extended accordingly.

Explanation 2.-Where, by an order referred to in clause (ii) of sub-section (3), any income isexcluded from the total income of the assessee for an assessment year, then, an assessment of such income for another assessment year shall, for the purposes of section 150 and this section,be deemed to be one made in comsequence of or to give effect to any finding or direction

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contained in the said order.

Explanation 3.-Where, by an order referred to in clause (ii) of sub-section (3), any income isexcluded from the total income of one person and held to be the income of another person, then,an assessment of such income on such other person shall, for the purposes of section 150 and this

section, be deemed to be one made in cosequence of or to give effect to any finding or directioncontained in the said order, provided such other person was given an opportunity of being heardbefore the said order was passed.

Collection and Recovery 

a) Notice of Demand:

The assessing officer can serve a notice to any tax, interest , fine or any other sum inconsequence of any order passed under the income tax act.

b) Intimation of Loss: 

When in course of the assessment of the total income of any assessee, it is established that a losshas taken place which the assessee is entitled to have carried forward and set off against theincome in subsequent years, the assessing officer shall notify to the assessee by a written orderfor the amount of the loss as computed by him for the purposes of carry forward and set off.

c) Collection and Recovery:

The amount specified in the notice of demand shall be paid within 30 days of the service of the

notice at the place and to the person mentioned in the notice. If the assessing officer has anyreason to believe that it will be derterimental to revenue if the full period of 30 days is allowedhe may, with the prior approval of the deputy commissioner reduce the period as he thinks fit.

Tax return

One-by-Six Scheme 

If a person is enjoying any of the following item, he/she has to file his/her return.

  Occupation of a House 

Ownership of a motor car  Expenditure on foreign travel  Holder of credit card  Electricity payments in excess of Rs 50,000/annum  Member of a club - where the entrance fee is more than Rs 25,000/-.

The assessee is obliged to voluntarily file the return of income without waiting for the notice of the assessing officer calling for the filing of the return. The time limit for filing of the return by

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an assessee if his total income of any other person in respect of which he is assessable exceedsthe maximum amount not chargeable to tax shall be as follows:

a.  Where the assessee is a company the 30th day of November of the assessment yearb.  Where the assessee is a person, other than a company :-

i. 

where the account of the assessee are required to be audited under the income taxact or any other law, or in cases where the report of the chartered Accountant isrequired to be furnished under sections 80HHC or 80HHD i.e.. for deduction inrespect of profits retained for export business and also in respect of earnings inconvertible foreign exchange, or in case of a cooperative society, the 31st day of October of the assessment year

ii.  where the total income includes any income from the business or profession, notbeing a case falling under sub clause (i), the 31st day of August for the assessmentyear

iii.  in any other case, 30th day of June of the assessment year

The requirements of Income-tax Act making it obligatory for the assessee to file a return of histotal income apply equally even in cases where the assessee has incurred a loss under the head'profit and gains form business and profession' or under the head 'capital gains' or maintenance of race horses. Unless the assessee files a return of loss in the manner and within the same timelimits as required for a return of income or by the 31st day of July of the assessment relevant tothe previous year during which the loss was sustained, the assessee would not be entitled to carryforward the loss for being set off against income in the subsequent year.

Late Return 

Any person who has not filed the return within the time allowed may be file a belated return atany time before the expiry of one year from the end of the relevant assessment year or before thecompletion of the assessment, which ever is earlier. However, in case of returns relating toassessment year 1988-89 or any other assessment year, the period allowable is two years.

Revised Return 

An assessee who is required to file a return of income is entitled to revise the return of incomeoriginally filed by him to make such amendments, additions or changes as may be foundnecessary by him. Such a revised return may be filed by the assessee at any time before theassessment is made. There is no limit under the income tax Act in respect of the number of timefor which the return of income may be revised by the assessee. However, if a person deliberatelyfiles a false return he will be liable to be imprisoned under section 277 and the offence will notbe condoned by filing a revised return.

Where the return relates to assessment year 1988-89 or any earlier assessment year, the period of limitation is two years from the end of the relevant assessment year.

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Defective Return 

If the assessing officer considers that the return of income furnished by the assessee is defective,he may intimate the defect to the assessee and give him an opportunity to rectify the defect

within 15 days from the date of such intimation or within such further period as may be allowedby the assessing officer on the request of the assessee. If the assessee fails to rectify the defectwithin the aforesaid period, the return shall be deemed invalid and further it shall be deemed thatthe assessee had failed to furnish the return. However, where the assessee is made the assessmentofficer may condone the delay and treat the return as a valid return.

Signing of Return 

The return of income must be signed and verified. In case of an individual

  by the individual himself  

where he is absent from India, by the individual himself or by some person dulyauthorised by him in this behalf   where he is mentally incapacitated from attending to his affairs, by his guardian or any

person competent to act on his behalf   where for any other reason, it is not possible for the individual to sign the return, by any

person duly authorised by him in this behalf.

Penalty 

Under the existing law, penalty for delay in filing of return of income is calculated as apercentage of the shortfall of tax. Where tax has already been deducted at source, or advance taxhas been duly paid, no penalty is leviable. It is proposed to amend the law to provide for thepenalty of Rs.1000 even in such cases. This provision is targeted towards the salary earners whoalways had the impression that their liability was over the moment the tax was deducted by theemployer.

Section 139 - Return of Income

(1) Every person, if his total income or the total income of any other person in respect of whichhe is assessable under this Act during the previous year exceeded the maximum amount which isnot chargeable to income-tax, shall, on or before the due date, furnish a return of his income orthe income of such other person during the previous year in the prescribed form 1416 andverified in the prescribed manner and setting forth such other particulars as may be prescribed :

Provided that a person, not furnishing return under this sub-section and residing in such area asmay be specified by the Board in this behalf by a notification in the Official Gazette, and who atany time during the previous year fulfils any one of the following conditions, namely :-

(i) Is in occupation of an immovable property exceeding a specified floor area, whether by wayof ownership, tenancy or otherwise, as may be specified by the Board in this behalf; or

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(ii) Is the owner or the lessee of motor vehicle other than a two- wheeled motor vehicle, whetherhaving any detachable side car having extra wheel attached to such two-wheeled motor vehicleor not; or

(iii) Is a subscriber to a telephone; or

(iv) Has incurred expenditure for himself or any other person on travel to any foreign country,

(v) Is the holder of the credit card, not being an "Add-on" card, issued by any bank or institution;or

(vi) Is a member of a club where entrace fee charged is twenty-five thousand rupees or more :shall furnish a return, of his income during the previous year, on or before the due date in theprescribed form and verified in the prescribed manner and setting forth such other particulars asmay be prescribed. Provided further that the Central Government may, by notification in the

Official Gazette, specify class or classes of persons to whom the provisions of the first provisoshall not apply,

Explanation 1 : In this sub-section, "due date" means -

(a) Where the assessee is a company, the 30th day of November of the assessment year;

(b) Where the assessee is a person, other than a company, -

(i) In a case where the accounts of the assessee are required under this Act or any other law to beaudited or where the report of an accountant is required to be furnished under section 80HHC orsection 80HHD or where the prescribed certificate is required to be furnished under section 80Ror section 80RR or sub-section (1) of section 80RRA, or in the case of a co-operative society orin the case of a working partner of a firm whose accounts are required under this Act or anyother law to be audited, the 31st day of October of the assessment year;

(ii) In a case where the total income referred to in this sub-section includes any income frombusiness or profession, not being a case falling under sub-clause (i), the 31st day of August of theassessment year;

(iii) In any other case, the 30th day of June of the assessment year.

Explanation 2 : For the purposes of sub-clause (i) of clause (b) of Explanation 1, the expression"working partner" shall have the meaning assigned to it in Explanation 4 of clause (b) of section40.

Explanation 3 : For the purposes of this sub-section, the expression "motor vehicle" shall havethe meaning assigned to it in clause (28) of section 2 of the Motor Vehicles Act, 1988 (59 of 1988).

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Explanation 4 : For the purposes of this sub-section, the expression "travel to any foreigncountry" does not include travel to the neighbouring countries or to such places of pilgrimage asthe Board may specify in this behalf by notification in the Official Gazette.

(3) If any person, who has sustained a loss in any previous year under the head "Profits and gains

of business or profession" or under the head "Capital gains" and claims that the loss or any partthereof should be carried forward under sub-section (1) of section 72 or sub-section (2) of section 73, or sub-section (1) or sub-section (3) of section 74 , or sub-section (3) of section 74A,he may furnish, within the time allowed under sub-section (1), a return of loss in the prescribedform and verified in the prescribed manner and containing such other particulars as may beprescribed, 1429 and all the provisions of this Act shall apply as if it were a return under sub-section (1).

(4) Any person who has not furnished a return within the time allowed to him under sub-section(1), or within the time allowed under a notice issued under sub-section (1) of section 142, mayfurnish the return for any previous year at any time before the expiry of one year from the end of 

the relevant assessment year or before the completion of the assessment, whichever is earlier :

Provided that where the return relates to a previous year relevant to the assessment yearcommencing on the 1st day of April, 1988, or any earlier assessment year, the reference to oneyear aforesaid shall be construed as reference to two years from the end of the relevantassessment year.

(4A) Every person in receipt of income derived from property held under trust or other legalobligation wholly for charitable or religious purposes or in part only for such purposes, or of income being voluntary contributions referred to in sub-clause (iia) of clause (24) of section 2,shall, if the total income in respect of which he is assessable as a representative assessee (thetotal income for this purpose being computed under this Act without giving effect to theprovisions of sections 11 and 12) exceeds the maximum amount which is not chargeable toincome-tax, furnish a return of such income of the previous year in the prescribed form andverified in the prescribed manner and setting forth such other particulars as may be prescribed1432 and all the provisions of this Act shall, so far as may be, apply as if it were a returnrequired to be furnished under sub-section (1).

(4B) The chief executive officer (whether such chief executive officer is known as secretary orby any other designation) of every political party shall, if the total income in respect of which thepolitical party is assessable (the total income for this purpose being computed under this Actwithout giving effect to the provisions of section 13A) exceeds the maximum amount which isnot chargeable to income-tax, furnish a return of such income of the previous year in theprescribed form and verified in the prescribed 1433a manner and setting forth such otherparticulars as may be prescribed and all the provisions of this Act, shall, so far as may be, applyas if it were a return required to be furnished under sub-section (1).

(5) If any person, having furnished a return under sub-section (1), or in pursuance of a noticeissued under sub-section (1) of section 142, discovers any omission or any wrong statementtherein, he may furnish a revised return at any time before the expiry of one year from the end of 

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the relevant assessment year or before the completion of the assessment, whichever is earlier :

Provided that where the return relates to the previous year relevant to the assessment yearcommencing on the 1st day of April, 1988, or any earlier assessment year, the reference to oneyear aforesaid shall be construed as a reference to two years from the end of the relevant

assessment year.

(6) The prescribed form of the returns referred to in sub-sections (1) and (3) of this section, andin clause (i) of sub-section (1) of section 142 shall, in such cases as may be prescribed, requirethe assessee to furnish the particulars of income exempt from tax, assets of the prescribed naturevalue and belonging to him, his bank account and credit card held by him, expenditure exceedingthe prescribed limits incurred by him under prescribed heads and such other outgoings as may beprescribed.

(6A) Without prejudice to the provisions of sub-section (6), the prescribed form of the returnsreferred to in this section, and in clause (i) of sub-section (1) of section 142 shall, in the case of 

an assessee engaged in any business or profession, also require him to furnish the report of anyaudit referred to in section 44AB, or, where the report has been furnished prior to the furnishingof the return, a copy of such report together with proof of furnishing the report, the particulars of the location and style of the principal place where he carries on the business or profession and allthe branches thereof, the names and addresses of his partners, if any, in such business orprofession and, if he is a member of an association or body of individuals, the names of the othermembers of the association or the body of individuals and the extent of the share of the assesseeand the shares of all such partners or the members, as the case may be, in the profits of thebusiness or profession and any branches thereof.

(8)(a) Where the return under sub-section (1) or sub-section (2) or sub-section (4) for anassessment year is furnished after the specified date, or is not furnished, then [whether or not theAssessing Officer has extended the date for furnishing the return under sub-section (1) or sub-section (2)], the assessee shall be liable to pay simple interest at fifteen per cent per annum,reckoned 1443 from the day immediately following the specified date to the date of thefurnishing of the return or, where no return has been furnished, the date of completion of theassessment under section 144, on the amount of the tax payable on the total income asdetermined on regular assessment, as reduced by the advance tax, if any, paid, and any taxdeducted at source : Provided that the Assessing Officer may, in such cases and under suchcircumstances as may be prescribed, 1444 reduce or waive the interest payable by any assesseeunder this sub-section.

Explanation 1 : For the purposes of this sub-section, "specified date", in relation to a return foran assessment year, means, - (a) In the case of every assessee whose total income, or the totalincome of any person in respect of which he is assessable under this Act, includes any incomefrom business or profession, the date of the expiry of four months from the end of the previousyear or where there is more than one previous year, from the end of the previous year whichexpired last before the commencement of the assessment year, or the 30th day of June of theassessment year, whichever is later;

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together with proof of furnishing the report;

(c) The return is accompanied by proof of - (i) the tax, if any, claimed to have been deducted atsource and the advance tax and tax on self-assessment, if any, claimed to have been paid;

(ii) The amount of compulsory deposit, if any, claimed to have been made under the CompulsoryDeposit Scheme (Income-tax Payers) Act, 1974 (38 of 1974);

(d) Where regular books of account are maintained by the assessee the return is accompanied bycopies of - (i) manufacturing account, trading account, profit and loss account or, as the case maybe, income and expenditure account or any other similar account and balance sheet;

(ii) In the case of a proprietary business or profession, the personal account of the proprietor; inthe case of a firm, association of persons or body of individuals, personal accounts of thepartners or members; and in the case of a partner or member of a firm, association of persons orbody of individuals, also his personal account in the firm, association of persons or body of 

individuals;

(e) Where the accounts of the assessee have been audited, the return is accompanied by copies of the audited profit and loss account and balance sheet and the auditor's report and, where an auditof cost accounts of the assessee has been conducted, under section 233B of the Companies Act,1956 (1 of 1956), also the report under that section;

(f) Where regular books of account are not maintained by the assessee the return is accompaniedby a statement indicating the amounts of turnover or, as the case may be, gross receipts, grossprofit, expenses and net profit of the business or profession and the basis on which such amountshave been computed, and also disclosing the amounts of total sundry debtors, sundry creditors,stock-in-trade and cash balance as at the end of the previous year.

Capital gain tax

A capital gain is income derived from the sale of an investment. A capital investment can be ahome, a farm, a ranch, a family business, or a work of art, for instance. In most years slightly lessthan half of taxable capital gains are realized on the sale of corporate stock. The capital gain isthe difference between the money received from selling the asset and the price paid for it.

"Capital gains" tax is really a misnomer. It would be more appropriate to call it the "capitalformation" tax. It is a tax penalty imposed on productivity, investment, and capital accumulation.

The capital gains tax is different from almost all other forms of taxation in that it is a voluntarytax. Since the tax is paid only when an asset is sold, taxpayers can legally avoid payment byholding on to their assets--a phenomenon known as the "lock-in effect."

There are many unfairnesses imbedded in the current tax treatment of capital gains. One is thatcapital gains are not indexed for inflation: the seller pays tax not only on the real gain inpurchasing power but also on the illusory gain attributable to inflation. The inflation penalty is

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Partnerships (residentand non-resident)

30% 10% without indexation (for units/ zero coupon bonds)

Individuals (residentand non-residents)

30%

Overseas financialorganisations specifiedin section 115AB

40% (corporate)30% (non-corporate)

10%

FIIs 30% 10%

Other Foreigncompanies

40% 20% with indexation;

10% without indexation (for units/ zero coupon bonds)Local authority 30%

Co-operative society Progressive slab rates

Computation of Capital Gains

Profits or gains arising from the transfer of a capital asset made in a previous year is taxable ascapital gains under the head "Capital Gains". The important ingredients for capital gains are,therefore, existence of a capital asset, transfer of such capital asset and profits or gains that arisefrom such transfer.

Capital asset 

Capital asset means property of any kind except the following :

a) Stock-in-trade, consumable stores or raw-materials held for the purpose of business orprofession.

b) Personal effects like wearing apparel, furniture, motor vehicles etc., held for personal use of the tax payer or any member of his family. However, jewellery, even if it is for personal use, is acapital asset.

c) Agricultural land in India other than the following:

  Land situated in any area within the jurisdiction of muni-cipality, municipal corporation,notified area committee, town area committee, town committee, or a cantonment boardwhich has a population of not less than 10,000 according to the figures published beforethe first day of the previous year based on the last preceding census.

  Land situated in any area around the above referred bodies upto a distance of 8kilometers from the local limits of such bodies as notified by the Central Government(Please see Annexure 'A' for the notification).

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d) 6 1/2 per cent Gold Bonds, 1977, 7 per cent Gold Bonds, 1980, National Defence Gold Bonds,1980 and Special Bearer Bonds, 1991 issued by the Central Government.

e) Gold deposit bonds issued under the Gold Deposit Scheme 1999 notified by the CentralGovernment.

Though there is no definition of "property" in the Income-tax Act, it has been judicially held thata property is a bundle of rights which the owner can lawfully exercise to the exclusion of allothers and is entitled to use and enjoy as he pleases provided he does not infringe any law of theState. It can be either corporeal or incorporeal. Once something is determined as property itbecomes a capital asset unless it figures in the exceptions mentioned above. Something isdetermined as property it becomes a capital asset unless it figures in the exceptions mentionedabove.

Transfer 

Transfer includes:

i) Sale, exchange or relinquishment of a capital asset

A sale takes place when title in the property is transferred for a price. The sale need not bevoluntary. An involuntary sale like that by a Court of a property of judgement debtor at theinstance of a decree holder is also transfer of a capital asset.

An exchange of capital asset takes place when the title in one property is passed in considerationof the title in another property. Relinquishment of a capital asset arises when the ownersurrenders his rights in property in favour of another person. For example, the transfer of rights

to Subscribe the shares in a company under a 'Right Issue' to a third person.

ii) Extinguishment of any rights in a capital asset

This covers every possible transaction which results in destruction, annihilation extinction,termination, Cessation or cancellation of all or any bundle of rights in a capital asset. Forexample, termination of a lease or and of a mortgagee interest in a property.

iii) Compulsory acquisition of the capital asset under any law

Acquisition of immovable properties under the Land acquisition Act, acquisition of industrial

undertaking under the Industries (Development and Regulation) Act or preemptive purchase of immovable properties by the Income-tax Department are some of the examples of compulsoryacquisition of a capital asset.

iv) Conversion of a capital asset into stock-in-trade

Normally, there can be no transfer if the ownership in an asset remains with the same person.However the Income-tax Act provides an exception for the purpose of capital gains. When a

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person converts any capital asset owned by him into stock-in-trade of a business carried on byhim, it is regarded as a transfer. For example, where an investor in shares starts a business of dealing in shares and treats his existing investments as the stock-in-trade of 6 new business, suchconversion arises and is regarded as a transfer.

v) Part performance of a contract of sale

Normally transfer of an immovable property worth Rs.100/- or more is not complete withoutexecution and registration of a conveyance deed. However, section 53A of the Transfer of Property Act envisages situations where under a contract for transfer of an immovable property,the purchaser has paid the price and has taken possession of the property, but the conveyance iseither not executed or if executed is not registered. In such cases the transferer is debarred fromagitating his title to the property against the purchaser.

The act of giving possession of an immovable property in part performance of a contract istreated as "transfer" for the purposes of capital gains. This extended meaning of transfer applies

also to cases where possession is already with the purchaser and he is allowed to retain it in partperformance of the contract.

vi) Transfer of rights in immovable properties through the medium of co-operative societies,companies etc.

Usually flats in multi-storeyed building and other dwelling units in group housing schemes areregistered in the name of a co-operative society formed by the individual allottees. Sometimescompanies are floated for his purpose and allottees take shares in such companies. In such casestransfer of rights to use and enjoy the flat is effected by changing the membership of co-operative society or by transferring the shares in the company. Possession and enjoyment of immovable property is also made by what is commonly known as Tower of Attorney' transfers.

All these transactions are regarded as transfer.

vii) Transfer by a person to a firm or other or Body of a person to a Association of Persons(AOP) Individuals (BOI)

Normally, firm/AOP/BOI is not considered a distinct legal entity from its partners or membersand so transfer of a capital asset from the partners to the firm/AOP/BOI is not considered as'Transfer'. However, under the Capital Gains, it is specifically provided that if any capital asset istransferred by a partner to a firm/AOP/BOI by way of capital contribution or otherwise, the samewould be construed as transfer.

viii) Distribution of capital assets on Dissolution

Normally, distribution of capital assets on dissolution of a firm/AOP/BOI is also not consideredas transfer for file same reasons as mentioned in (vii) above. However, folder the capital gains,this is considered as transfer by the firm/AOP/BOI and therefore gives rise to capital gains .| thecase of the firm/AOP/BOI.

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ix) Distribution of money or other assets by a Company on liquidation

(i) If a shareholder receives any money or other assets from a Company in liquidation, theshareholder is liable to pay capital gains as the same would have been received in lieu of the

shares held by him in the company. However, if the assets of a company are distributed to theshareholders on its liquidation, such distribution shall not be regarded as transfer by thecompany.

(ii) Transactions not regarded as Transfer

The following, though may fall under the above definition of transfer are to be treated as nottransfer for the purpose of computing Capital Gains:

Distribution of capital assets on the total or partial , partition of a Hindu Undivided Family; of acapital asset under a gift or will or an irrevocable trust except transfer under a gift or an

irrevocable trust, of shares, debentures or warrants allotted by a company to its employees underEmployees' Stock Option Plan or Scheme;

iii) transfer of a capital asset by a company to its subsidiary company, if:

a) the parent company or its nominees hold the whole of the share capital of a subsidiarycompany,

b) the subsidiary company is an Indian company,

c) the capital asset is not transferred as stock-in- trade,

d) the subsidiary company does not convert such capital asset into stock-in-trade for a period of 8years from the date of transfer, and

e) the parent company or its nominees continue to hold the whole of the share capital of thesubsidiary company for 8 years from the date of transfer.

iv) transfer of a capital asset by a subsidiary company to the holding company, if:

a) the whole of the share capital of the subsidiary company is held by the holding company,

b) the holding company is an Indian Company,

c) the capital asset is not transferred as stock-in-trade,

d) the holding company does not convert such capital asset into stock-in-trade for a period of 8years from the date of transfer, and

e) the holding company or its nominees continue or hold the whole of the share capital of the

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subsidiary company for 8 years from the date of transfer.

v) in a scheme of amalgamation, transfer of a capital asset by the amalgamating company to theamalgamated company if the amalgamated company is an Indian company.

vi) transfer of shares of an amalgamating company, if:

a) the transfer is made in consideration of the allotment of share or shares in the amalgamatedcompany, and

b) the amalgamated company is an Indian company.

vii) transfer of shares of an Indian Company by an amalgamating foreign company to theamalgamated foreign company, if:

a) at least twenty-five per cent of the shareholders of the amalgamating foreign company

continue to remain shareholders of the amalgamated foreign company and

b) such transfer does not attract tax on capital gains in the country, in which the amalgamatingcompany is incorporated.

viii) in a demerger :

a) transfer of a capital asset by the demerged company to the resulting company, if the resultingcompany is an Indian company;

b) transfer of share or shares held in an Indian company by the demerged foreign company to theresulting foreign company if: i) the shareholders holding not less than three-fourths in value of the shares of the demerged foreign company continue to remain shareholders of the resultingforeign company; and

ii) such transfer does not attract tax on capital gains in the country, in which the demergedforeign company is incorporated.

c) transfer or issue of shares, in consideration of demerger of the undertaking by,the resultingcompany to the shareholders of the demerged company.

ix) transfer of bonds or Global Depository Receipts, purchased in foreign currency, by a non-resident to another non-resident outside India.

x) transfer of agricultural land in India effected before first of March,'70.

xi) transfer of any work of art, archeological, scientific or art collection, book,manuscript,drawing, painting, photograph or print, to the Government or a University or theNational Museum, National Art Gallery, National Archives or any such other public museum orinstitution notified by the Central Government in the Official Gazette to be of national

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importance or to be of renown throughout any State or States.

xii) transfer by way of conversion of bonds or debentures, debenture stock or deposit certificatein any form, of a company into shares or debentures of that company.

xiii) transfer of membership of a recognised stock exchange made by a person (other than acompany) on or before 31.12.1998, to a company in exchange of shares allotted by thatcompany. However, if the shares of the company are transferred within 3 years of theiracquisition, the gains not charged to tax by treating their acquisition as not transfer would betaxed as capital gains in the year of transfer of the shares.

xiv) transfer of land of a sick industrial company, made under a scheme prepared and sanctionunder section 18 of the Sick Industrial Companies (Special Provisions) Act, 1985 (1 of 1986)where such sick industrial company is being managed by its workers' co-operative and suchtransfer is made during the period commencing from the previous year in which the saidcompany has become a sick industrial company under section 17(1) of that Act and ending with

the previous year during which the entire net worth of such company becomes equal to orexceeds the accumulated losses.

xv) Transfer of a capital asset to a company in the course of corporitisation of a recognised stock exchange in India as a result of which an Association of Persons (AOP) or Body of Individuals(BOI) is succeeded by such company, if:

a) all the liabilities of the AOP or BOI relating to the business immediately before the successionbecome the assets and liabilities of the company,

b) corporitisation is carried out in accordance with a scheme which is approved by Securities andExchanges Board of India (SEBI).

(xvi) Where a firm is succeeded by a company in the business carried on by it as a result of which the firm sells or otherwise transfers any capital asset or intangible asset to the company, if:

a) all the assets and liabilities of the firm relating to the business immediately before thesuccession become the assets and liabilities of the company,

b) all the partners of the firm immediately before the succession become the shareholders of thecompany in the same proportion in which their capital accounts stood in the books of the firm onthe date of succession,

c) the partners of the firm do not receive any consideration or benefit, directly or indirectly, inany form or manner, other than by way of allotment of shares in the Company and

d) the aggregate of the shareholding in the company of the partners of the firm is not less thanfifty percent of the total voting power in the company and their shareholding continues to be assuch for a period of five years from the date of the succession.

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If the conditions laid down above are not complied with, then the amount of profits or gainsarising from the above transfer would be deemed to be the profits and gains of the successorcompany for the previous year during which the above conditions are not complied with.

xvii) Where a sole proprietary concern is succeeded by a company in the business carried on by

it as a result of which the sole proprietary concern sells or otherwise transfers any capital asset orintangible asset to the company, if:

a) all the assets and liabilities of the sole proprietary concern relating to the business immediatelybefore the succession become the assets and liabilities of the company.

b) the shareholding of the sole proprietor in the company is not less than fifty percent of the totalvoting power in the company and his shareholding continues to so remain as such for a period of five years from the date of the succession and

c) the sole proprietor does not receive any consideration or benefit, directly or indirectly, in any

form or manner, other than by way of allotment of shares in the company.

If the conditions laid down above are not complied with, then the amount of profits or gainsarising from the above transfer would be deemed to be the profits and gains of the successorcompany for the previous year during which the above conditions are not complied with.

xviii) transfer in a scheme of lending of any securities under an arrangement subject to theguidelines of Securities and Exchanges Board of India (SEBI).

Corporate Tax 

For the Assessment Year 2007-08

Description  Existing Rate* (%)  Proposed Rate* (%) Difference + - =

(%) 

Domestic Company 

Regular Tax 33.6 33.9** +0.33

MAT 11.22

(of book profits)

11.33

(of book profits)

+0.11

DDT 14.025 16.995 +2.97

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Foreign Company 

Regular Tax 41.82 42.33# 0.41

*It includes the applicable surcharge and the education cess.**If the income is equal or less than Rs 10 million, it is 30.9%.#If the income is equal or less than Rs 10 million, it is 41.2%.

A company has been defined as a juristic person having an independent and separate legal entityfrom its shareholders. Income of the company is computed and assessed separately in the handsof the company. However the income of the company which is distributed to its shareholders asdividend is assessed in their individual hands. Such distribution of income is not treated asexpenditure in the hands of company, the income so distributed is an appropriation of the profits

of the company.

Residence of a company:

A company is said to be a resident in India during the relevant previous year if:

1.  it is an Indian company

2.  if it is not an Indian company then, the control and the management of its affairs issituated wholly in India

A company is said to be non-resident in India if it is not an Indian company and some part of thecontrol and management of its affairs is situated outside India.

Taxable Corporate Income 

Corporate Sector Taxes : 

The taxability of a company's income depends on its domicile. Indian companies are taxable inIndia on their worldwide income. Foreign companies are taxable on income that arises out of their Indian operations, or, in certain cases, income that is deemed to arise in India. Royalty,interst, gains from sale of capital assets located in India (including gains from sale of shares in anIndian company), dividends from Indian companies and fees for techincal services are all treatedas income arising in India.

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Domestic Corporate Income Taxes Rates 

Tax

Rate

Effective Tax Rate with

surcharge

Domestic

Corporations 30% 30%1 

 Note:-

   A surcharge of 10% of the income tax is levied, if the taxable income exceeds Rs. 1

million.    All companies incorporated in India are deemed as domestic Indian companies for tax

 purposes, even if owned by foreign companies. 

Foreign Companies Tax Rates 

Withholding Tax Rate for

non-treaty foreign

companies

Tax Rate for US

companies under the

treaty

Dividends  20% 15%1 

InterestIncome 

20% 15%2 

Royalties  30% 20%2 

Technical

Services 30% 20%2 

Other

Income 55% 55%

 Note :-

   Inter-corporate rates where there is minimum holding.   10% or 15% in some cases.   Withholding tax is charged on estimated income, as approved by the tax authorities.    There are other favorable tax rates under various tax treaties between India and other 

countries. 

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Asessing taxable income 

In ascertaining taxable income, all expenditure incurred for business purposes are deductible.This includes interest on borrowings paid in the financial year and depreciation on fixed assets.

Certain expenses are specifically disallowed or their quantum of deduction is restricted. Theseinclude :

  Entertainment expenses  Interest or other amounts paid to a non-resident without deducting without tax  Corporate taxes paid  Indirect general and administrative costs of a foreign head office.

 Assessment and Rate of Income Tax

For the Assessment Year 2007-08

Description  Existing Rate* (%)  Proposed Rate* (%) Difference + - =

(%) 

Domestic Company 

Regular Tax 33.6 33.9** +0.33

MAT 11.22(of book profits)

11.33(of book profits)

+0.11

DDT 14.025 16.995 +2.97

Foreign Company 

Regular Tax 41.82 42.33# 0.41

*It includes the applicable surcharge and the education cess.**If the income is equal or less than Rs 10 million, it is 30.9%.#If the income is equal or less than Rs 10 million, it is 41.2%

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Rates of Income Tax : The rates which are applicable to companies for the assessment year 1998-99 are

Category  Rates 

Tax on long-term capital gains 20 %

Tax on winnings form lotteries, cross word puzzles,

races etc.40%

Tax on any other income

a) domestic company

b) foreign company

35%

48%

 Minimum Alternative Tax (MAT)

For the Assessment Year 2009-10

Minimum Alternate Tax (MAT) to be increased to 15 per cent of book profits from 10per cent. The period allowed to carry forward the tax credit under MAT to be extended

from seven years to ten years.

For the Assessment Year 2007-08

The scope has been widened. Income eligible for tax holiday under sections 10A and10B has been included:

In the Budget this year, it has been announced that the income eligible for taxholiday under sections 10A and 10B henceforth will be considered in thecomputation of ‗book profits‘ for the levy of MAT.

Normally, a company is liable to pay tax on the income computed in accordance with theprovisions of the income tax Act, but the profit and loss account of the company is prepared asper provisions of the Companies Act. There were large number of companies who had book profits as per their profit and loss account but were not paying any tax because income computedas per provisions of the income tax act was either nil or negative or insignificant. In such case,although the companies were showing book profits and declaring dividends to the shareholders,they were not paying any income tax. These companies are popularly known as Zero Tax

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companies. In order to bring such companies under the income tax act net, section 115JA wasintroduced i.e. assessment year 1997-98.

According to this section, if the taxable income of a company computed under this Act, inrespect of previous year 1996-97 and onwards is less than 30 % of its book profits, the total

income of such company is chargeable to tax for the relevant previous year shall be deemed to anamount equal to 30 % of such book profits.

A new tax credit scheme is introduced by which MAT paid can be carried forward for set-off against regular tax payable during the subsequent five year period subject to certain conditions,as under:-

  When a company pays tax under MAT, the tax credit earned by it shall be an amountwhich is the difference between the amount payable under MAT and the regular tax.Regular tax in this case means the tax payable on the basis of normal computation of totalincome of the company.

 MAT credit will be allowed carry forward facility for a period of five assessment yearsimmediately succeeding the assessment year in which MAT is paid. Unabsorbed MATcredit will be allowed to be accumulated subject to the five year carry forward limit.

  In the assessment year when regular tax becomes payable, the difference between theregular tax and the tax computed under MAT for that year will be set off against theMAT credit available.

  The credit allowed will not bear any interest.

 Depreciation, Set off, Carry forward 

Depreciation 

Depreciation is normally calculated on the declining balance method at varying rates and isavailable for a full year, irrespective of the actual period of use of the asset in the year of theacquisition of the asset. Depreciation is allowed at half the normal rate, if the as set is used forless than 180 days in that year. No depreciation is available in the year of the sale of the asset.

Depreciation is calculated on the opening written-down value of the block of assets plus theadditions to the block less the sale proceeds/ scrap value of selections from the block.Depreciation at 100% is allowed in respect of machinery and equipment the unit cost of whichdoes not exceed Rs. 5,000. No depreciation is allowed in respect of motorcars manufacturedoutside India, unless they are rental cars for tourists or where such motorcars are used outsideIndia for the purposes of business. No depreciation is allowed on plant and machinery if actualcost is otherwise allowed as a deduction in one or more years under an agreement entered intowith the Central Government for prospecting, etc. of mineral, oil. The rates applicable for theaccounting year ending March 1996 :

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Blocks of AssetsDepreciation

Rates (%) 

Buildings

-- Dwelling units with plinth area not exceeding 80square meters and hotels 20

-- Mainly residential 5

-- Others 10

Purely temporary structures 100

Machinery and Equipment

-- General 25

Motorcars, other than those used in a business of 

hire, acquired after April 1, 199020

Airplanes, air engines; specified moulds; air and

water pollution control equipment; solid waste

control equipment; motor buses; motor trucks;

motor taxis used in a business of hire

40

Specified energy-saving/ renewable energy

devices; specified machinery used in mines and

quarries, mineral oil concerns, salt and sugar

works, iron and steel industries, glassworks, etc.

100

Furniture and Fittings

-- General10

Special furniture and fittings used in hotels,

cinemas, etc. 15

Oceangoing ships, including dredgers, etc., and

speedboats20

Inland water vessels 10

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Tax Rebates for Corporate Sector 

The classical system of corporate taxation is followed

  Domestic companies are permitted to deduct dividends received from other domesticcompanies in certain cases.

  Inter Company transactions are honored if negotiated at arm's length.

  Special provisions apply to venture funds and venture capital companies.

  Long-term capital gains have lower tax incidence.

  There is no concept of thin capitalization.

  Liberal deductions are allowed for exports and the setting up on new industrialundertakings under certain circumstances.

  There are liberal deductions for setting up enterprises engaged in developing, maintainingand operating new infrastructure facilities and power-generating units.

  Business losses can be carried forward for eight years, and unabsorbed depreciation canbe carried indefinitely. No carry back is allowed.

  Specula tax provisions apply to activities carried on by nonresidents.

  A minimum alternative tax (MAT) on corporations has been proposed by the Finance Bill1996.

 Dividends, interest and long-term capital gain income earned by an infrastructure fund orcompany from investments in shares or long-term finance in enterprises carrying on thebusiness of developing, monitoring and operating specified infrastructure facilities or inunits of mutual funds involved with the infrastructure of power sector is proposed to betax exempt.

Concessions Offered to Specific Sectors

Oil Companies 

The taxable income of all oil companies which are engaged in petroleum exploration and

production is taxed favorably and the following expenses/allowances are deductible:

  In fructuous or abortive exploration expenses incurred in areas surrendered prior to thecommencement of commercial production.

  All expenses incurred for drilling or exploration activities, whether before or aftercommencement of commercial production, including the cost of physical assets used.These are deductible after the commercial production.

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The allowances are calculated according to the agreement reached between the oil company andthe Government.

Oil and Gas Services

All revenues of non-resident oil service companies (excluding royalties and technical servicefees), earned in connection with providing services and facilities (e.g. hire of plant andmachinery) to be used in extraction or production of mineral oils, are taxed at a deemed profit.

Power Projects

Foreign companies engaged in constructing, erecting, testing or commissioning of plant andmachinery for turnkey power projects approved by the Government and financed by aninternational aid programme are taxed on a deemed profit.

Custom duty

Introduction 

As per AY 2009-10 

  Customs duty of 5% to be imposed on Set Top Box for television broadcasting.  Customs duty on LCD Panels for manufacture of LCD televisions to be reduced from

10% to 5%.  Full exemption from 4% special CVD on parts for manufacture of mobile phones and

accessories to be reintroduced for one year.  List of specified raw materials/inputs imported by manufacturer-exporters of sports goods

which are exempt from customs duty, subject to specified conditions, to be expanded byincluding five additional items.

  List of specified raw materials and equipment imported by manufacturer-exporters of leather goods, textile products and footwear industry which are fully exempt fromcustoms duty, subject to specified conditions, to be expanded.

  Customs duty on unworked corals to be reduced from 5% to Nil.  Customs duty on 10 specified life saving drugs/vaccine and their bulk drugs to be

reduced from 10% to 5% with Nil CVD (by way of excise duty exemption).  Customs duty on specified heart devices, namely artificial heart and PDA/ASD occlusion

device, to be reduced from 7.5% to 5% with Nil CVD (by way of excise duty exemption).  Customs duty on permanent magnets for PM synchronous generator above 500 KW used

in wind operated electricity generators to be reduced from 7.5% to 5%.  Customs duty on bio-diesel to be reduced from 7.5% to 2.5%.  Concessional customs duty of 5% on specified machinery for tea, coffee and rubber

plantations to be reintroduced for one year, upto 06.07.2010.

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  Customs duty on ‘mechanical harvester’ for coffee plantation to be reduced from7.5% to 5%. CVD on such harvesters has also been reduced from 8% to nil, by way of excise duty exemption.

  Customs duty on serially numbered gold bars (other than tola bars) and gold coins to beincreased from Rs.100 per 10 gram to Rs.200 per 10 gram. Customs duty on other forms

of gold to be increased from Rs.250 per 10 gram to Rs.500 per 10 gram. Customs duty onsilver to be increased from Rs.500 per Kg. to Rs.1000 per Kg. These increases also to beapplicable when gold and silver (including ornaments) are imported as personal baggage.

  Customs duty on cotton waste to be reduced from 15% to 10%.  Customs duty on wool waste to be reduced from 15% to 10%.  Customs duty on rock phosphate to be reduced from 5% to 2%.  CVD exemption on Aerial Passenger Ropeway Projects to be withdrawn. Such projects

will now attract applicable CVD.  Customs duty exemption on concrete batching plants of capacity 50 cum per hour or

more to be withdrawn. Such plants will now attract customs duty of 7.5%.  On packaged or canned software, CVD exemption to be provided on the portion of the

value which represents the consideration for transfer of the right to use such software,subject to specified conditions.  Customs duty on inflatable rafts, snow-skis, water skis, surf-boats, sail-boards and other

water sports equipment to be fully exempted.

The Customs Act was formulated in 1962 to prevent illegal imports and exports of goods.Besides, all imports are sought to be subject to a duty with a view to affording protection toindigenous industries as well as to keep the imports to the minimum in the interests of securingthe exchange rate of Indian currency.

Duties of customs are levied on goods imported or exported from India at the rate specifiedunder the customs Tariff Act, 1975 as amended from time to time or any other law for the timebeing in force. For the purpose of exercising proper surveillance over imports and exports, theCentral Government has the power to notify the ports and airports for the unloading of theimported goods and loading of the exported goods, the places for clearance of goods imported orto be exported, the routes by which above goods may pass by land or inland water into or out of Indian and the ports which alone shall be coastal ports.

In order to give a broad guide as to classification of goods for the purpose of duty liability, thecentral Board of Excises Customs (CBEC) bring out periodically a book called the "IndianCustoms Tariff Guide" which contains various tariff rulings issued by the CBEC. The Act alsocontains detailed provisions for warehousing of the imported goods and manufacture of goods isalso possible in the warehouses.

For a person who do not actually import or export goods customs has relevance in so far as theybring any baggage from abroad.

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Types of duties 

Under the custom laws, the following are the various types of duties which are leviable.

Basic Duty: This is the basic duty levied under the Customs Act. The rate varies for different items from 5%to 40%.

Additional Duty (Countervailing Duty) (CVD):This additional duty is levied under section 3 (1) of the Custom Tariff Act and is equal to exciseduty levied on a like product manufactured or produced in India. If a like product is notmanufactured or produced in India, the excise duty that would be leviable on that product had itbeen manufactured or produced in India is the duty payable. If the product is leviable at differentrates, the highest rate among those rates is the rate applicable. Such duty is leviable on the valueof goods plus basic custom duty payable. eg. If the customs value of goods is Rs. 5000 and rate

of basic customs duty is 10% and excise duty on similar goods produced in India is 20%, CVDwill be Rs.1100/-.

Additional Duty to compensate duty on inputs used by Indian manufacturers. This AdditionalDuty is levied under section 3(3) of the Customs Act. It can be charged on all goods by thecentral government to counter balance excise duty leviable to raw materials, components andother inputs similar to those used in the production of such good.

Anti-dumping Duty: Sometimes, foreign sellers abroad may export into India goods at prices below the amountscharged by them in their domestic markets in order to capture Indian markets to the detriment of Indian industry. This is known as dumping. In order to prevent dumping, the CentralGovernment may levy additional duty equal to the margin of dumping on such articles, if thegoods have been sold at less than normal value. Pending determination of margin of dumping,such duty may be provisionally imposed. After the exact rate of dump ing duty is finallydetermined, the Central government may vary the provisional rate of dumping duty. Dumpingduty can be imposed even when goods are imported indirectly or after changing the condition of goods. There are however certain restrictions on imposing dumping duties in case of countrieswhich are signatories to the GATT or on countries given "Most Favoured Nation Status" underagreement. Dumping duty can be levied on imports on such countries only if the CentralGovernment proves that import of such goods in India at such low prices causes material injuryto Indian industry.

Protective Duty:If the Tariff Commission set up by law recommends that in order to protect the interests of Indian industry, the Central Government may levy protective anti-dumping duties at the raterecommended on specified goods. The notification for levy of such duties must be introduced inthe Parliament in the next session by way of a bill or in the same session if Parliament is insession. If the bill is not passed within six months of introduction in Parliament, the notificationceases to have force but the action already undertaken under the notification remains valid. Such

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Registration-cum-Membership Certificate 

Any person, applying for (i) a license/ certificate/ permission to import/ export, [except itemslisted as restricted items in ITC(HS)] or (ii) any other benefit or concession under this policyshall be required to furnish Registration-cum-Membership Certificate (RCMC) granted by thecompetent authority in accordance with the procedure specified in the Handbook (Vol.1) unlessspecifically exempted under the Policy.

Sales Tax 

Sales Tax is a tax, levied on the sale or purchase of goods. There are two kinds of Sales Tax i.e.Central Sales Tax, imposed by the Centre and Sales Tax, imposed by each state.

When is Sales Tax payable? 

Central Sales tax is generally payable on the sale of all goods by a dealer in the course of inter-state Trade or commerce or, outside a State or, in the course of import into or, export from India.

What is interstate sale? 

According to S3, a sale or purchase shall be deemed to take place in the course of interstate tradeor commerce in the following cases:

  when the sale or purchase occasions the movement of goods from one State to another;  when the sale is effected by a transfer of documents of title to the goods during their

movement from one State to another.

Where the goods are delivered to a carrier or other bailee for transmission, the movement of thegoods for the purpose of clause (b) above, is deemed to start at the time of such delivery andterminate at the time when delivery is taken from such carrier or bailee. Also, when themovement of goods starts and terminates in the same State, it shall not be deemed to be amovement of goods from one State to another.

To make a sale as one in the course of interstate trade, there must be an obligation to transportthe goods outside the state. The obligation may be of the seller or the buyer. It may arise byreason of statute or contract between the parties or from mutual understanding or agreementbetween them or, even from the nature of the transaction, which linked the sale to suchtransaction. There must be a contract between the seller and the buyer. According to the terms of the contract, the goods must be moved from one state to another. If there is no contract, thenthere is no inter-state sale.

There can be an interstate sale even if the buyer and the seller belong to the same state; even if 

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the goods move from one state to another as a result of a contract of sale; or, the goods are soldwhile they are in transit by transfer of documents.

To whom is Sales Tax payable? By whom is it payable? 

Sales tax is payable to the sales tax authority in the state from which the movement of goodscommences. It is to be paid by every dealer on the sale of any goods effected by him in thecourse of inter-state trade or commerce, notwithstanding that no liability to tax on the sale of goods arises under the tax laws of the appropriate state.

What are the possible offences, which may be committed, those are liable to be penalized?What are the penalties for such offences? 

The offences that may be committed and, the penalties, prescribed for can be summarized asunder. Offences, under section10, are punishable with simple imprisonment (up to 6months) withor without fine.

1.  Giving false declaration in Form C, E-I, E-II, F or H, which he knows or has reason tobelieve it to be false.

2.  Not getting registered under the CST Act, when required to be registered or notcomplying with provisions relating to security.

3.  False representation by a registered dealer that the goods, purchased are covered underhis certificate of registration for a concessional rate.

4.  Falsely representing that he is a registered dealer, though he is not.5.  Misusing or using for different purpose, the goods, obtained under C form at a

concessional rate.6.  Having possession of form C, which is not obtained as per provisions of the CST Act?7.  Collecting any amount, representing as sales tax, by an unregistered dealer or by a

registered dealer in contravention of the provisions of the CST Act.

What is the liability of a Company in liquidation, with respect to payment of Central SalesTax? What is the liability of the directors of a private company?

If a liquidator or receiver is appointed in the case of a company, he should inform the Sales Taxauthorities within 30 days of his appointment. The Sales Tax Authority shall intimate him theamount of tax due from the company in liquidation within 3 months. The Sales Tax authoritiesare "preferential creditors' in a case of liquidation.

The Liquidator shall not dispose of assets of the company before setting aside the amount of duesas intimated by sales tax department. The liquidator may, however, part with such assets orproperties in compliance with any order of a court or for the purpose of payment of the tax,payable by the company under the CST Act or, for making any payment to secured creditorswhose debts are entitled under law to priority of payment over debts due to the government, onthe date of liquidation or, for meeting such costs and expenses of the winding up of the company,as are in the opinion of the appropriate authority, reasonable.

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What is the liability of the directors of a private company with respect to payment of Central Sales Tax? 

If a private limited company is in liquidation and, any tax, assessed on the company, cannot be

recovered, it becomes the personal liability of the directors, jointly and severally.

Directors can however avoid this liability; if they prove that the non-payment of tax was not onaccount of neglect, misfeasance or breach of duty on the part of the directors, in relation toaffairs of the company.

The power to levy Sales tax 

1.  No state can levy sales tax on any sale or purchase where such sale or purchase takesplace

o  outside the state ando 

in the course of import of goods into or export of goods outside India.2.  Only the parliament can levy tax on inter-state sale or purchase of goods

Main Principles in State Sales Tax Laws 

1.  A sale or purchase of goods is said to take place when the transfer of property in theexisting goods or future goods takes place for consideration of money.

2.  The goods have been divided into different categories and different rates of sales tax arecharged for different categories of goods.

3.  In most of the cases related to the sales tax, the tax on the sale or purchase of goods is at

single point.4.  Under the provisions of some state laws the assesses are divided into several categoriessuch as manufacturer, dealer, selling agent etc. and such as assess is required to obtain aregistration certificate to that effect. The sales tax or the purchase tax is levied on thatassessee on the basis of his category such as dealer, manufacturer etc. on production of certain forms or certificates (and differential rates of sales tax are levied).

5.  Generally , a quarter return of sales or purchases is insisted upon and the assessee isrequired to furnish the return in the prescribed form.

6.  At the time of assessment, the assessee has to furnish all the documentary evidence andsatisfy the concerned sales tax / commercial tax officer.

7.  The sales tax laws of the states prescribe the procedure to be followed in case an assesseeprefers to make an appeal.

8.  Every dealer should apply for registration and obtain a registration certificate to thateffect. The registration certificate number should be quoted in all the bill / cash memos.

Transactions not amounting to inter-state sales 

Not all dispatches of goods from one state to another result in inter state sales rather the

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movement must be on account of a covenant or incident of the contract of sales. There are someinstances wherein the goods are moved out of the selling state and yet they are not consideredinter state sales :-

  Intra-state sales 

Stock transfer from head office to branch & vice versa  Import and Export sales or purchases  Sale through commission agent / on account sales  Delivery of Goods for executing works contract

Sales Tax ID number 

A state sales tax ID number is basically a business version of your Social Security number underwhich you collect and pay tax for any service or product you sell that qualifies for taxation inyour state. The state department of taxation provides sales tax ID numbers and it takes about a

month to get one.

The rule of thumb for sales tax is that most services are exempt and most products are taxableexcept for food and drugs. However, states have been gradually adding to the list of services thatare taxable for the last few years. Check with your state department of taxation to determine if the product or service you sell is taxable in your state.

Exception in the sales taxes

  Sales to resellers such as wholesalers and retailers that have a valid state resalecertificate.

 Sales to tax-exempt institutions such as schools or charities

Which forms are to be filled?

  Form C;  Form D;  Form G;  Forms E-I & E-II.

 Excise duty

  Excise duty rate on items currently attracting 4% to be raised to 8% with following majorexceptions:

o  Specified food items including biscuits, sharbats, cakes and pastrieso  Drugs and pharmaceutical products falling under Chapter 30o  Medical equipmento  Certain varieties of paper, paperboard and articles thereof 

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  EVA compound manufactured on job work for further use in manufacture of footwear tobe exempted from excise duty.

  Benefit of SSI exemption scheme to be extended to printed laminated rolls bearing thebrand name of others by excluding this item from the purview of the brand namerestriction.

 On packaged or canned software, excise duty exemption to be provided on the portion of the value which represents the consideration for transfer of the right to use such software,subject to specified conditions.

  Excise duty on branded articles of jewellery to be reduced from 2% to Nil.

The Customs Act was formulated in 1962 to prevent illegal imports and exports of goods.Besides, all imports are sought to be subject to a duty with a view to affording protection toindigenous industries as well as to keep the imports to the minimum in the interests of securingthe exchange rate of Indian currency.

Duties of customs are levied on goods imported or exported from India at the rate specified

under the customs Tariff Act, 1975 as amended from time to time or any other law for the timebeing in force. For the purpose of exercising proper surveillance over imports and exports, theCentral Government has the power to notify the ports and airports for the unloading of theimported goods and loading of the exported goods, the places for clearance of goods imported orto be exported, the routes by which above goods may pass by land or inland water into or out of Indian and the ports which alone shall be coastal ports

In order to give a broad guide as to classification of goods for the purpose of duty liability, thecentral Board of Excises Customs (CBEC) bring out periodically a book called the "IndianCustoms Tariff Guide" which contains various tariff rulings issued by the CBEC. The Act alsocontains detailed provisions for warehousing of the imported goods and manufacture of goods isalso possible in the warehouses.

For a person who do not actually import or export goods customs has relevance in so far as theybring any baggage from abroad.

Types of Excise Duties 

There are three types of Central Excise duties collected in India namely

1.  Basic Excise Duty

This is the duty charged under section 3 of the Central Excises and Salt Act,1944 on allexcisable goods other than salt which are produced or manufactured in India at the ratesset forth in the schedule to the Central Excise tariff Act,1985.

2.  Additional Duty of Excise

Section 3 of the Additional duties of Excise (goods of special importance) Act,1957

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A resident who was not present in India for 730 days during the preceding seven years or whowas nonresident in nine out of ten preceding yeas I treated as not ordinarily resident. In effect, anewcomer to India remains not ordinarily resident.

For tax purposes, an individual may be resident, nonresident or not ordinarily resident.

Non-Residents and Non-Resident Indians 

Residents are on worldwide income. Nonresidents are taxed only on income that is received inIndia or arises or is deemed to arise in India. A person not ordinarily resident is taxed like anonresident but is also liable to tax on income accruing abroad if it is from a business controlledin or a profession set up in India.

Capital gains on transfer of assets acquired in foreign exchange is not taxable in certain cases.

Non-resident Indians are not required to file a tax return if their income consists of only interestand dividends, provided taxes due on such income are deducted at source.

It is possible for non-resident Indians to avail of these special provisions even after becomingresidents by following certain procedures laid down by the Income Tax act.

Taxability of individuals is summarised in the table below 

Status  Indian Income  Foreign Income 

Resident and ordinarily resident Taxable Taxable

Resident but not ordinary resident Taxable Not Taxable

Non-Resident Taxable Not Taxable

Income Tax Calculator

See, how to calculate Your Income Tax in seven simple steps:

Step i: Determine your Gross Income Gross Income = Monthly Income * 12

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Step ii: Calculate your Donation/Charity amount (if any) Donations here mean the amount given to some organization(s) as charity, which should be inconformity with the Income Tax Rules.

Step iii: Calculate your Savings 

It includes all your savings and investments that are listed in the sections under Income TaxRebates. 

Step iv: Assess your Taxable Income axable Income = Gross Income – (Donations/Charity + Savings)ORStep I – (Step II + Step III)

Step v: Calculating the Income Tax Now that you have calculated your taxable income, you may refer to the Income Tax Slab forcalculating the income tax.

Step vi: Add Surcharge Add a surcharge of 10% of your annual income to the Income Tax that you have calculated in thepreceding step. This will be your new income tax figure. (Note: This step is not applicable incase the annual income falls behind Rs. 10 lakhs)

Step vii: Adding the Education Cess Make an addition of 3% of your taxable income (as the education cess) to the new income taxfigure that you have calculated in Step VI above.

The figure reached after Step VII is your final INCOME TAX.

Tax upon salaries and wages 

Salary includes the pay, allowances, bonus or commission payable monthly or otherwise or anymonetary payment, in whatever name called from one or more employers, as the case may be,but does not include the following, namely:

a.  dearness allowance or dearness pay unless it enters into the computation of superannuation or retirement benefits of the employee concerned;

b.  employer's contribution to the provident fund account of the employee;

c. 

allowances which are exempted from payment of tax;d.  the value of perquisites specified in sub-section (2) of section 17 of the Income-tax Act;

It also includes the following:

a.  Wages;b.  Any annuity or pension;

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c.  Any gratuity;d.  Any fees, commissions, perquisites or profits in lieu of or in addition to any salary or

wages;e.  Any advance of salary;f.  Any payment received by an employee in respect of any period of leave not availed of by

him;g.  The annual accredition to the balance at the credit of an employee participating in arecognized provident fund, to the extent to which it is chargeable to tax under Rule 6 of Part A of the Fourth Schedule; and

h.  The aggregate of all sums that are comprised in the transferred balance as referred to insub-rule (2) of rule 11 of part A of the Fourth Schedule of an employee participating in arecognized provident fund, to the extent to which it is chargeable to tax under sub-rule (4)thereof.

Is the allowance paid outside India by the Government to the Indian citizens taxable?

Any allowance, paid outside India by the Government to an Indian citizen for rendering servicesoutside India, is fully exempt from tax u/s.10 (7) of the Income-tax Act.

How is the tax determined on the salary received by ships crew?

Under section 10(6)(viii), salary that is received by or due to a Non-resident foreign national,who is a member of a ships crew, is exempt from tax, provided the total stay of the crew memberin India does not exceed 90 days in the previous year.

If a person foregoes his salary for any reason, would it be taxable?

Since the salary is taxable on due or receipt basis, whichever is earlier, foregoing of salary wouldamount to giving up something, which is due to him. Hence, even if a person foregoes salary, thesame would still be taxable.

In the case of a Hindu undivided family, how would you determine whether theremuneration, received by an individual is the income of the individual or the income of theHindu undivided family?

If the remuneration, received by the co-parcener, is compensation made for the services renderedby the individual co-parcener, then it will be income of the individual co-parcener. If theremuneration received by the individual co-parcener is because of investments of the familyfunds, then it will be considered as the income of the Hindu undivided family. If the income wasessentially earned as a result of the funds invested, then the fact that the co-parcener hadrendered some service will not change the character of the receipt. It will still be regarded asincome of the Hindu undivided family. However, on the other hand, if the co-parcener hasreceived remuneration for services rendered by him, even if his services were availed of becausehe was a member of the family which had invested funds in that business or that he had obtainedqualifying shares from out of the family funds, the receipt would be the income of the individual.

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If an assessee is employed in a company where he is called Managing Agent but is in fact,the Chief Manager of the company, under what head would the remuneration that is paidto him be charged? 

Though he may be called a Managing Agent, the remuneration earned by him will be chargedunder the head of Salaries and not as Business Income. The fact that he is actually the Chief Manager of the company will make the remuneration earned by him chargeable to tax under thehead Salaries. It is the true nature of the contract that will determine the relationship between theassessee and the company. Once it is established that the managing director functions, subject tothe control and supervision of the Board of Directors, the inevitable corollary is that an employer- employee relationship exists and, that being so, his remuneration is assessable under the head"salary".

Is the salary, bonus, commission or remuneration, received by a partner of a firm from thefirm regarded as salary?

No. The salary, bonus, commission or remuneration, by whatever name called, due to or receivedby the partner of a firm from the firm shall not be regarded as salary for the purpose of tax. Itwill be regarded as Business Income and taxable under the head 'profits and gains from businessor profession'. Accordingly, no standard deduction, which is otherwise allowable from SalaryIncome, is available.

Would the remuneration, received by a director be taxable under the head 'Income fromsalaries'?

The remuneration, received by a director is taxable as 'Income from salaries' or not, woulddepend upon whether the director is an employee of the payer or not. This can be determinedfrom the nature of the relationship between the director and the payer. If the relationship of amaster and servant exists between the payer and payee, then the director would be an employeeand the remuneration that is received would be taxable under the head 'salaries'. However, if suchrelationship does not exist, then the director will not be considered an employee of the payer andthe Income would be taxable as Professional Income.

If a person is following the cash system of accounting would he be liable to pay tax inrespect of salary which is due to him but which he has not received? 

Salary is taxable on due basis or receipt basis, whichever is earlier, irrespective of the method of accounting that is followed by the assessee. Accordingly, advance salary is taxable on receiptbasis, though not due. Hence, the method of accounting followed by the assessee is not of anyconsequence.

Explain the taxability of salary of foreign employees.

Under section 10(6)(vi), the remuneration received by An individual who is not a citizen of India

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  The value of any medical treatment provided to an employee or any member of hisfamily in any hospital maintained by the employer;

  Any sum, paid by the employer in respect of any expenditure, actually incurred by theemployee on his medical treatment or treatment of any member of his family-(a) In anyhospital, maintained by the Government or any local authority or any other hospital

approved by the Government for the purposes of medical treatment of its employees; (b)In respect of the prescribed diseases or ailments, in any hospital approved by the Chief Commissioner, having regard to the prescribed guidelines. In such a case, the employeeshall attach, with his return of income, a certificate from the hospit al specifying thedisease or ailment for which medical treatment was required and the receipt for theamount paid to the hospital.

  Any portion of the premium, paid by an employer in relation to an employee, to effect orto keep in force an insurance on the health of such employee under any scheme approvedby the Central Government for the purposes of clause (ib) of sub-section (1) of section36;

  Any sum, paid by the employer in respect of any premium paid by the employee to effect

or to keep in force an insurance on his health or the health of any member of his familyunder any scheme, approved by the Central Government for the purposes of section 80D;  Any sum paid by the employer in respect of any expenditure actually incurred by the

employee on his medical treatment or treatment of any member of his family other thanthe treatment referred to in clauses (i) and (ii); so, however, that such sum does notexceed Rs 15,000 in the previous year;

  Any expenditure incurred by the employer on the following:  Medicl treatment of the employee, or any member of the family of such employee,

outside India;  Travel and stay abroad of the employee or any member of the family of such employee

for medical treatment;  Travel and stay abroad of one attendant who accompanies the patient in connection with

such treatment, subject to the following conditions:  The expenditure on medical treatment and stay abroad shall be ex cluded from perquisite

only to the extent permitted by the Reserve Bank of India; and  The expenditure on travel shall be excluded from perquisite only in the case of an

employee whose gross total income, as computed before including therein the saidexpenditure, does not exceed two lakh rupees;

  Any sum, paid by the employer in respect of any expenditure actually incurred by theemployee for any of the purposes specified in clause (vi) subject to the conditionsspecified in or under that clause:

For the assessment year beginning on the 1st day of April, 2002, nothing contained in this clauseshall apply to any employee whose income under the head "Salaries" (whether due from, or paidor allowed by, one or more employers) exclusive of the value of all perquisites, not provided forby way of monetary payment, does not exceed Rs 1,00,000.

Explanation 

For the purposes of clause (2),

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i. 'Hospital' includes a dispensary or a clinic or a nursing home;

ii. 'Family', in relation to an individual, shall have the same meaning as in clause (5) of section10; and

'Gross total income' shall have the same meaning as in clause (5) of section 80B;

How are perquisites valued?

For the purpose of computing the income chargeable under the head 'Salaries,' the value of perquisites provided by the employer directly or indirectly to the assessee (hereinafter referred toas employee) or to any member of his household by reason of his employment shall bedetermined in accordance with Rules 3 of the Income Tax Act.

What is the perquisite value of furnished Accommodation? 

In the case of furnished accommodation, first the value of the un-furnished accommodation isworked out and to that 10% per annum of the original cost of the furniture is added. If thefurniture is not owned by the employer, the actual hire charge that is payable (whether paid ornot) is added.

How is the perquisite value of a motorcar, provided to the employee by an employer,computed?

Value of Perquisite per calendar month

Sl.No. 

Circumstances  Where cubic capacity of engine does not exceed

1.6 litres 

Where cubic capacity of engine exceeds 1.6 litres 

1. Where the motor car is owned or

hired by the employer and-

a.  a. is used wholly andexclusively in theperformance of his officialduties.

b.  Is used exclusively for theprivate or personal purposesof the employee or anymember of his house-holdand the running andmaintenance expenses aremet or reimbursed by the

No value provided that

the documents specified

in clause (B) of this sub-

rule are maintained by the

employer.

Actual amount of expenditure incurred by

the employer on the

running and maintenance

of motor car during the

relevant previous year

including remuneration, if 

No value provided that the

documents specified in

clause (B) of this sub-rule

are maintained by the

employer.

Actual amount of expenditure incurred by

the employer on the

running and maintenance

of motor car during the

relevant previous year

including remuneration, if 

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i.  such reimbursement is for theuse of the vehicle wholly andexclusively for officialpurposes.

ii.  Such reimbursement is for

the use of the vehicle partlyfor official purposes andpartly for personal or privatepurposes of the employee.

Subject to the provisions

contained in clause (B)of 

this sub-rule, the actual

amount of expenditure

incurred by the employer

as reduced by an amount

of Rs.600:

Provided that where one or more motor-cars are owned or hired by the employer and theemployee or any member of his household are allowed the use of such motor-car or all or anysuch motor-cars (otherwise than wholly and exclusively in the performance of his duties), thevalue of perquisite shall be the amount calculated in respect of one car in accordance with item(1)(c)(i) of the Table II as if the employee had been provided one motor-car for use partly in the

performance of his duties and partly for his private or personal purposes and the amountcalculated in respect of the other car or cars in accordance with item (1)(b) of the Table II as if hehad been provided with such car or cars exclusively for his private or personal purposes.

(B) Where the employer or the employee claims that the motor-car is used wholly andexclusively in the performance of official duty or that the actual expenses on the running andmaintenance of the motor-car owned by the employee for official purposes is more than theamounts deductible in item 2(ii) or 3(ii) of the above Table, he may claim a higher amountattributable to such official use and the value of perquisite in such a case shall be the actualamount of charges met or reimbursed by the employer as reduced by such higher amountattributable to official use of the vehicle provided that the following conditions are fulfilled.

i.  the employer has maintained complete details of the journey undertaken for officialpurpose, which may include date of journey, destination, mileage, and the amount of expenditure incurred thereon;

ii.  the employee gives a certificate that the expenditure was incurred wholly and exclusivelyfor the performance of his official duty;

iii.  the supervising authority of the employee, wherever applicable, gives a certificate to theeffect that the expenditure was incurred wholly and exclusively for the performance of official duties.Explanation: For the purposes of this sub-rule, the normal wear and tear of a motorcarshall be taken at 10% per annum of the actual cost of the motor-car or cars.

Is the facility of a car, provided by the employer for use between the residence and office, aperquisite? 

The use of a vehicle of an employer for the journey from his residence to his office or, from anyother place of work to his residence will not be taxable as perquisite provided the followingconditions are satisfied:

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(i) The employer has maintained complete details of the journey undertaken for official purpose,which may include date of journey, destination, mileage, and the amount of expenditure incurredthereon;

(ii) The employee gives a certificate that the expenditure was incurred wholly and exclusively forthe performance of his official duty;

(iii) The supervising authority of the employee, wherever applicable, gives a certificate to theeffect that the expenditure was incurred wholly and exclusively for the performance of officialduties.

What is the perquisite value of gas, electricity or water supply, provided free of cost to theemployee? 

The value of benefit to the employee or any member of his household, resulting from the supply

of gas, electric energy or water for his household consumption shall be determined as the sumequal to the amount paid on that account by the employer to the agency supplying the gas,electric energy or water. Where such supply is made from resources, owned by the employer,without purchasing them from any other outside agency, the value of perquisite would be themanufacturing cost per unit incurred by the employer. Where the employee is paying any amountin respect of such services, the amount so paid shall be deducted from the value so arrived at.

Can the reimbursement of actual expenses be treated as a perquisite?

No. Reimbursement of actual expenses cannot be treated as a perquisite.

What is the perquisite value of rent-free unfurnished accommodation that is provided byan employer to an employee? 

Rule 3: The value of the residential accommodation, provided by the employer during theprevious year, shall be determined as below.

  Where the accommodation is provided by Union or State Government to their employees,either holding office or post in connection with the affairs of Union or State or, servingwith any body or undertaking under the control of such Government on deputation:Licence fee, as determined by Union or State Government in accordance with the rulesframed by that Government as reduced by the rent, actually paid by the employee. It is tobe noted that the value of the rent-free official residence, provided to officers of Parliament, Union Ministers and the leader of the Opposition Party in Parliament, is alsoexempt from tax.

  Where the accommodation is provided by any other employer and  Where the accommodation is owned by the employer: 10% of salary in cities having

population exceeding 4 lakhs as per 1991 census;  Where the accommodation is taken on lease or rent by the employer: 7.5 % of salary in

other cities, in respect of the period during which the said accommodation was occupied

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by the employee during the previous year as reduced by the rent, if any, actually paid bythe employee. Actual amount to lease rental, paid or payable by the employer or 10% of salary whichever is lower as reduced by the rent, if any, actually paid by the employee.

Tax upon profits in lieu of or in addition to salary

The amount of any compensation due to or received by an assessee from his employer or formeremployer at or in connection with the termination of his employment or the modification of theterms and conditions relating thereto;

Any payment (other than any payment referred to in clause (10) clause (10A)clause (10B, clause(11), clause (12), clause (13) or clause (13A) of section 10), due to or received by an assesseefrom an employer or a former employer or from a provident or other fund, to the extent to whichit does not consist of contributions by the assessee or interest on such contributions or any sum,received under a Keyman insurance policy, including the sum allocated by way of bonus on suchpolicy. The expression "Keyman Insurance policy" shall have the meaning assigned to it inclause (10D) of section 10;

Any amount, due to or received, whether in lump sum or otherwise, by any assessee from anyperson in the following cases:

  Before his joining any employment with that person; or  After cessation of his employment with that person.

Tax upon Annuity

Annuity is an annual grant received by the employee from his employer and is covered under thedefinition of salary. It may be paid by the employer voluntarily or on account of contractual

agreement. A deferred annuity is not taxable until the right to receive the same arises. Otherforms for annuities made under a will or granted by a life insurance company or accruing as aresult of contract come under the head ―Income from Other Sources‖ and are assessed u/s 56 of 

the I.T. Act.

Tax upon Gratuity

Gratuity can be received by the employee at the time of his retirement or by his legal heir in theevent of death of the employee. Gratuity received by an employee on his retirement is taxableunder the head "Salary" and gratuity received by the legal heir is taxable under the head" Incomefrom Other Sources".

In both the above situations gratuity upto a specified limit is exempt under the provisions of sec.10(10) of the Income Tax Act, 1961.

For the purpose of exemption of gratuity under sec.10(10) the employees are divided under threecategories:

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1.  Govt. employees - In the case of govt. employees the entire amount of death-cum-retirement gratuity is exempt from tax and nothing is therefore taxable under the headSalaries.

2.  Employees covered under the Payment of Gratuity Act, 1972 - The employees coveredunder the Gratuity Act who receive gratuity have been given exemption which is the

minimum of the following amounts. Gratuity received in excess of the minimum of theamounts mentioned below is included in the gross salary for the purposes of taxation.o  The amount of gratuity actually received.o  Fifteen days' salary (7 days in the case of seasonal employment) for every

completed year of service provided the employment is more than six months.3.  Other employees - In the case of other employees the gratuity received or receivable on

his retirement or on his becoming incapacited prior to such retirement or termination of his employment or any gratuity received by his heirs is exempt to the extent of theminimum of the following amounts. The amount received in excess of the sumsmentioned below is included in the gross salary of the employee for the purposes of taxation.

o Actual amount of gratuity received.

o  Half month's average salary for every completed year of service. (Average salarymeans the average of the salary drawn by the employee for 10 monthsimmediately preceding the month in which he retires)

Tax Planning As per Assessment Year 2006-07  

QUICK LOOK 

 Investing in a senior citizen's name can result for the higher tax exemption one enjoys.

  Certain investments offers higher return to senior citizens.  Through gifts made to a senior citizen, investment can be made.  Tax-free investments can be made in the name of any family member.  A self-occupied house should be bought in the name of the member in the highest tax

bracket.  A salary earner can reduce his tax by paying rent to the family member owning the

house.

There are different considerations while planning of family investments. They are as follows:

 Choosing the right member's fund for investments.

  Availability of the concessions on the initial investment and the returns.  The tax liability of such earnings.  Taxability of sums received on maturity.  Capital generation needs of each member.  The age of the investor.

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Investment made in the name of Senior Citizens 

  Higher basic exemption limit and increased rate of return.  Rs. 1.95 lakh is exempt from tax (F.Y. 2007-08).  With investment or utilising, a senior citizen may not pay tax up to Rs. 2.85 lakh.  Certain investment schemes offer higher rates of return or are open for senior citizens.

Investing in these increases the earnings of the family.  Funds for a senior citizen can be generated by gifts from a high net worth member. It

would not suffer tax.  The earnings are reinvested to increase income in the subsequent years.

Note:- A donor legally divests the title to the property in favour of the recipient by the way of gift, so he/she cannot have any claim to the property thereafter.

Tax-exempt Investment It can be made in the name of any member but one should keep in mind to make it through suchmember whose chance of falling in the highest tax bracket is the least in the long run. It can bemade in the name of minor so that parents does not have to pay the tax even after clubbing.

Concessional Tax Treatment Certain investments attract tax concessions, like short-term capital gains on the transfer of sharesthrough recognised stock exchanges. It is taxed only at 10% flat. Investment on shares can be

made in any members name as it do not result in any differential tax outflaw.

Investment on Business Premises An investment can be made in office/ business premises in the name of a member who is not theproprietor of the business. Take an example, a person carrying a retail business can buy a shop inthe name of another member and then take it on rent. The rent paid is tax-deductible. The rentearned by the member of the family paying lesser or negligible tax suffers lesser tax than the taxpaid by the owner of the business.

Salary Earners and HRA A salary earner can reduce tax liability by paying rent to a member of his family who owns hishouse in which the former resides, provided the member falls in lower tax bracket. But beforepractising this one must take into consideration the place where the house is located, the locallaws on letting out property on rent, like stamp duty, registration charges, leave and licenseagreements. The rent should be perfectly paid by cheque and on regular basis through the year toprove authenticity of the transaction.

Joint Ownership of a Residential House In case of joint ownership where the shares are in an agreed ratio, each co-owner's share of the

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Joint Ownership of a Residential House In case of joint ownership where the shares are in an agreed ratio, each co-owner's share of theincome from the property will be included in his/her total income while filing returns. Whiletaking loans, the co-owner can take in any ratio, irrespective of the sharing ratio. Hence, it is

beneficial for the person in higher tax bracket to borrow more. It helps him/her to save more taxon interest deductions.

Owning House Property A self-occupied house should always be bought by the person with highest tax bracket. This willnot fetch any return and the fall in his investible surplus will reduce his future income and futuretax liability.

 Income Tax - Who, When & How to Pay IT 

An individual having salary income and no business income must file his return not later than30th June of the assessment year. The due date of filing the return by an individual havingbusiness income and whose accounts are not required to be audited under the Act is 31st August.The return should be in the prescribed form (Saral Form). It is also necessary to file a return toclaim a refund of any excess tax paid.

You need to attach documentery support for tax deducted at source, investments/payments madethat allow you to claim deductions and tax rebates and employer's certificate in Form 16-A.

The income tax year or assessment year is the year in which income of the previous year is to beassessed. The financial year following a previous year is called the assessment year in relation tothat previous year. Thus the assessment year for the previous year 1999-2000 is 2000-2001.

An assessment, therefore, comprises of two stages

  Computation of total income, and  Determination of the tax payable thereon.

When both these stages are completed, an assessment is said to have been made.

Dates with Income Tax 

Date  Obligation  Form No. 

November 30, of 

the relevant

assessment year

Submission of annual return of income/wealth

for the relevant assessment year, if the

assessee is a corporate assessee

Income: Form No.1

Wealth: Form BA

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November 30, of 

the relevant

assessment year

Furnish audit report under section 44AB for

the relevant assessment year in the case of a

corporate assessee.

Form Nos. 3CA &

3CD

December 15, of 

each year

Payment of second installment (in the case of 

an assessee other than a company) or third

installment (in the case of a company) of 

advance tax for that financial year.

No statement/ estimate is required

to be submitted

March 15, of 

each year

Payment of third installment (in the case of an

assessee other than a company) or fourth

installment (in the case of a company) of 

advance income-tax for that financial year

No estimate/ 

statement is required

to be submitted

April 30, of each

year

Certificate of tax deducted at source to begiven to employees in respect of salary paid

and tax deducted during for the preceding

financial year ended 31 March

Form No.16

April 30, of each

year

Certificate of tax deducted at source from

insurance commission during the preceding

financial year ended 31 March to be given.

Form No.16A

April 20, of each

year

Consolidated certificate of tax deduction

(other than salary) during the precedingfinancial year ended 31 March.

Form No.16A

April 30, of each

year

Submission of annual return of dividend and

income in respect of units under section 206

of the I.T. Act 1961 for the preceding

financial year ended 31 March

Form No.26

May 31, of each

year

Return of tax deduction from contributions

paid by the trustees of an approved

superannuation fund

Form No.22

May 31, of each

year

Submission of annual return of winning from

lottery, crossword puzzle for the preceding

financial year ended 31 March.

Form No.26B

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May 31, of each

year

Submission of annual return of winning from

horse races for the preceding financial year

ended 31 March

Form No.26BB

May 31, of eachyear

Submission of annual return of salary income

in respect of salary paid during the preceding

financial year ended 31 March

Form No.24

June 15, of each

year

Payment of first installment of advance tax in

the case of a company for that financial year

No statement/ 

estimate is required

to be submitted

June* 30, of each

year

Submission of annual return of income/wealth

for the relevant assessment year in case the

following conditions are satisfied:a. the assessee is not a corporate assessee or a

b. cooperative society;

c. his total income does not include any

income from a business or profession

Income: FormNo.3/2A

Wealth: Form BA

June 30, of each

year

Submission of annual return of insurance

commission for the preceding financial year

ended 31 March

Form No.26D

June 30, of each

year

Submission of annual return of insurancecommission paid/ credited without tax

deduction during preceding financial year

ended 31 March

Form No.26E

June 30, of each

year

Submission of annual return of interest on

securities for the preceding financial year

ended 31 March

Form No.25

June 30, of eachyear

Submission of annual return of interest (not

being on securities) for the preceding financial

year ended 31 March

Form No.26A

June 30, of each

year

Submission of annual return of payment to

contractors / sub-contractors for the preceding

financial year ended 31 March

Form No.26C

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immediately preceding

October* 31, of 

each year

Submission of annual return of income/wealth

for the relevant assessment year if the

following conditions are satisfied:

a. the assessee is a cooperative society or a

non-corporate assessee;

b. he is required to get his accounts audited

under the income-tax Act or under any other

law.

Income:Form No.2

Wealth: form BA

October 31, of 

each year

Furnish audit report under Section 44AB for

the relevant assessment year, in the case of a

non-corporate assessee

Form Nos.3CA,

3CB/3CC and

3CD/3CE

October 31, of 

each year

Submission of half-yearly return in respect of 

tax collected at source during April 1 and

September 30 immediately preceding.

Form Nos.27EA,

27EB, 27EC and

27ED

October 31, of 

each year

Submission of annual audited accounts for

each approved programmes under section 35

(2AA)

Form No.2D for non-corporate assessee other than those claiming exemption under Section11 also, can be filled up. 

Where the last day for filing return of income/loss or any other return under direct taxes is a dayon which the office is closed, the assessee can file the return on the next day afterwards on whichthe office is open and, in such cases, the return will be considered to have been filed within thespecified time limit-Circular No.639, dated November 13, 1992.

Taxation of Non-residents

With a view to attract investment by Non-resident Indians and Indian Nationals living abroad,special provisions exist in Chapter XIIA providing incentives in the form of reliefs andconcessional tax rate as also simplifying the tax assessment procedure for such persons. Non-resident Indian has been defined as an individual, being a citizen of India or a person of Indiaorigin, who is not a resident. A person is of Indian origin if he or either of his parents or any of his grand parents was born in undivided India. These special provisions are dealt with in Chapter

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Exemptions and concessions for NRI's 

All receipts which give rise to income are taxable unless they are specifically exempted from taxunder the Act. Such exempted income are enumerated in section 10 of the Act. The same aresummarised in the table below :

Section  Nature of Income  Exemption limit, if any 

1  2  3 

10(1) Agricultural income

10(2) Share from income of HUF

10(2A) Share of profit from firm

10(3) Casual and non-recurring receiptsWinnings from racesRs.2500/- other receipts

Rs.5000/-

10(10D) Receipts from life Insurance Policy

10(16) Scholarships to meet cost of education

10(17) Allowances of MP and MLA.For MLA not exceeding

Rs. 600/- per month

10(17A) Awards and rewards

(i) from awards by Central/State Government

(ii) from approved awards by others

(iii) Approved rewards from Central & State

Governments

10(26)

Income of Members of scheduled tribes residing

in certain areas in North Eastern States or in the

Ladakh region.

Only on income arising

in those areas or interest

on securities or dividends

10(26A) Income of resident of LadakhOn income arising in

Ladakh or outside India

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(ii) from other employers

Where gratuity is

payable - value of 1/3

pension. Where gratuity

is not payable - value of 

1/2 pension.

(iii) from fund set up by LIC u/s 10(23AAB)

10(10AA) Encashment of unutilised earned leave

(i) from Central or State government

(ii) from other employers

Upto an amount equal to

10 months salary or Rs.

1,35,360/- which ever is

less

10(10B) Retrenchment compensation

Amount u/s. 25F(b) of 

Industrial Dispute Act

1947 or the amount

notified by the

government, whichever

is less.

10(10C)

Amount received on voluntary retirement or

termination of service or voluntary separation

under the schemes prepared as per Rule 2BA

from public sector companies, statutory

authorities, local authorities, Indian Institute of 

Technology, specified institutes of management

or under any scheme of a company or Co-

operative Society

Amount as per the

Scheme subject to

maximum of Rs. 5 lakh

10(11)Payment under Provident Fund Act 1925 or other

notified funds of Central Government

10(12) Payment under recognized provident funds

To the extent provided in

rule 8 of Part A of Fourth

Schedule

10(13) Payment from approved Superannuation Fund

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10(6)(xi)Remuneration of foreign Government employee

on training in certain establishments in India.

Exemptions to Non-

residents only

Refer Chapter VII (Para 7.1.1)

Chapter VIII (Para 8.4)

Chapter IX

Chapter X (Para 10.4)

Exemptions to Non-

resident Indians(NRIs) only

Refer Chapter XI

Exemptions to

funds, institutions,

etc.

10(14A)

Public Financial Institution from exchange risk 

premium received from person borrowing inforeign currency if the amount of such premium

is credited to a fund specified in section 10(23E)

10(15)(iii)Central Bank of Ceylon from interest on

securities

10(15)(v)

Securities held by Welfare Commissioners

Bhopal Gas Victims, Bhopal from Interest on

securities held in Reserve Bank's SGL Account

No. SL/DH-048

10(20) any local Authority

(a) Business income

derived from Supply of 

water or electricity any

where. Supply of other

commodities or service

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10(23BBB)European Economic Community from Income

from interest, dividend or capital gains

10(23BBC) SAARC Fund

10(23C)

Certain funds for relief, charitable and

promotional purposes, certain educational or

medical institutions

10(23D) Notified Mutual Funds

10(23E) Notified Exchange Risk Administration Funds

10(23EA)Notified Investors Protection Funds set up by

recognised Stock Exchanges

10(23FB)

Venture capital Fund/ company set up to raise

funds for investment in venture Capital

undertaking

Income from investment

in venture capital

undertaking

10(23G)Infrastructure capital fund, or infrastructure

capital company

Income from dividend,

interest and long term

capital gains from

investment in approved

infrastructure enterprise

10(24) Registered Trade Unions

Income from house

property and other

sources

10(25)(i) Provident Funds

Interest on securities and

capital gains from

transfer of such securities

10(25)(ii) Recognised Provident Funds

10(25)(iii) Approved Superannuation Funds

10(25)(iv) Approved Gratuity Funds

10(25)(v) Deposit linked insurance funds

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10(25A) Employees State Insurance Fund

10(26B)(26BB) and

(27)

Corporation or any other body set up or financed

by and government for welfare of scheduled

caste/ scheduled tribes/backward classes or

minorities communities

10(29) Marketing authoritiesIncome from letting of 

godown and warehouses

10(29A)Certain Boards such as coffee Board and others

and specified Authorities

Assessment of NRIsA non-resident may be assessed to tax in India either directly or through agents. Persons in Indiawho may be treated as 'agent1 of a non-resident are:-

i. employee or trustee of the non-resident;

ii. any person who has any business connection with the non-resident;

iii. any person from or through whom the non-resident is in receipt of any income;

iv. any person who has acquired a capital asset in India from the non-resident.

A broker in Indian who has independent dealings with a non-resident broker acting on behalf of anon-resident principal is, however, not treated as an 'agent' of the non-resident, if the transactionsbetween the two brokers are carried on in the ordinary course of their business.

Before any person is treated as an 'agent' of non-resident, he is given an opportunity of beingheard and any representation from him in the matter is considered

Taxable income of NRI's

As mentioned in Chapter-II, a person who is non-resident is liable to tax on that income onlywhich is earned by him in India. Income is earned in India if:

  It is directly or indirectly received in India; or  It accrues in India or the law construes it as having accrued in India.

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The rate at which tax is to be deducted at source will be the rates as specified in the Finance Actof the relevant year or the rate specified in any agreement for avoidance of double tax whicheveris beneficial to the assessee.

In respect of income of the nature referred to in para 7.2(iii) arising to Offshore Funds and of thenature referred to in para 7.2(iv), tax is deductible at the rates at which such income is taxable.

For certain remittances, the Reserve Bank of India Exchange Control Manual requiresproduction of a no objection certificate from the Income-tax authorities. The Central Board of Direct Taxes, vide circular No. 759 and 767, has simplified the procedure by dispensing withsuch requirement. The person making the remittance has only to furnish an undertaking (induplicate) addressed to the Assessing Officer which should be accompanied by a certificate froma Chartered Accountant in the prescribed form. The undertaking should be submitted to theReserve Bank of India or the authorised dealer in foreign exchange who will forward a copy tothe assessing officer.

Any tax deducted in excess of the required amount is normally refundable to the non-resident onmaking a proper claim for it. Sometimes the non-resident returns the amount in respect of whichtax was deducted or, circumstances occur in which tax is found to be non-deductible or, in whichtax is found to have been deducted in excess and the non-resident is either not able to claimrefund or does not show initiative in claiming such refund. In such cases, the CBDT has bycircular No. 790 dated 20.4.2000 permitted refund of excess tax to the person making thededuction.

Tax clearance certificate for NRIs 

The following categories of persons are required to produce a tax clearance certificate from theconcerned assessing officer prior to their departure:-

  persons who are not domiciled in India, and in whose case the stay in India has exceeded120 days;

  persons of Indian or non-Indian domicile whose names have been communicated to theairlines/shipping Companies by the Income Tax authorities;

  persons who are domiciled in India at the time of their departure; buti.  intend to leave India as emigrants; or

ii.  intend to proceed to another country on a work permit with the object of taking

any employment or other occupation in that country; oriii.  in respect of whom circumstances exist, which in the opinion of the income tax

authorities render it necessary for him to obtain the Tax Clearance Certificate.

Such certificates is granted where there are no outstanding taxes under the Income Tax Act, theExcess Profits Tax Act, the Business Profits Tax Act, the Wealth Tax Act, the Expenditure TaxAct or the Gift Tax Act against him or where satisfactory arrangements have been made for the

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Regulation Act. For this purpose National Saving Certificate VI and VII issues arenotified.

c.  Income from NRI Bonds 1988 and NRI Bonds (Second Series) purchased by NRIs inforeign exchange is exempt from tax. This exemption continues to be available to a Non-resident Indian even after he becomes resident and is available also to the nominee or

survivor of the NRI and to the donee who gets a gift of such bonds from the NRI.

Concessional Tax Treatment of certain incomes of non-resident Indians 

The income other than dividend and long term capital gains derived from any 'Foreign ExchangeAsset1 by NRI is charged to tax at the flat rate of 20%. Long term capital gains arising ontransfer of such assets are charged at the flat rate of 10%. The term 'Foreign Exchange Asset1means any of the following assets acquired, purchased or subscribed to in convertible foreignexchange in accordance with Foreign Exchange Regulation Act :-

a. 

Shares in Indian companyb.  Debentures issued by a public limited companyc.  Deposits in a Public Ltd. Co.d.  Securities of the Central Governmente.  Any other notified asset.

In computing the total income of such persons from any foreign exchange asset, no deduction isallowed in respect of any expenditure or allowance under any provision of the Act. Further,where a NRI has income only from foreign exchange asset or income by way of long termcapital gains arising in transfer of a foreign exchange asset, or both, and the tax deductible atsource from such income has been deducted, he is not required to file the return of income as

otherwise required under the Act.

It may further be noted that the special provisions mentioned as above, will continue to apply inrelation to the investment income from 'foreign exchange assets' (other than shares of an IndianCompany) even after the NRI becomes resident in India. If the NRI becoming a resident wishesto be assessed under these provisions, he is required to file a declaration in writing along with thereturn of income. These special provisions will apply in relation to such income until the transferor conversion of such assets into money.

Non-resident Indian may also elect not to be governed by these provisions for any assessmentyear by furnishing to the assessing officer the return of income for that assessment year anddeclaring therein that these provisions shall not apply to him for that assessment year. If he doesso, then his total income and tax will be computed in accordance with the normal provisions of the Act.

Any long term capital gain arising to a NRI from the transfer of a foreign exchange asset, the netconsideration of which is invested or deposited within a period of 6 months from the date of transfer in any specified asset mentioned at (a) to (e) of para 11.3 or in the National SavingCertificate VI or VII issue is dealt with as follows:-

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a.  if the cost of the new asset is not less than the net consideration in respect of the originalforeign exchange asset, the whole of the capital gain will not be liable to tax;

b.  if the cost of the new asset is less than the net consideration in respect of the originalforeign exchange asset, proportionate amount of capital gain will be exempted from tax.The proportionate amount will be- Capital gain x (Cost of new assets / Net consideration

of Transfer)

Simplified procedure of remittances 

With a view to simplify the procedure for tax deduction at source and to avoid delay andinconvenience in the case of nonresident Indians wishing to remit the sale proceeds of foreignexchange assets, it has been provided that the non-resident Indians can remit such proceedsabroad or credit the same to their Non-resident (External) Account without having to obtain 'NoObjection Certificate1 from the Income-tax authorities provided tax @ 10% on the long termcapital gains relating to such assets is deducted by the authorised dealer, i.e. the bank concerned.

Tax Rebates Introduction & General Tax Incentives

In each section of Personal Tax (income tax), Indirect taxes (sales, excise & customs duty) andthe corporate taxes there are certain rebates given to the tax payer if he fits in the prescribedcriteria. These concessions or Tax Holidays as they call are meant to attract more and morepeople to pay tax. These rebates also mean less 'pinch' on the pockets and a good fast growth of 

economy.

Rebate is a deduction from tax payable. Since these are the best tax-slashing devices, it isabsolutely essential to have a clear, concise and complete insight into these.

In computing the amount of income-tax on the total income of an assessee with which he ischargeable for any assessment year, there shall be allowed from the amount of income-tax, inaccordance with and subject to the provisions of certain sections, the deductions specified inthose sections.

The aggregate amount of the deductions under such sections shall not, in any case, exceed theamount of income tax on the total income of the assessee with which he is chargeable for anyassessment year.

General Tax Incentives 

The Government offers many incentives to investors in India with a view to stimulatingindustrial growth and development. The incentives offered are normally in line with thegovernment's economic philosophy, and are revised regularly to accommodate new areas of 

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emphasis. The following are some of the important incentives offered, which significantly reducethe effective tax rates for the beneficiary companies:

  Five year tax holiday for:o  Power projects.o 

Firms engaged in exports.o  New industries in notified states and for new industrial units established, in

electronic hardware/software parks.o  Export Oriented Units and units in Free Trade Zones. o  As of 1994-95 budget firms engaged in providing infrastructure facilities, can also

avail of this benefit.  Tax deductions of of 100 per cent of export profits.  Deduction of 30 per cent of net (total) income for 10 years for new industrial

undertakings.  Deduction of 50 per cent on foreign exchange earnings by construction companies, hotels

and on royalty, commission etc. earned in foreign exchange. 

Deduction in respect of certain inter-corporate dividends to the extent of dividenddeclared.

Taxation - Incentives, Rebates and Allowances - Relief for Foreign NationalsForeigners are entitled to certain special concessions as follows.

1.  Remuneration received by a foreigner as an employee of a foreign enterprise for servicesrendered in India is not subject to Indian income tax, provided :

o  The foreign enterprise is not engaged in any trade or business in India;

o  The foreigner is not present in India for more than 90 days in that year; and

o  The remuneration is not liable to be deducted in computing the employer's taxableincome in India.

 Note: In a treaty situation, the 183-day rule applies. 

2.  A foreigner (including a nonresident Indian) who was not resident in India in any of thefour financial years immediately preceding the year of arrival in India is entitled to aspecial tax concession, if :

o  The foreigner has specialized knowledge and experience in construction ormanufacturing operations, mining, generation of electricity or any other form of 

power, agriculture, animal husbandry, dairy farming, deep-sea fishing,shipbuilding, grading and evaluation of diamonds for diamond export or importtrade, cookery, information technology (including computer architecture systems,platforms and associated technology), a software development process and tools,or such other fields as the central government may specify; and

The individual is employed in any business in India in a capacity in whichspecialized knowledge and experience are used.

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 Note: During the first 48 months commencing from the date of arrival in India, the

remuneration will not be subject to any further tax in such a foreigner's hands if the

employer bears the tax on the remuneration. 

3.  A visiting foreign professor who teaches in any university or educational institution inIndia land whose contact of service is approved by the central government is exemptfrom tax on remuneration received during the first 36 months from the date of arrival inIndia, provided the teacher was not resident in India in any of the four financial yearsimmediately preceding the year of arrival in India. If the foreigner continues inemployment in India thereafter, the remuneration of the following 24 months is taxable;however, if the tax is paid by the university or education institution, there is no further taxliability.

4.  Salary received by a nonresident foreigner in connection with employment on a foreignship is exempt from tax if the employee's stay in India during a year does not exceed 90days.

5.  Special exemptions under specified circumstances are available for the following :o  Amounts receivable from a foreign government or a foreign body by a foreigner

for undertaking research in India under an approved scheme;

o  Remuneration received by employees of a foreign government during trainingwith the Indian government or in an Indian government undertaking (applicable toindividuals assigned to India under cooperative technical assistance programs inaccordance with agreements between the Indian government and a foreigngovernment); and

o  Remuneration received by nonresident expatriates in connection with the filmingof motion pictures by nonresident producers.

Tax Rebates for Corporate SectorThe classical system of corporate taxation is followed

  Domestic companies are permitted to deduct dividends received from other domesticcompanies in certain cases.

  Inter Company transactions are honored if negotiated at arm's length.

  Special provisions apply to venture funds and venture capital companies.

  Long-term capital gains have lower tax incidence.

  There is no concept of thin capitalization.

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  Liberal deductions are allowed for exports and the setting up on new industrialundertakings under certain circumstances.

  There are liberal deductions for setting up enterprises engaged in developing, maintainingand operating new infrastructure facilities and power-generating units.

  Business losses can be carried forward for eight years, and unabsorbed depreciation canbe carried indefinitely. No carry back is allowed.

  Specula tax provisions apply to activities carried on by nonresidents.

  A minimum alternative tax (MAT) on corporations has been proposed by the Finance Bill1996.

  Dividends, interest and long-term capital gain income earned by an infrastructure fund orcompany from investments in shares or long-term finance in enterprises carrying on thebusiness of developing, monitoring and operating specified infrastructure facilities or in

units of mutual funds involved with the infrastructure of power sector is proposed to betax exempt.

VAT 

The much awaited Value Added Tax (VAT) has been introduced in Indian Taxation System fromApril 1, 2005. Now India is a part of other 123 countries following VAT which was leaded firsttime by UK in 1973. It is said that 4 years is very short period in introducing VAT in the countryas compared to 10 years on an average by other countries.

VAT will replace the present sales tax in India. Under the current single-point system of tax levy,the manufacturer or importer of goods into a State is liable to sales tax. There is no sales tax onthe further distribution channel. VAT, in simple terms, is a multi-point levy on each of theentities in the supply chain with the facility of set-off of input tax - that is, the tax paid at thestage of purchase of goods by a trader and on purchase of raw materials by a manufacturer. Onlythe value addition in the hands of each of the entities is subject to tax. For instance, if a dealerpurchases goods for Rs 100 from another dealer and a tax of Rs 10 has been charged in the bill,and he sells the goods for Rs 120 on which the dealer will charge a tax of Rs 12 at 10 per cent,the tax payable by the dealer will be only Rs 2, being the difference between the tax collected of Rs 12 and tax already paid on purchases of Rs 10. Thus, the dealer has paid tax at 10 per cent onRs 20 being the value addition in his hands.

Purchase price - Rs 100Tax paid on purchase - Rs 10 (input tax)Sale price - Rs 120Tax payable on sale price - Rs 12 (output tax)Input tax credit - Rs 10VAT payable - Rs 2

VAT levy will be administered by the Value Added Tax Act and the rules made there-under.

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VAT can be computed by using either of the three methods detailed below

  The Subtraction method:- The tax rate is applied to the difference between the value of output and the cost of input.

 The Addition method: The value added is computed by adding all the payments that ispayable to the factors of production (viz., wages, salaries, interest payments etc).

  Tax credit method: This entails set-off of the tax paid on inputs from tax collected onsales.

India opted for tax credit method, which is similar to CENVAT.

States such as Andhrapradesh, Kerala, Maharashtra, Madhyapradesh, Delhi and Haryana haveexperimented with VAT albeit in a limited manner, covering only limited goods. Theexperiments never had the full-fledged features of VAT and were only concoctions. These stateshave even called off their experiments owing to different reasons. If one analyses why VAT or

its variant failed in Maharashtra, which was the only state to come closer to a true VAT regime,the following reasons emerge:

1. Dual methodologies of computation of VAT credit Error! Hyperlink reference not valid. , onefor the Manufacturing stage and the other for the trading stage, thus breaking the audit trail. Itmay be noted that one of the advantages of VAT system, as we would be dealing later on, is theaudit trail that is created in the VAT chain.

2. Presence of a large number of tax deferral and holiday schemes, which resulted in a narrowbase. It may again be noted that under VAT, which is multi-point, the tax rates have to bereasonably low, and lower tax rates presupposes that the tax base is wide. These two featureswere not present in the Maharashtra tax regime.

3. Low level of awareness among traders, and even administrators, giving rise to fears andapprehensions. Owing to this, there was considerable consternation among the trade, which gaverise to open revolt against the system.

4. Partial implementation of the ideal VAT with the existing system coexisting even under thisregime.

5. Increased burden on retailers of Bookkeeping and compliance.

6. Multiplicity of rates of tax under the VAT regime.

7. Drop in revenue for the State Government, though there are no studies attributing suchreduction to the system of taxation.

Thus States had indeed tried some variations of VAT, but eventually gave up due to a variety of reasons.

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Central VAT (CENVAT)

The Modvat Scheme was replaced by a new set of rules called CENVAT Credit Rules 2002.

A manufacturer or producer of final product is allowed to take CENVAT credit of dutiesspecified in the Cenvat Credit Rules, 2002.

WHEN AND HOW MUCH CREDIT CAN BE TAKEN

1. The Cenvat Credit in respect of inputs may be taken immediately on receipt of the inputs.

2. The Cenvat credit in respect of Capital Goods received in a factory at any point of time in agiven financial year shall be taken only for an amount not exceeding fifty percent of the duty

paid on such capital goods in the same financial year and the balance of Cenvat Credit may betaken in any subsequent financial year.

3. The Cenvat credit shall be allowed even if any inputs or capital goods as such or after beingpartially processed are sent to a job worker for further processing, testing, repair etc. and it isestablished from the records that the goods are received back in the factory within180 days of their being sent to a job worker.

4. Where any inputs are used in the final products which are cleared for export, the Cenvat Creditin respect of the inputs so used shall be allowed to be utilised towards payment of duty on anyfinal product cleared for home consumption and where for any reason such adjustment is not

possible, the manufacture shall be allowed refund of such amount.

CENVAT IF FINAL PRODUCT EXEMPTED

No Cenvat credit shall be allowed on any input or capital goods which is used in the manufactureof exempted goods. This provisions shall not be applicable in case the exempted goods areeither;

i. Cleared to a unit in a free Trade Zone.

ii. Cleared to a 100% E.O.U.

iii. Cleared to a unit in an Electronic Hardware Technology Parks or Soft ware Technology Park.

iv. Supplied to the UN or an International Organisation for their official use or supplied toprojects funded by them.

v. Cleared for export under bond.

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CONDITIONS

1. Various documents have been prescribed on the basis of which a manufacturer can avail the

Cenvat Credit.

2. The Manufacturer shall take all reasonable steps to ensure that the inputs or Capital goods inrespect of which he has taken the Cenvat Credit are goods on which the appropriate duty hasbeen paid.

3. The Cenvat credit in respect of inputs or Capital Goods purchased from a first stage or secondstage dealer shall be allowed only if such dealer has maintained records indicating the fact thatthe inputs or capital goods were supplied from the stock on which duty was paid by the producerof such inputs or capital goods and only an amount of such duty on pro-rata basis has beenindicated in the invoice issued by him.

4. The manufacturer of final products shall maintain proper records for the receipt, disposal,consumption and inventory of the inputs and capital goods and the burden of proof regarding theadmissibility of the Cenvat Credit shall lie upon the manufacturer taking such credit

SHIFTING, SALE, MERGER, AMALGATION ETC. OF UNIT

If a manufacturer shifts his factory to another site or the unit is transferred on account of changein ownership, sale, merger, amalgamation etc., the manufacturer shall be allowed to transfer theCenvat credit lying unutilised to the accounts of such transferred factory.

UNUTILISED CREDIT

1. Any amount of credit earned by a manufacturer under the CENVAT Credit Rules. 2001 asthey excisted prior to the 1st day of March, 2002 and remaining unutilised on that day isallowable as Cenvat credit and be allowed to be utilised.

2. A manufacturer who opts for exemption under a notification based on the value of clearancesin a financial year and who has been availing of the credit of the duty paid on inputs before suchoption is exercised, shall be required to pay an amount equivalent to the credit in respect of theinputs lying in stock or used in any finished goods lying in stock on the date when such option isexercised.

CENVAT CREDIT RULES, 2002 

Rule 1. Short title, extent and commencement.-(1) These rules may be called the CENVAT Credit Rules, 2002.(2) They extend to the whole of India.(3) They shall come into force on the 1st day of March, 2002.

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Rule 2. Definitions.-In these rules, unless the context otherwise requires,-(a) "Act" means the Central Excise Act, 1944 (1 of 1944);(b) "capital goods" means,-

(i) all goods falling under Chapter 82, Chapter 84, Chapter 85, Chapter 90, heading No. 68.02and sub-heading No. 6801.10 of the First Schedule to the Tariff Act;(ii) pollution control equipment(iii) components, spares and accessories of the goods specified at (i) and (ii) above;(iv) moulds and dies;(v) refractories and refractory materials;(vi) tubes and pipes and fittings thereof; and(vii) storage tank,used in the factory of the manufacturer of the final products, but does not include any equipmentor appliance used in an office;

(c) "Customs Tariff Act" means the Customs Tariff Act, 1975 (51 of 1975);(d) "exempted goods" means goods which are exempt from the whole of the duty of exciseleviable thereon, and includes goods which are chargeable to "Nil" rate of duty;(e) "final products" means excisable goods manufactured or produced from inputs, exceptmatches;(f) "first stage dealer" means a dealer who purchases the goods directly from,-

(i) the manufacturer under the cover of an invoice issued in terms of the provisions of CentralExcise Rules, 2002 or from the depot of the said manufacturer, or from premises of theconsignment agent of the said manufacturer or from any other premises from where the goodsare sold by or on behalf of the said manufacturer, under cover of an invoice; or

(ii) an importer or from the depot of an importer or from the premises of the consignment agentof the importer, under cover of an invoice;

(g) "input" means all goods, except high speed diesel oil and motor spirit, commonly known aspetrol, used in or in relation to the manufacture of final products whether directly or indirectlyand whether contained in the final product or not, and includes lubricating oils, greases, cuttingoils, coolants, accessories of the final products cleared along with the final product, goods usedas paint, or as packing material, or as fuel, or for generation of electricity or steam used for

manufacture of final products or for any other purpose, within the factory of production.

Explanation 1.- The high speed diesel oil or motor spirit, commonly known as petrol, shall notbe treated as an input for any purpose whatsoever.

Explanation 2.- Inputs include goods used in the manufacture of capital goods which are furtherused in the factory of the manufacturer;

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(h) "manufacturer" or "producer" in respect of goods falling under Chapter 61 or 62 of the FirstSchedule to the Tariff Act shall include a person who is liable to pay the duty of excise leviableon such goods under sub-rule (3) of rule 4 of the Central Excise Rules, 2002;

(i) "notification" means the notification published in the Official Gazette;

(j) "Tariff Act" means the Central Excise Tariff Act, 1985 (5 of 1986);

(k) "second stage dealer" means a dealer who purchases the goods from a first stage dealer;

(l) words and expressions used in these rules and not defined but defined in the Act shall havethe meanings respectively assigned to them in the Act.

Rule 3. CENVAT credit.-

(1) A manufacturer or producer of final products shall be allowed to take credit (hereinafter

referred to as the CENVAT credit) of -

1. the duty of excise specified in the First Schedule to the Tariff Act, leviable under the Act;2. the duty of excise specified in the Second Schedule to the Tariff Act, leviable under the Act;3. the additional duty of excise leviable under section 3 of the Additional Duties of Excise(Textile and Textile Articles) Act,1978 ( 40 of 1978);4. the additional duty of excise leviable under section 3 of the Additional Duties of Excise(Goods of Special Importance) Act, 1957 ( 58 of 1957);5. the National Calamity Contingent duty leviable under section 136 of the Finance Act, 2001(14 of 2001); and6. the additional duty leviable under section 3 of the Customs Tariff Act, equivalent to the dutyof excise specified under clauses (i), (ii), (iii), (iv) and (v) above,

paid on any inputs or capital goods received in the factory on or after the first day of March,2002, including the said duties paid on any inputs used in the manufacture of intermediateproducts, by a job-worker availing the benefit of exemption specified in the notification of theGovernment of India in the Ministry of Finance (Department of Revenue), No. 214/86- CentralExcise, dated the 25th March, 1986, published vide number G.S.R. 547 (E), dated the 25thMarch, 1986, and received by the manufacturer for use in, or in relation to, the manufacture of final products, on or after the first day of March, 2002.

Explanation.- For the removal of doubts it is clarified that the manufacturer of the final productsshall be allowed CENVAT credit of additional duty leviable under section 3 of the CustomsTariff Act on goods falling under heading 98.01 of the First Schedule to the Customs Tariff Act.

(2) Notwithstanding anything contained in sub-rule (1), the manufacturer or producer of finalproducts shall be allowed to take CENVAT credit of the duty paid on inputs lying in stock or inprocess or inputs contained in the final products lying in stock on the date on which any goodscease to be exempted goods or any goods become excisable.

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(3) The CENVAT credit may be utilized for payment of any duty of excise on any final productsor for payment of duty on inputs or capital goods themselves if such inputs are removed as suchor after being partially processed, or such capital goods are removed as such:

Provided that while paying duty, the CENVAT credit shall be utilised only to the extent such

credit is available on the fifteenth day of a month for payment of duty relating to the firstfortnight of the month, and the last day of a month for payment of duty relating to the secondfortnight of the month or in case of a manufacturer availing exemption by a notification based onvalue of clearances in a financial year, for payment of duty relating to the entire month.

(4) When inputs or capital goods, on which CENVAT credit has been taken, are removed as suchfrom the factory, the manufacturer of the final products shall pay an amount equal to the duty of excise which is leviable on such goods at the rate applicable to such goods on the date of suchremoval and on the value determined for such goods under sub-section (2) of section 3 or section4 or section 4A of the Act, as the case may be, and such removal shall be made under the coverof an invoice referred to in rule 7.

(5) The amount paid under sub-rule (4) shall be eligible as CENVAT credit as if it was a dutypaid by the person who removed such goods under sub-rule (4).

1. Notwithstanding anything contained in sub-rule (1),-

(a) CENVAT credit in respect of inputs or capital goods produced or manufactured,-

(i) in a free trade zone or by a hundred per cent. export-oriented undertaking or by a unit in anElectronic Hardware Technology Park or Software Technology Park (other than a unit whichpays excise duty under section 3 of the Act read with notification No. 8/97- Central Excise, datedthe 1st March, 1997, number G.S.R 114 (E), dated the 1st March, 1997 or No. 20/2002-CentralExcise, dated the 1st March, 2002) and used in the manufacture of the final products in any otherplace in India, in case the unit pays excise duty under section 3 of the Act read with notificationNo. 2/95-Central Excise, dated the 4th January, 1995, number G.S.R. 189 (E), dated the 4thJanuary, 1995, shall be admissible equivalent to the amount calculated in the following manner,namely:-

Fifty per cent. of [ X multiplied by{( 1+ BCD/100) multiplied by ( CVD/100)}], where BCD andCVD denote ad valorem rates, in per cent., of basic customs duty and additional duty of customsleviable on the inputs or the capital goods respectively and X denotes the assessable value.

(ii) in a Special Economic Zone, and used in the manufacture of the final products in any otherplace in India, shall be admissible equivalent to the amount calculated in the following manner,namely:-

X multiplied by {( 1+ BCD/100) multiplied by ( CVD/100)}, where BCD and CVD denote advalorem rates, in per cent., of basic customs duty and additional duty of customs leviable on theinputs or the capital goods respectively and X denotes the assessable value.

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manufacture of such final products by the job worker.

(2) (a) The CENVAT credit in respect of capital goods received in a factory at any point of timein a given financial year shall be taken only for an amount not exceeding fifty per cent. of theduty paid on such capital goods in the same financial year:

Provided that the CENVAT credit in respect of capital goods shall be allowed for the wholeamount of the duty paid on such capital goods in the same financial year if the said capital goodsare cleared as such in the same financial year.

(b) The balance of CENVAT credit may be taken in any financial year subsequent to thefinancial year in which the capital goods were received in the factory of the manufacturer, if thecapital goods, other than components, spares and accessories, refractories and refractorymaterials and goods falling under heading No. 68.02 and sub-heading No. 6801.10 of the FirstSchedule to the Tariff Act, are in the possession and use of the manufacturer of final products insuch subsequent years.

Illustration.- A manufacturer received machinery on April 16, 2002 in his factory. CENVAT of two lakh rupees is paid on this machinery. The manufacturer can take credit upto a maximum of one lakh rupees in the financial year 2002-2003, and the balance in subsequent years.

(3) The CENVAT credit in respect of the capital goods shall be allowed to a manufacturer evenif the capital goods are acquired by him on lease, hire purchase or loan agreement, from afinancing company.

(4) The CENVAT credit in respect of capital goods shall not be allowed in respect of that part of the value of capital goods which represents the amount of duty on such capital goods, which themanufacturer claims as depreciation under section 32 of the Income-tax Act, 1961( 43 of 1961).

(5) (a) The CENVAT credit shall be allowed even if any inputs or capital goods as such or afterbeing partially processed are sent to a job worker for further processing, testing, repair, re-conditioning or any other purpose, and it is established from the records, challans or memos orany other document produced by the assessee taking the CENVAT credit that the goods arereceived back in the factory within one hundred and eighty days of their being sent to a jobworker and if the inputs or the capital goods are not received back within one hundred eightydays, the manufacturer shall pay an amount equivalent to the CENVAT credit attributable to theinputs or capital goods by debiting the CENVAT credit or otherwise, but the manufacturer cantake the CENVAT credit again when the inputs or capital goods are received back in his factory.

(b) The CENVAT credit shall also be allowed in respect of jigs, fixtures, moulds and dies sent bya manufacturer of final products to a job worker for the production of goods on his behalf andaccording to his specifications.

(6) The Commissioner of Central Excise having jurisdiction over the factory of the manufacturerof the final products who has sent the inputs or partially processed inputs outside his factory to a job-worker may, by an order, which shall be valid for a financial year, in respect of removal of 

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such inputs or partially processed inputs, and subject to such conditions as he may impose in theinterest of revenue including the manner in which duty, if leviable, is to be paid, allow finalproducts to be cleared from the premises of the job-worker.

Rule 5. Refund of CENVAT credit.- 

Where any inputs are used in the final products which are cleared for export under bond or letterof undertaking, as the case may be, or used in the intermediate products cleared for export, theCENVAT credit in respect of the inputs so used shall be allowed to be utilized by themanufacturer towards payment of duty of excise on any final products cleared for homeconsumption or for export on payment of duty and where for any reason such adjustment is notpossible, the manufacturer shall be allowed refund of such amount subject to such safeguards,conditions and limitations as may be specified by theCentral Government by notification:

Provided that no refund of credit shall be allowed if the manufacturer avails of drawback allowed

under the Customs and Central Excise Duties Drawback Rules, 1995, or claims a rebate of dutyunder the Central Excise Rules, 2002, in respect of such duty.

Rule 6. Obligation of manufacturer of dutiable and exempted goods.- 

(1) The CENVAT credit shall not be allowed on such quantity of inputs which is used in themanufacture of exempted goods, except in the circumstances mentioned in sub-rule (2).

(2) Where a manufacturer avails of CENVAT credit in respect of any inputs, except inputsintended to be used as fuel, and manufactures such final products which are chargeable to duty aswell as exempted goods, then, the manufacturer shall maintain separate accounts for receipt,consumption and inventory of inputs meant for use in the manufacture of dutiable final productsand the quantity of inputs meant for use in the manufacture of exempted goods and takeCENVAT credit only on that quantity of inputs which is intended for use in the manufacture of dutiable goods.

(3) The manufacturer, opting not to maintain separate accounts shall follow either of thefollowing conditions, as applicable to him, namely:-

(a) if the exempted goods are-

1. goods falling within heading No. 22.04 of the First Schedule to the Tariff Act;2. Low Sulphur Heavy Stock (LSHS) falling within Chapter 27 of the said First Schedule used inthe generation of electricity;3. Naphtha (RN) falling within Chapter 27 of the said First Schedule used in the manufacture of fertilizer;4. tyres of a kind used on animal drawn vehicles or handcarts and their tubes, falling withinChapter 40 of the said First Schedule;5. newsprint, in rolls or sheets, falling within heading No.48.01 of the said First Schedule;6. final products falling within Chapters 50 to 63 of the said First Schedule,

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the manufacturer shall pay an amount equivalent to the CENVAT credit attributable to inputsused in, or in relation to, the manufacture of such final products at the time of their clearancefrom the factory; or

(b) if the exempted goods are other than those described in condition (a), the manufacturer shall

pay an amount equal to eight per cent. of the total price, excluding sales tax and other taxes, if any, paid on such goods, of the exempted final product charged by the manufacturer for the saleof such goods at the time of their clearance from the factory.

Explanation I.- The amount mentioned in conditions (a) and (b) shall be paid by themanufacturer by debiting the CENVAT credit or otherwise.

Explanation II.- If the manufacturer fails to pay the said amount, it shall be recovered alongwith interest in the same manner, as provided in rule 12, for recovery of CENVAT creditwrongly taken.

(4) No CENVAT credit shall be allowed on capital goods which are used exclusively in themanufacture of exempted goods, other than the final products which are exempt from the wholeof the duty of excise leviable thereon under any notification where exemption is granted basedupon the value or quantity of clearances made in a financial year.(5) The provisions of sub- rule (1), sub-rule (2), sub-rule (3) and sub-rule (4) shall not beapplicable in case the exempted goods are either-

1. cleared to a unit in a free trade zone; or2. cleared to a unit in a special economic zone; or3. cleared to a hundred per cent. export-oriented undertaking; or4. cleared to a unit in an Electronic Hardware Technology Park or Software Technology Park; or5. supplied to the United Nations or an international organization for their official use or suppliedto projects funded by them, on which exemption of duty is available under notification of theGovernment of India in the Ministry of Finance (Department of Revenue) No.108/95-CentralExcise, dated the 28th August, 1995, number G. S R. 602 (E), dated the 28th August, 1995; or6. cleared for export under bond in terms of the provisions of the Central Excise Rules, 2002.

Rule 7. Documents and accounts.-

(1) The CENVAT credit shall be taken by the manufacturer on the basis of any of the followingdocuments, namely :-(a) an invoice issued by-

(i) a manufacturer for clearance of -

(I) inputs or capital goods from his factory or from his depot or from the premises of theconsignment agent of the said manufacturer or from any other premises from where the goodsare sold by or on behalf of the said manufacturer;(II) inputs or capital goods as such;(ii) an importer;

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(iii) an importer from his depot or from the premises of the consignment agent of the saidimporter if the said depot or the premises, as the case may be, is registered in terms of theprovisions of Central Excise Rules, 2002;(iv) a first stage dealer or a second stage dealer,in terms of the provisions of Central Excise Rules, 2002;

(b) a supplementary invoice, issued by a manufacturer or importer of inputs or capital goods interms of the provisions of Central Excise Rules, 2002 from his factory or from his depot or fromthe premises of the consignment agent of the said manufacturer or importer or from any otherpremises from where the goods are sold by, or on behalf of, the said manufacturer or importer, incase additional amount of excise duties or additional duty of customs leviable under section 3 of the Customs Tariff Act, has been paid, except where the additional amount of duty becamerecoverable from the manufacturer or importer of inputs or capital goods on account of any non-levy or short-levy by reason of fraud, collusion or any wilful mis-statement or suppression of facts or contravention of any provisions of the Act or of the Customs Act, 1962 or the rules madethereunder with intent to evade payment of duty.

Explanation.- For removal of doubts, it is clarified that supplementary invoice shall also includeChallan or any other similar document evidencing payment of additional amount of additionalduty of customs leviable under section 3 of the Customs Tariff Act;1. a bill of entry;

(d) a certificate issued by an appraiser of customs in respect of goods imported through a ForeignPost Office.

(2) The manufacturer or producer taking CENVAT credit on inputs or capital goods shall take allreasonable steps to ensure that the inputs or capital goods in respect of which he has taken theCENVAT credit are goods on which the appropriate duty of excise as indicated in the documentsaccompanying the goods, has been paid.

The manufacturer or producer taking CENVAT credit on inputs or capital goods received by himshall be deemed to have taken reasonable steps if he satisfies himself about the identity andaddress of the manufacturer or supplier, as the case may be, issuing the documents specified inrule 7, evidencing the payment of excise duty or the additional duty of customs, as the case maybe, either-

(a) from his personal knowledge; or(b) on the strength of a certificate given by a person with whose handwriting or signature he isfamiliar; or(c) on the strength of a certificate issued to the manufacturer or the supplier, as the case may be,by the Superintendent of Central Excise within whose jurisdiction such manufacturer has hisfactory or the supplier has his place of business,and where the identity and address of the manufacturer or the supplier is satisfied on the strengthof a certificate, the manufacturer or producer taking CENVAT credit shall retain such certificatefor production before the Central Excise Officer on demand.

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(3) The CENVAT credit in respect of inputs or capital goods purchased from a first stage orsecond stage dealer shall be allowed only if such dealer has maintained records indicating thefact that the inputs or capital goods were supplied from the stock on which duty was paid by theproducer of such inputs or capital goods and only an amount of such duty on pro rata basis hasbeen indicated in the invoice issued by him.

(4) The manufacturer of final products shall maintain proper records for the receipt, disposal,consumption and inventory of the inputs and capital goods in which the relevant informationregarding the value, duty paid, the person from whom the inputs or capital goods have beenpurchased is recorded and the burden of proof regarding the admissibility of the CENVAT creditshall lie upon the manufacturer taking such credit.

(5) The manufacturer of final products shall submit within ten days from the close of each monthto the Superintendent of Central Excise, a monthly return in the form annexed to these rules.

Explanation.- In respect of a manufacturer availing of any exemption based on the value or

quantity of clearances in a financial year, the provisions of this sub-rule shall have effect in thatfinancial year as if for the expression "month", the expression "quarter" was substituted.

Rule 8. Transfer of CENVAT credit.- 

(1) If a manufacturer of the final products shifts his factory to another site or the factory istransferred on account of change in ownership or on account of sale, merger, amalgamation,lease or transfer of the factory to a joint venture with the specific provision for transfer of liabilities of such factory, then, the manufacturer shall be allowed to transfer the CENVAT creditlying unutilized in his accounts to such transferred, sold, merged, leased or amalgamated factory.

(2) The transfer of the CENVAT credit under sub-rule (1) shall be allowed only if the stock of inputs as such or in process, or the capital goods is also transferred alongwith the factory to thenew site or ownership and the inputs, or capital goods, on which credit has been availed of areduly accounted for to the satisfaction of the Commissioner.

Rule 9. Transitional provision 

(1) Any amount of credit earned by a manufacturer under the CENVAT Credit Rules, 2001, asthey existed prior to the 1st day of March, 2002 and remaining unutilised on that day shall beallowable as CENVAT credit to such manufacturer under these rules, and be allowed to beutilised in accordance with these rules.

(2) A manufacturer who opts for exemption from the whole of the duty of excise leviable ongoods manufactured by him under a notification based on the value or quantity of clearances in afinancial year, and who has been taking CENVAT credit on inputs before such option isexercised, shall be required to pay an amount equivalent to the CENVAT credit, if any, allowedto him in respect of inputs lying in stock or in process or contained in final products lying instock on the date when such option is exercised and after deducting the said amount from thebalance, if any, lying in his credit, the balance, if any, still remaining shall lapse and shall not be

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allowed to be utilized for payment of duty on any excisable goods, whether cleared for homeconsumption or for export.

Rule 10. Special dispensation in respect of inputs manufactured in factories located inspecified areas of North East region and Kutch district of Gujarat.-

Notwithstanding anything contained in these rules, where a manufacturer has cleared any inputsor capital goods, in terms of notifications of the Government of India in the Ministry of Finance(Department of Revenue) No. 32/99- Central Excise, dated the 8th July, 1999, number G.S.R.508 (E), dated the 8th July, 1999 or notification No. 33/99- Central Excise, dated the 8th July,1999, number G.S.R. 509 (E), dated the 8th July, 1999 or notification No. 39/2001-CentralExcise, dated the 31st July, 2001, number G.S.R. 565 (E), 31st July, 2001, the CENVAT crediton such inputs or capital goods shall be admissible as if no portion of the duty paid on suchinputs or capital goods was exempted under any of the said notifications.

Rule 11. Power of Central Government to notify goods for deemed CENVAT credit.- 

Notwithstanding anything contained in rule 3, the Central Government may, by notificationdeclare the inputs on which the duties of excise, or additional duty of customs paid, shall bedeemed to have been paid at such rate or equivalent to such amount as may be specified in thesaid notification and allow CENVAT credit of such duty deemed to have been paid in suchmanner and subject to such conditions as may be specified in the said notification even if thedeclared inputs are not used directly by the manufacturer of final products declared in the saidnotification, but are contained in the said final products.

Rule 12. Recovery of CENVAT credit wrongly taken.- 

Where the CENVAT credit has been taken or utilized wrongly, the same along with interest shallbe recovered from the manufacturer and the provisions of sections 11A and 11AB of the Actshall apply mutatis mutandis for effecting such recoveries.

Rule 13. Confiscation and penalty.- 

(1) If any person, takes CENVAT credit in respect of inputs or capital goods, wrongly or withouttaking reasonable steps to ensure that appropriate duty on the said inputs or capital goods hasbeen paid as indicated in the document accompanying the inputs or capital goods specified inrule 7, or contravenes any of the provisions of these rules in respect of any inputs or capitalgoods, then, all such goods shall be liable to confiscation and such person, shall be liable to apenalty not exceeding the duty on the excisable goods in respect of which any contravention hasbeen committed, or ten thousand rupees, whichever is greater.

(2) In a case, where the CENVAT credit has been taken or utilized wrongly on account of fraud,willful mis-statement, collusion or suppression of facts, or contravention of any of the provisionsof the Act or the rules made thereunder with intention to evade payment of duty, then, themanufacturer shall also be liable to pay penalty in terms of the provisions of section 11AC of theAct.

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» Matches other than pyrotechnics articles of heading number 36.04 of CETA» Cinematograph Films» Woven fabrics classified under chapter 52,54 & 55 of CETA other than cotton fabrics, manmade fibre fabrics and filament yarn fabrics

Advantages of Modvat 

» It reduces the effects of taxation at multiple stages of manufacture.» It facilitates duty free exports.» It increases the tax base.

Disadvantages of Modvat 

» It increases paper work and leads to multiplicity of records.» It leads to corruption.» It leads to litigation.

The modvat scheme is regulated by Rules 57A and 57U of the Central Excise Rules and thenotifications issued thereunder.

Items Covered in Indian VAT

550 items covered 270 items of basic needs,

like medicine, drugs, agro

& industrial inputs, capital

& declared goods 4% VAT

Rest 12.5% VAT. Gold &

silver jewellery - 1%

Tea-producing states

options either percentage

VAT

Petrol, diesel, liquor, lottery

not included *

Sugar, textile & tobacco

excluded for one year

Traders with turnover of less than 500,000 rupees are exempt from the new tax. 

Note : * Some states like Delhi have imposed VAT on diesel at 20%, which is higher than the12% sales tax charged earlier. Similarly, Delhi imposed VAT on LPG at 12.5%, which is alsohigher than the previous sales tax rate of 8 percent.

All business transactions carried on within a State by individuals, partnerships, companies etc.will be covered by VAT.

"More than 550 items would be covered under the new Indian VAT regime of which 46 naturaland unprocessed local products would be exempt from VAT", a PTI report quoted West BengalFinance Minister and VAT panel chairman Asim Dasgupta as saying.

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About 270 items including drugs and medicines, all agricultural and industrial inputs, capitalgoods and declared goods would attract four per cent VAT in India.

The remaining items would attract 12.5 per cent VAT. Precious metals like gold and bullionwould be taxed at one per cent.

Considering the difficulties faced by the tea industry, it was decided that tea-producing stateswould be given an option to levy 12.5 per cent or four per cent subject to review in 2006.

Petrol and diesel would be kept out of VAT regime in India, which covers only marketableitems.

Dasgupta was quoted as saying that the panel was yet to take a view on CNG.

Following opposition from some of the states, it was decided that states would have option toeither levy four per cent or totally exempt food grains but it would be reviewed after one year.

Three items - sugar, textile and tobacco - covered under Additional Excise Duties, will not beunder VAT regime for one year but the existing arrangement would continue.

The Indian VAT panel relaxed the threshold limit for traders coming under VAT regime from Rs5-50 lakh of turnover from the previous stance of Rs 5-40 lakh.