Chapter: 10 The Fiscal Federalism: Definition of the Fiscal Federalism Principles of fiscal federalism Financial relationship between Centre

tween Centre and States 1. Sharing of the taxation power 2. Sharing of non tax revenue Financial relationship between State and Local Bodies. Grants in Aid a) Statutory Grant b) Discretionary Grant Role of Finance Commission (FC) Special focus on 13th Finance Commission Alternate Devolution Scheme Gadgil-Mukherjee Formula Role of Planning commission ( PC) Comparision of FC and PC. An assessment of the Indian Fiscal Federalism 1. Problems associated with Financial Federalism 2. Solutions for it

Definition of the Fiscal Federalism Fiscal federalism is a general normative framework for assignment of functions to the different levels of government and appropriate fiscal instruments for carrying out these functions. Principles of fiscal federalism The principles upon which fiscal federalism is based upon are: 1. Independence and responsibility 2. Efficiency and economy 3. Integration and coordination 4. Equalisation transfer 5. Transparency Financial relationship between Centre and States Article 264 to 293 explains the fiscal relation between Centre and the states. The fiscal relationship between Centre and the States are divided in the following ways: a) Allocation of the taxation power b) Distribution of the Tax Revenue c) Distribution of the Non Tax Revenue d) Grants in aid to the states e) Role of the Finance Commission f) Protection of the Interest of the states g) Borrowing of the Centre and the States h) Inter-Governmental tax immunities

i)

Effect of emergencies

a) The taxation powers between centre and the states are divided in the constitution itself. b) The seventh schedule provided for 3 lists . c) On the basis on the power to levy tax the seventh Schedule of our constitution has divided the power in three lists. These are Central list // State list // Concurrent list List III (3)

List I (15) 1.Tax on Income other than Agriculture. 2.Tax on sales and purchase of newspaper and On Advertisements therein. 3.Excise duties except on Alcoholic liquior and narcotics not contained in medical or Toilet preparation. 4.Corporate tax,

List II (20) 1.Tax on Agriculture income Land revenue 2.Tax on sales and purchase of goods except newspaper 3. Excise in alcoholic liquior

Distribution of the Tax Revenue : 80th Constitutional amendment act 2000 88th constitutional amendment act 2003 Tax Article Levied Tax Collected Tax appropriation Examples Stamp duties on bills of exchange, cheque , Excise duties on medical preparation containing S alcohol and narcotics. Sale and purchase of goods, tax on railways fright, terminal tax on goods and passengers, Succession tax, Estate Duty and interstate trade S or commerce. All in list 1 except( 1+2, C-S Surcharge + Cess ) Surcharge on duties on 2 C and 3

268 C

269 C 270 C 271 C

C C C

272 S

State list entries.

Distribution of the Non tax revenue: Non-tax revenue of Centre Non tax revenue of the states 1. Post and Telegraph 1. Irrigation 2. Railways 2. Forest 3. Banking 3. Fisheries 4. Broadcasting 4. State public Sector Enterprises 5. Coinage and currency 5. Escheat and Post 6. Central Public Sector Undertaking 7. Escheat and Post Financial relationship between State and Local Bodies. Grants in Aid : Besides sharing the taxes between centre and the states, the constitution has provided for grant in aid to the states from the central resources. There are two types of grant in aid. 1. Statutory grant 2. Discretionary grant

Statutory grant 1. Article 275 of Indian Constitution empowers the parliament to make grants to the states which are in need of financial assistance and not to every state. 2. These sums are charged on the consolidated fund of India. 3. The statutory grants under article 275 to the states are given on the recommendation of Finance Commission.

Discretionary grant 1. Article 282 of Indian constitution empow both the centre and states to make any gra for public purpose.

2. Under this provision centre makes gran the states on the recommendation of the Planning Commission.

The discretionary grants have two fold purposes. These are: 1. To help the state financially to fulfil the plan targets. 2. To give some leverage the centre to influence and coordinate state action to effectuate the national plan. Role of Finance Commission (FC) Special focus on 13th Finance Commission : 1. Tax revenue 32% of the net sharable central tax to be transferred to the states in each financial year 2. Public Debt 68% of GDP for combined debt of the centre and states should be achieved by 2014-15. 3. Fiscal consolidation RD=0% and FD= 3% of GDP by 2014-2015. 4.Grants under 1. Non plan RD grant article 275 Elementary Ed Environment

Outcome improvement

Maintenance of R&B Performance grants

State specific grant

5. Local Bodies 6. Disaster relief

Basic Grants

Merger of NCCF into NDRF at national level Merger of CRF into SDRF.

Alternate Devolution Scheme Gadgil-Mukherjee Formula Role of Planning commission ( PC) Comparision of FC and PC.

Finance Commission Political aspects Functions Article 280 Distribution of the net proceedings Principle for grant in aid Augument the CFI 275 Statutory grant Fiscal Federalism 13th FC ( 2010-15)

Planning commission Through executive resolution Making of the five year plan

Philosophy

282 Discretionary grant Socio economic development 12th FYP ( 2012-2017)

An assessment of the Indian Fiscal Federalism Problems associated with Financial Federalism 1. Constitutional bias 2. Finance Commission process 3. FC vs. PC 4. Centrally Sponsored Schemes 5. Issues Related to Borrowing power :

Article 292 and Article 293 are instrumental regarding the Market borrowing power of the Centre and the states. A state government cannot raise any loan without the consent of the centre if there is still any outstanding any part of a loan made to the state by the centre or in respect of which a guarantee has been given by the centre. The central government can make loans to any state or give guarantees in respect of loans raised by any state. Any sums required for the purpose of making such loans are to be charged on the Consolidated Fund of India. 6. Non tax revenue 7. Tax revenue 8. Calamity relief 9. Increasing dependence of states on the centre 10. Inadequate payment of royalty of minerals to the state 11. Centres monopoly of the control over industries, trade, commerce and production and distribution. 12. Fiscal consolidation at the state level is more coercive than voluntary. Solutions for it 1. Rationalising the non development expenditure 2. Exploit the tax base fully 3. Comprehensive review of the incomplete projects to weed out low priority projects. 4. Centrally sponsored schemes should be reduced 5. Reduce the discretion in fund transfer from the centre to the states. Planning Commission and Centres assistance to the States: The Gadgil formula is due to D.R. Gadgil, the social scientist and the first critic of Indian Planning. It was evolved in 1969 for determining the allocation of central assistance for state plans in India. Gadgil formula was adopted for distribution of plan assistance during Fourth and Fifth Five Year Plans.[1] Gadgil Formula The Gadgil formula was formulated with the formulation of the fourth five year plan for the distribution of plan transfers amongst the states. It was named after the then deputy chairman of the Planning Commission, Dr. D.R.Gadgil. The central assistance provided for in the first three plans and annual plans of 1966-1969 lacked objectivity in its formulation and did not lead to equal and balanced growth in the states. The National development council (NDC) approved the following formula: 1. Special Category states like Assam, Jammu and Kashmir and Nagaland were given preference. Their needs should first be met out of the total pool of Central assistance. 2. The remaining balance of the Central assistance should be distributed among the remaining States on the basis of the following criteria: (i) 60 per cent on the basis of population; (ii) 10 per cent on the basis of tax effort, determined on the basis of individual State's per capita tax receipts as percentage of the State's per capita income; (iii) 10 per cent on the basis of per

capita State income, assistance going only to States whose per capita incomes are below the national average; (iv) 10 per cent on the basis of spill-over into the Fourth Plan of major continuing irrigation and power projects; (v) 10 per cent for special problems of individual States. Reasoning behind the given weights: 1. Population In a country like India population acts as an apt measure to represent the requirements of the people because a major portion of the population lives below the poverty line. This proposition was also supported by the empirical data which showed a negative correlation between population of states and their per capita income. 2. Tax effort This is an important factor to measure the potential of the state as far as its own resources are concerned. This relative measure incentivizes the states to undertake measures to increase their own potential through various tax measures. 3. State per capita income A problem regarding unequal development amongst the states was faced in the earlier plans because of larger states with their large plans were able to get a larger share of resources from the centre. This led to increased inequalities amongst the states. Therefore, to make the distribution fairer to the smaller states with a lesser than national per capita average income were given extra share in the resources. 4. Special Problems This factor was introduced so as to provide enough resources to states to overcome problems like droughts, famines etc. In the absence of this share, such states would have suffered huge losses because of these problems and the implementation of their plans could have been hindered. This was a discretionary element in the formula which required proper scrutiny of the states situation by the Finance Commission. 5. Irrigation and power projects These projects have been in the process of implementation before the fourth plan was formulated. They needed extra resources for the successful completion of these projects. Background The offer of financial assistance from the centre to the states for implementing planned development has been an extremely important matter right from the beginning of the Indian Planning process. The constitution divides the responsibilities between the Union government and the state governments. There was an imbalance between responsibilities assigned to the states and the revenue resources possessed by them to carry out those responsibilities. The transfer of resources for development purposes under the Plans came to be made under Article 282 of the Constitution. The states were highly dependent on the Union government for financing their development plans because the extra resources on which states could bank on were largely concentrated with the Union government. There was a need for a separate body to look into the division of resources. Therefore the finance commission was appointed in 1951 for the allocation of resources of revenue between the central and the state governments. It was held responsible for examining their liabilities, the resources of the states, their budgeted promises and the effort undertaken to fulfil their commitment. Each five year, the finance commission puts in its recommendations on the proportion of the total collections to be allocated to each of the states. The Planning Commission which was formed soon after the framing of the constitution of India looked into the

problems of financing development, which had added to the old problem of financial relations. It came into being because the issue of formulating development plans and implement them efficiently for the development of the economy was not only a very important but also a necessary one. This commission provides for a settlement between the Centre and the states in two categories 1. Division of revenues 2. Grants in special cases The centre adds to state resources by conferring fixed percentage of revenue from taxation and from other sources to the states. However, this does not ensure a proper balance in distribution. There are states which are poorer or more backward than the others and therefore require central finances on a much larger scale than the others. This is why recommendations for special grants were introduced. Hence in this manner, the extra resources controlled by the centre were shared with the states to finance the state plans. However, this system in turn induced the states to undertake those schemes in which they got a higher share of the central finances and therefore a steady central assistance was given to the states for a planned period. The grants were supposed to be given to the states which did not have enough capital assets that would have earned them enough money to pay for loans taken from the centre. They were provided to the states outright according to their needs. But in reality, no correlation was found between grants and the need for them. The first Five Year Plan had provision of only a marginal central assistance which did not play an important part. Due to this, in the second five year plan, substantial importance was given to it. And in the third five year plan, the states had laid more stress on planning and had become critical. In fact, they were given a choice set of various schemes with various proportions of grants and loans attached. This led to an obvious result. The states with larger resources and power could choose schemes with a greater share of grants in them. On the other hand, poor states had to finance almost all their plans by the loans given by the central government. Consequently, there were huge variations in the averages of grants and loans received by the states. A developed state which had resources got 40% as grants; an under-developed state which had no resources got 12% as grants while the average was 22% . The commissions did not have a distinct criteria which was used while allocation of resources. As a result, the states were dissatisfied when they realised that the larger states were getting a bigger share in the pie. Therefore, in 1965 when the fourth plan was being thought of, the states demanded for a set of firm objective criteria for the distribution of central assistance. The planning commission left it on the states to decide on the criteria. But no agreement was reached in the National Development Council (NDC). Thus, the planning commission thought of an award system, where the finance commission had the discretion to award states in times of need after a proper scrutiny of their situation. In 1968, Planning Commission induced the state governments to come to an agreement. The system of varying proportions of grants and loans from scheme to scheme was abolished. Central assistance to states was now given uniformly in blocks. Each state got 70% loans and 30% grants. There was no special manoeuvrability and therefore no special advantage on the part of the bigger states. This type of settlement also faced problems because of the artificial division between the plan and the non-plan expenditures. The former type of expenditure was to be looked after by the finance commission awards and the latter by central assistance given by either NDC

or the Planning Commission. The loan part which was given to the state had gotten accumulated and for some of the states the loan obligation and repayments were bigger than the assistance they got. In 1969, after the draft the fourth five year plan was presented, the Planning Commission officially discussed with the states the impact of the Finance Commission Awards on their finances. Great variations in the provision of these awards were witnessed amongst the states. Some states had a substantial surplus and other states could not even meet their budgetary responsibilities. Another problem was of the ways and means advances. To overcome the temporary difficulties faced by the state governments, the Reserve Bank of India provided this facility so that the states could balance their balance sheet and remain solvent. This was the extra debt that was to be cleared quickly. After the droughts and famines hit India, states had huge overdrafts year after year. Therefore it was recommended by the Planning commission that resources must first be set aside for meeting the deficits of the states and then help in enabling states to put the new resources into their plans. This was an effort towards bringing non plan and plan expenditures together. This has partially helped in solving the problem of artificial division of expenditures into plan and non-plan expenditures. The other problem was that the total division of resources did not lead to equality in the development in the states. The larger states with their own resources could have a larger plan and the states with less of own resources at their disposal could only have smaller plans. This led to unequal patterns of development in the country. This problem was partly solved by providing 10% of the total resources to states with lesser per capita income than the national average in the formula. This solution led to two other problems: 1. The states at the margin suffered a loss due to this as the state, even marginally upper than the national average could not avail of its rightful share 2. Even after giving no central assistance to certain states, their per capita plan expenditure was larger than those states which entirely depended on central assistance for the finance of their plans. And it was inevitable for the government not to give any central assistance to these states The Gadgil Formula, though well intentioned, did not achieve much success in reducing inter State disparities. For instance, Andhra Pradesh and Tamil Nadu, which came under the low income category at the time, received below average Plan assistance and Bihar and Uttar Pradesh, just managed to get Plan assistance equal to all the States average. Therefore, there was an increasing clamour for modification of the formula, especially from the economically backward states. Modified Gadgil Formula The formula was modified on the eve of the formulation of the Sixth Plan. The 10 percent indicator for ongoing power and irrigation projects was dropped and the share of per capita income was increased to 20 percent, to be distributed to those states whose per capita incomes were below the national average. The modified Gadgil formula continued for the Sixth and the Seventh Plans. Compared to the allocations in the

Fourth and Fifth Plans, the allocations during the Sixth and the Seventh Plans show a definite shift in favour of the poorer states. All the low income states, except Tamil Nadu, received Plan assistance higher than the average income of the 14 states taken into consideration at the time. This can certainly be attributed to the higher weightage given to per capita income as per the modification. Per capita income serves as a suitable proxy for changes in the economy. If the states are ranked according to their per capita income as well as their per capita Plan assistance and the rank correlation coefficient is worked out, it should give a fair idea of the effectiveness of the modified Gadgil Formula in terms of progressivity. The rank correlation coefficients worked out for the four Plan periods are as follows: Plan Period Rank Correlation Coefficient IV (-)0.17 V (-)0.04 VI (-)0.66* VII (-)0.72** Notes: *Significant at 5 percent level Significant at 1 percent level The low income states received better allocations during all the four Plan periods, as there is a negative correlation. However, for the Fourth and the Fifth Plans, the correlation coefficients are not significant, which shows that allocations in these periods were only marginally progressive. In the Sixth and the Seventh Plan periods, there was a marked improvement in the progressivity of Plan allocations, as can be deduced from the statistically significant correlation coefficients. Therefore, the modified Gadgil formula resulted in a more progressive distribution of Central Plan assistance. In the period spanning the beginning of the Fourth Plan to the Seventh Plan, the dependence of the states on Central Plan Assistance for financing their Plan outlays has been declining for all states. Despite this trend, the low income states depended heavily on Central Plan assistance for funding their outlays, despite this assistance increasing considerably after the modification made to the Gadgil formula. Also, it has been seen that the states with a higher per capita outlay are usually the high income states. Therefore, unless the distribution of the Central Plan assistance is made sharply progressive, narrowing down of inter State differentials in per capita outlays will be impossible. While Plan outlays have increased by over nine times, Central Plan assistance has increased only by half the amount from the Fourth to the Seventh Plan period. This is the reason for persistent inter state inequality. The Centre has resorted to funding states for the implementation of Centrally Sponsored Schemes, which form 80 percent of Plan Assistance. This has led to the sidelining of the states own Plan outlays. Due to the problem of increasing gaps between the assistance provided and outlay of the states, calls for further revision of the Gadgil Formula increased, which resulted in the next revision of the formula in 1990. Gadgil-Mukherjee Formula The National Development Council (NDC) meeting held in October 11, 1990; discussed and approved a New Revised formula. The new revised formula is popularly known as Gadgil-Mukherjee formula after the name of then deputy chairman of Planning commission Dr. Pranab Mukherjee. The new revised formula as approved by NDC is given in the following table. Criteria for inter-state allocation of Plan Assistance
o

CRITERIA WEIGHTAGE (%) POPULATION 55 PER CAPITA INCOME 25 FISCAL MANAGEMENT 5 SPECIAL PROBLEMS 15 TOTAL 100 Under the new revised formula, Population was given maximum weightage by considering it as most important factor for the allocation of central assistance, but in comparison with old Gadgil formula the weightage has been reduced by 5%. The share of Per Capita Income has increased from 20% to 25%. Out of 25%, 20% will continue to be allocated on the principle of The Deviation method (The per capita state domestic product is calculated by taking an average of per capita state domestic product whose actual data are available, for the latest three years.) to those states whose per capita income is below the average national per capita income and the rest 5% will be allocated to all states on the principle of The Distance method (The distance of per capita income of each state from the state which has the highest per capita income is calculated, then these values are multiplied with the respective value of the population of each state. This was done to meet the objections like, less developed states were allocated less and given low weightage, also the states whose per capita income were slightly higher than the average national per capita income, were deprived of share under this particular criterion. Fiscal management, as a new criterion has been introduced with 5% weightage by discarding the earlier Tax effort criterion which was given 10% weightage in old Gadgil formula. Fiscal management criterion is to be assessed on the basis of a states actual resource mobilization for its plan in comparison with the target agreed upon the Planning Commission. Therefore this criterion is considered to be more comprehensive for fiscal efficiency than The Tax effort criterion. The Fiscal Management was given only 5% weightage due to the danger arises from the manner in which it is defined. It can develop an unhealthy competition among the states to show their resources less at the time of preparing initial resource estimates. The remaining 5% weightage of Tax effort has been given to The Special problems criterion due to which its weightage increased from 10% to 15%. The NDC has defined special problems under these seven heads: i. Coastal areas ii. Flood and drought prone areas iii. Desert problems iv. Special environmental issues v. Exceptionally sparse and densely populated areas vi. Problem of slums in urban areas vii. Special financial difficulties for achieving minimum reasonable plan size. By comparing the new revised Gadgil formula with the old Gadgil formula as a whole, only 85% of the total central assistance has been distributed on the basis of four well defined criteria, whereas, in the old Gadgil formula these criteria were given 90% weightage. The Gadgil Formula in 2000 At the advent of the 21st century the formula was reviewed and the component of performance by the respective states was adopted. The allocation accruing to the states under this head was 7.5 percent. Within this, 2.5 percent of the allocation was based on tax efforts of the states, 2 percent for fiscal management at state level and 1 percent for undertaking population control measures. Special attention was also paid to the sluggish improvements in female literacy and 1 percent allocation was set aside taking female literacy into account. Timely completion of externally funded projects and land reforms undertaken accounted for the remainder of the 7.5 percent figure.

a) Gadgil formula (4 th Plan ) : Transfer of financial assistance to the states(1969 to 1974) b) This formula is used for 4th and 5th FYP ( 1974 to 1979) c) First modification in 1990 d) Modified version is used for 6th , 7th and 1990-1991 Annual plans e) In 1990 again remodified by NDC f) The modification is g) Used for 1991-92 Annual plans , h) In 1991 , Mukherjee Gadgil Formula : NDC is adopting the same

Modification 2 Population =55% Per capita Income =25% Financial Arrangement =5% Special development Problems = 15%

Mukherjee -Gadgil formula Population =60% Per capita income = 25% Financial Performance =7.5 a) Special development Problems=7.5

Special category states are usually those with, according to the thirteenth Finance Commission, hilly terrain, sparsely populated habitation and high transport costs leading to high delivery cost of public services. For such states, in the past, 90 per cent of Central assistance was treated as a grant, the remaining 10 per cent as a loan. Unsurprisingly, these include the states of the Northeast, Sikkim and Uttarakhand. International Institutions:

Income tax in India From Wikipedia, the free encyclopedia The government of India imposes an income tax on taxable income of individuals, Hindu Undivided Families (HUFs), companies, firms, co-operative societies and trusts (identified as body of individuals and association of persons) and any other artificial person. Levy of tax is separate on each of the persons. The levy is governed by the Indian Income Tax Act, 1961. The Indian Income Tax Department is governed by the Central Board for Direct Taxes (CBDT) and is part of the Department of Revenue under the Ministry of Finance, Govt. of India. There are close to 35 million income tax payers in India.[1] . [edit]Overview Charge to Income-tax Everyone exceeds the maximum amount which is not chargeable to the income tax is an assesse, and shall be chargeable to the income tax at the rate or rates prescribed under the finance act for the relevant assessment year, shall be determined on basis of his residential status.

Income tax is a tax payable, at the rate enacted by the Union Budget (Finance Act) for every Assessment Year, on the Total Income earned in the Previous Year by every Person. The chargeability is based on nature of income, i.e., whether it is revenue or capital. The rates of taxation of income are-: Income Tax Rates/Slabs Rate (%) for men: Up to 1,80,000 = 0, 1,80,001 5,00,000 = 10%, 5,00,001 8,00,000 = 20%, 8,00,001 upwards = 30%, Up to 1,90,000 (for resident women)=0% Up to 2,50,000 (for resident individual of 60 years or above)= 0, Up to 5,00,000 (for very senior citizen of 80 years or above)= 0. Education cess is applicable @ 3 per cent on income tax, surcharge = NA [edit]Residential Status The three residential status, viz., Resident Ordinarily Residents Under this category ,person must be living in India at least 182 days during previous year Or must have been in India 365 days during 4 years preceding previous year and 60 days in previous year. Ordinary residents are always taxable on their income earned both in India and Abroad. Resident but not Ordinarily Residents Must have been a non-resident in India 9 out of 10 years preceding previous year or have been in India in total 729 or less days out of last 7 years preceding the previous year. Not Ordinarily residents are taxable in relation to income received in India or income accrued or deemed to be accrue or arise in India and income from business or profession controlled from India. Non Residents Non Residents are exempt from tax if accrue or arise or deemed to be accrue or arise outside India. Taxable if income is earned from business or profession setting in India or having their head office in India.[2][3] [edit]Heads of Income The total income of a person is divided into five heads, viz., taxable[4]: [edit]Individual Heads of Income [edit]Income from Salary All income received as salary under EmployerEmployee relationship is taxed under this head. Employers must withhold tax compulsorily, if income exceeds minimum exemption limit, as Tax Deducted at Source (TDS), and provide their employees with a Form 16 which shows the tax deductions and net paid income. In addition, the Form 16 will contain any other deductions provided from salary such as:

1. Medical reimbursement: Up to Rs. 15,000 per year is tax free if supported by bills. 2. Transport allowance: Up to Rs. 800 per month (Rs. 9,600 per year) is tax free if provided as transport allowance. No bills are required for this amount. 3. Conveyance allowance:is tax exempt. 4. Professional taxes: Most states tax employment on a per-professional basis, usually a slabbed amount based on gross income. Such taxes paid are deductible from income tax. 5. House rent allowance: the least of the following is available as deduction 1. Actual HRA received 2. 50%/40%(metro/non-metro) of basic 'salary' 3. Rent paid minus 10% of 'salary'. basic Salary for this purpose is basic+DA forming part+commission on sale on fixed rate. Income from salary is the least of all the above deductions. [edit]Income from House property Income from House property is computed by taking into account what is called Annual Value of the property. The annual value (in the case of a let out property) is the maximum of the following: Rent received Municipal Valuation Fair Rent (as determined by the I-T department) If a house is not let out and not self-occupied, annual value is assumed to have accrued to the owner. Annual value in case of a self occupied house is to be taken as NIL. (However if there is more than one self occupied house then the annual value of the other house/s is taxable.) From this, deduct Municipal Tax paid and you get the Net Annual Value. From this Net Annual Value, deduct : 30% of Net value as repair cost (This is a mandatory deduction) No any other deduction avaliable Interest paid or payable on a housing loan against this house In the case of a self occupied house interest paid or payable is subject to a maximum limit of Rs,1,50,000 (if loan is taken on or after 1 April 1999 and construction is completed within 3 years) and Rs.30,000 (if the loan is taken before 1 April 1999). For all non self-occupied homes, all interest is deductible, with no upper limits. The balance is added to taxable income.

[edit]Income from Business or Profession An example .. An architect works out of home and co-ordinates work for his clients. All the following expenses would be deductible from his professional fees. he uses a computer, he travels to sites in his car, he has a peon to help him collect payments He has a maid who comes in daily part of the society maintenance bills entertainment expenses incurred.. books and magazines for his professional practice. The income referred to in section 28, i.e., the incomes chargeable as "Income from Business or Profession" shall be computed in accordance with the provisions contained in sections 30 to 43D. However, there are few more sections under this Chapter, viz., Sections 44 to 44DA (except sections 44AA, 44AB & 44C), which contain the computation completely within itself. Section 44C is a disallowance provision in the case nonresidents. Section 44AA deals with maintenance of books and section 44AB deals with audit of accounts. In summary, the sections relating to computation of business income can be grouped as under: 1. Deductible Expenses - Sections 30 to 38 [except 37(2)]. 2. Inadmissible Expenses - Sections 37(2), 40, 40A, 43B & 44-C. 3. Deemed Incomes - Sections 33AB, 33ABA, 33AC, 35A, 35ABB & 41. 4. Special Provisions - Sections 42 & 43D 5. Self-Coded Computations - Sections 44, 44A, 44AD, 44AE, 44AF, 44B, 44BB, 44BBA, 44BBB, 44-D & 44-DA. The computation of income under the head "Profits and Gains of Business or Profession" depends on the particulars and information available.[5] If regular books of accounts are not maintained, then the computation would be as under: Income (including Deemed Incomes) chargeable as income under this head xxx Less: Expenses deductible (net of disallowances) under this head xxx Profits and Gains of Business or Profession xxx However, if regular books of accounts have been maintained and Profit and Loss Account has been prepared, then the computation would be as under: -

Net Profit as per Profit and Loss Account xxx Add : Inadmissible Expenses debited to Profit and Loss Account xxx Deemed Incomes not credited to Profit and Loss Account xxx xxx Less: Deductible Expenses not debited to Profit and Loss Account xxx Incomes chargeable under other heads credited to Profit & Loss A/c xxx xxx Profits and Gains of Business or Profession xxx [edit]Income from Capital Gains Transfer of capital assets results in capital gains. A Capital asset is defined under section 2(14) of the I.T. Act, 1961 as property of any kind held by an assessee such as real estate, equity shares, bonds, jewellery, paintings, art etc. but does not include some items like any stock-in-trade for businesses and personal effects. Transfer has been defined under section 2(47) to include sale, exchange, relinquishment of asset, extinguishment of rights in an asset, etc. Certain transactions are not regarded as 'Transfer' under section 47. For tax purposes, there are two types of capital assets: Long term and short term. Long term asset is that which is held by a person for three years except in case of shares or mutual funds which becomes long term just after one year of holding. Sale of such long term assets gives rise to long term capital gains. There are different scheme of taxation of long term capital gains. These are: 1. As per Section 10(38) of Income Tax Act, 1961 long term capital gains on shares or securities or mutual funds on which Securities Transaction Tax (STT) has been deducted and paid, no tax is payable. STT has been applied on all stock market transactions since October 2004 but does not apply to off-market transactions and company buybacks; therefore, the higher capital gains taxes will apply to such transactions where STT is not paid. 2. In case of other shares and securities, person has an option to either index costs to inflation and pay 20% of indexed gains, or pay 10% of non indexed gains. The

indexation rates are released by the I-T department each year. 3. In case of all other long term capital gains, indexation benefit is available and tax rate is 20%. All capital gains that are not long term are short term capital gains, which are taxed as such: Under section 111A, for shares or mutual funds where STT is paid, tax rate is 10% From Asst Yr 2005-06 as per Finance Act 2004. For Asst Yr 2009-10 the tax rate is 15%. In all other cases, it is part of gross total income and normal tax rate is applicable. For companies abroad, the tax liability is 20% of such gains suitably indexed (since STT is not paid). [edit]Income from Other Sources This is a residual head, under this head income which does not meet criteria to go to other heads is taxed. There are also some specific incomes which are to be taxed under this head. 1. Income by way of Dividends 2. Income from horse races 3. Income from winning bull races 4. Any amount received from key man insurance policy as donation. 5. Income from shares (dividend otherthan Indian company) [edit]Deduction While exemptions is on income some deduction in calculation of taxable income is allowed for certain payments. [edit]Section 80C Deductions Section 80C of the Income Tax Act [1] allows certain investments and expenditure to be deducted from total income up to the maximum of 1 lac. The total limit under this section is Rs. 100,000 ) which can be any combination of the below: Contribution to Provident Fund or Public Provident Fund. PPF provides 8.6% [6] return compounded annually. Maximum limit to contribute in it is 100,000 for each year. It is a long term investment with complete withdrawal not possible till 15 years though partial withdrawal is possible after 5 years. Besides, there is employee providend fund which is deducted from the salary of the person. This is about 10% to 12% of the BASIC salary component. Recent changes are being discussed regarding reducing the instances of withdrawal from EPF especially when one changes the job. EPF has the option of full

settlement on leaving the job, taking VRS, retirement after 58. It also has options of withdrawal for certain expenses related to home, marriage or medical. EPF contribution includes 12% of basic salary from employee and employer. It is distributed in ratio of 8.33:3.67 in Pension fund and Providend fund Payment of life insurance premium Investment in pension Plans. National Pension Scheme is meant to save money for the post retirement which invests money in different combination of equity and debt. depending upon age up to 50% can go in equity. Annuity payable after retirement is dependent upon age. NPS has six fund managers. Individual can make minimum contribution of Rs6000/- . It has 22 point of purchase (banks). Investment in Equity Linked Savings schemes (ELSS) of mutual funds. Among other investment opportunities, ELSS has the least lock-in period of 3 years. However, one should note that after the Direct Tax Code is in place, ELSS will no longer be an investment for 80C deduction. Investment in National Savings Certificates (interest of past NSCs is reinvested every year and can be added to the Section 80 limit) Tax saving Fixed Deposits provided by banks for a tenure of 5 years. Interest is also taxable. Payments towards principal repayment of housing loans. Also any registration fee or stamp duty paid. Payments towards tuition fees for children to any school or college or university or similar institution (Only for 2 children). Post office investments The investment can be from any source and not necessarily from income chargeable to tax. [edit]Section 80CCF: Investment in Infrastructure Bonds From April, 1 2011, a maximum of Rs. 20,000 is deductible under section 80CCF provided that amount is invested in infrastructure bonds. This is in addition to the 100,000 deduction allowed under Section 80C. [edit]Section 80D: Medical Insurance Premiums Health insurance, popularly known as Mediclaim Policies, provides a deduction of up to Rs. 35,000.00 (Rs. 15,000.00 for premium payments towards policies on self, spouse and children and (read as in addition to) Rs. 15,000.00 for premium payment towards non-senior citizen dependent parents or Rs. 20,000.00 for premium payment towards senior citizen dependent). This deduction

is in addition to Rs. 1,00,000 savings under IT deductions clause 80C. For consideration under a senior citizen category, the incumbent's age should be 65 years during any part of the current fiscal, e.g. for the fiscal year 2010-11, the incumbent should already be 65 as on March 31, 2011), This deduction is also applicable to the cheques paid by proprietor firm.. [edit]Interest on Housing Loans Section For self occupied properties, interest paid on a housing loan up to Rs 150,000 per year is exempt from tax. This deduction is in addition to the deductions under sections 80C, 80CCF and 80D. However, this is only applicable for a residence constructed within three financial years after the loan is taken and also the loan if taken after April 1, 1999. If the house is not occupied due to employment, the house will be considered self occupied. For let out properties, the entire interest paid is deductible under section 24 of the Income Tax act. However, the rent is to be shown as income from such properties. 30% of rent received and municipal taxes paid are available for deduction of tax. The losses from all properties shall be allowed to be adjusted against salary income at the source itself. Therefore, refund claims of T.D.S. deducted in excess, on this count, will no more be necessary.[7] [edit]Use of Deductions While the use of the above sections helps one to make savings for the long-term, one should look at this more as an investment-return opportunity. One should still file income tax return, even if one doesn't fall into the bracket of paying tax, if there are sources of income as defined by Income Tax rules. Except ELSS (Equity Linked Savings Scheme) and the NPS (National Pension Scheme), other schemes under 80C typically offer a relatively risk-free investment and guaranteed returns. [edit]Tax Rates In India, Individual income tax is a progressive tax with three slabs. About 10 per cent of the population meets the minimum threshold of taxable income[8][9] From April 1, 2011 new tax slabs apply, which are as follows: No income tax is applicable on all income up to Rs. 1,80,000 per year. (Rs. 1,90,000 for women, Rs. 2,50,000 for senior citizens of 60 till 80 yrs (excluding 80) and Rs. 5,00,000 for

very senior citizens of 80 yrs and above and must be resident of India) From 1,80,001 to 5,00,000 : 10% of amount greater than Rs. 1,80,000 (Lower limit changes appropriately for women and senior citizens) From 5,00,001 to 8,00,000 : 20% of amount greater than Rs. 5,00,000 + 32,000 ( Rs. 31,000 for women and Rs. 25,000 for senior citizens) Above 8,00,000 : 30% of amount greater than Rs. 8,00,000 + 92,000 ( Rs. 91,000 for women and Rs. 85,000 for senior citizens) [edit]Surcharge Surcharge has been abolished for personal income tax in the financial year 2009-10. A 7.5% surcharge (tax on tax) is applicable if the taxable income (taking into consideration all the deductions) is above Rs. 10 lakh (Rs. 1 million). The limit of 10 lacs was increased to Rs. 1 crore (Rs. 10 million) with effect from 1 June 2009 All taxes in India are subject to an education cess, which is 3% of the total tax payable. With effect from assessment year 2009-10, Secondary and Higher Secondary Education Cess of 1% is applicable on the subtotal of income tax. The education cess is mainly applicable on excise duty and service tax From income tax year 2010-11, education cess would be 3% and no surcharge would be levied. [edit]Tax Rate for non-Individuals There are special rates prescribed for Firms, Corporates, Local Authorities & Co-operative Societies.[10] [edit]Refund Status for Salaried tax payers The Income Tax Department has put on its website the list of income tax refunds of all salary tax payers which could not be sent to the concerned persons for want of correct address. (link to check refund) Salary taxpayers who have not received refunds for assessment years 2003-04 to 2006-07 can click on the link below and query using the PAN number and assessment year whether any refund due to them has been returned undelivered. .[11] 123 [edit]Corporate Income tax For companies, income is taxed at a flat rate of 30% for Indian companies, with a 5% surcharge applied on the tax paid by companies with gross turnover over Rs. 1 crore (10 million). Foreign companies pay 40%.[12] An education cess of 3% (on both the tax and the surcharge) are payable, yielding effective tax rates of 32.5% for domestic

companies and 41.2% for foreign companies. [13] From 2005-06, electronic filing of company returns is mandatory.[14] [edit]Tax Penalties The major number of penalties initiated every year as a ritual by I T Authorities is under section 271(1)(c)[15] which is for either concealment of income or for furnishing inaccurate particulars of income. "If the Assessing Officer or the Commissioner (Appeals) or the Commissioner in the course of any proceedings under this Act, is satisfied that any person(b) has failed to comply with a notice under subsection (1) of section 142 or sub-section (2) of section 143 or fails to comply with a direction issued under sub-section (2A) of section 142, or (c) has concealed the particulars of his income or furnished inaccurate particulars of such income, he may direct that such person shall pay by way of penalty,(ii) in the cases referred to in clause (b), in addition to any tax payable by him, a sum of ten thousand rupees for each such failure; (iii) in the cases referred to in clause (c), in addition to any tax payable by him, a sum which shall not be less than, but which shall not exceed three times, the amount of tax sought to be evaded by reason of the concealment of particulars of his income or the furnishing of inaccurate particulars of such income. WTO aspects 1. Agreement on Agriculture a) Market Access b) Domestic support c) Export Competition 2. Non Agriculture Market Access (NAMA): The products covered under NAMA are: Marine products, chemicals, rubber products, wool products, textile products, ceramics, glassware, engineering products, electronics, automobiles etc. Two more thing Bound tariff lines and unbound tariff lines. a) Discriminatory Swiss formula : b) Special and differential treatment c) Service : Mode 4 d) Sectoral Initiative: e) Non tariff measures: NTB are the barriers other than the tariff barriers to protect the domestic industries. . SPS+ others f) Preference Erosion : 3. Service: For service the modalities have been decided. The GATS (General Agreement on Trade on Services) agreement covers four modes of supply for the delivery of services in cross-border trade: Criteria Supplier Presence

Mode 1: Crossborder supply Mode 2: Consumption abroad Mode 3: Commercial presence

Service delivered within the territory of the Member, from the territory of another Member

Service supplier not present within the Service delivered outside the territory of territory of the the Member, in the territory of another member Member, to a service consumer of the Member Service delivered within the territory of the Member, through the commercial presence of the supplier Service supplier present within the territory of the Member

Service delivered within the territory of Mode 4: Presence the Member, with supplier present as of a natural person a natural person

4. 5. 6. 7. 8. 9.

Regarding service the modalities have been decided. Indias core area of Interest are : Mode 1 and Mode 4 Recently both India and China have put forward the demand to bring service negotiations on par with the negotiation on NAMA and agricultural goods.

Rules negotiation: Anti Dumping Agreement : TRIPS Related Agreement: Geographical Indication : Trade and Environment: Dispute Settlement Understanding: DSU is based on the f