MS5210
Legal Aspects of Business
ASSIGNMENT 5
Department of Management Studies
IIT Madras, Chennai - 600036
Submitted to:
Adv B. Ramana Kumar
Group 5
Karandeep Singh MS19A016
Navneet Kaur MS19A033
Pranav R MS19A041
Sreya M Abraham MS19A056
Madhu Jethani MS19A072
August, 2020
QUESTION 1
Income Tax Act 1961 is used to implement the compliance of
other laws - discuss with other examples.
The Income Tax Act of 1961 provides for the levy, administration,
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and recovery ofSo Far Tax in India. In 2017, the Central
Income
Board of Direct Taxes was formed as a task force to draft a better,
newer tax law, with the objective to replace the older act of 1961.
A portion of section 43B of the Income Tax Act deals with certain types
of payments and directs the taxpayer to claim such payments as an
expense in the same assessment year when it was actually paid and not
in the year in which the liability to pay such sum was incurred. The
types of Payments Under Section 43B include any tax, duty, cess or fee
under any law, Employer’s Contribution to the provident fund, Bonus
or Commission payable by the employer, Interest Payable on
borrowing from any public financial institution, state financial
corporation or state Industrial Investment Corporation and Interest
Payable on loans or Advance from a scheduled bank.
The assessee can claim any of the above expenses as deductions only
for the year in which they are paid. While filing income tax returns,
these deductions incentivize people to pay their expenses in the year
they incur them. Hence, this section ensures indirect compliance to
the other relevant laws.
Any taxpayer can claim deductions if they follow an accrual system of
accounting, based on the following conditions:
1. If a taxpayer follows a mercantile system of accounting
2. .If all expenses are paid on or before the due date for submission of ITR.
3. The evidence of all such payments made must be submitted by the
taxpayer while filing an ITR.
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QUESTION 2
Are so many exemptions, deductions, allowances and reliefs given in
the income tax necessary- discuss with examples.
What
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difficult Learned
for most So Far
people to handle tax-related compliance and to
take the aid of tax experts or chartered accountants. It is best, however,
to have clarification about simple concepts like tax exemptions, tax
deductions and tax rebates. All three help bring down the tax outgo, but
vary from each other.
Tax Exemption: There are some types of income that are exempted
from tax. In other words, you do not have to pay tax on any income that
emerges from that source. When measuring tax liability, exempted
incomes are the first components that get reduced from the salary or
other income. For instance, house rent allowance (HRA) is tax-exempt
depending on certain rules. So if one avails that allowance, he/she can
claim tax exemption on the component. Tax exemptions are generally
covered under Section 10 of the Income Tax Act. Any taxpayer in the
country can qualify for income tax exemptions. The most famous
exemptions are:
1. Leave travel Allowance
2. Entertainment Allowance
3. Conveyance Allowance
4. House Rent Allowance (HRA)
5. Hostel Allowance
6. Education Allowance
7. City Compensatory Allowance
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Tax deductions: Once you deduct exempt income from your salary or
combined income from all the five sources, you get a gross total
income. You can further reduce this gross total income by way of
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deductions. You Learned SoaFar
can claim deduction by making investments in
specified products or by incurring certain expenses under different
income tax sections.
For instance, from the current financial year, you can claim a standard
deduction of ₹40,000 from your gross salary, if you are a salaried
individual. Similarly, you can claim deduction of up to ₹1.5 lakh under
Section 80C for investments made in equity-linked savings schemes
(ELSS), Public Provident Fund (PPF), National Savings Certificates
(NSC) and a few other instruments.
Also, expenses such as children education fee, stamp duty paid on
residential house registration also qualify for deduction under the
same section. However, there is one other form of deduction covered
under Section 16 of the Act, which specifically provides for deduction
of three different items from salary income, i.e., Standard Deduction,
Entertainment Allowance, and Professional Tax. Section 80C is the
most extensively used option for saving income tax. Here, an individual
or a HUF (Hindu Undivided Families) who invests or spends on
stipulated tax-saving avenues can claim deduction up to Rs. 1.5 lakh for
tax deduction.
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Tax Rebates: After exemptions and deduction, what remains is the
total income on which you pay the tax. Once you calculate the tax, a
rebate offers relief in the amount of income tax you need to pay. It is
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For instance, rebate under Section 87A of the Act. As per this Section, if
you have total income of below ₹3.5 lakh in a financial year, you are
allowed to claim rebate of up to ₹2,500 from tax.So, let’s say, someone
earns ₹5 lakh and has an eligible HRA of ₹50,000, the gross total
income would come to ₹4.5 lakh after the exemption. Then, assuming a
deduction of ₹1.5 lakh is availed, the total income will come down to ₹3
lakh on which the person needs to pay tax. The tax liability at a slab rate
of 5% will come to ₹2,500. Given the rebate of ₹2,500, the person will
not be liable to pay any tax.
So why do we need these exemptions, deductions and rebates? All
these tax exemptions, deductions and rebates are provided and allowed
by the income tax department to bring down the tax liability of an
individual. The smart way to make the most of the tax savings options
is to first claim the standard deduction, next claim the possible
exemptions before venturing to specific deductions and finally settling
on the rebate. This way, one would have followed a sequential way to
reduce their income tax outgo. Tax exemptions are very important in
countries like India because tax evasions are at all time high and with
less than 5% of the total adult population comprising taxpayers.
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An exemption would provide a taxpayer with a lesser amount of taxable
income which he/ she may be comfortable paying. A deduction on the
other hand, allows the taxpayer to make certain expenditure
throughout the previous year for various reasons, specified under the
What We've Learned So Far
Act, following which, he/she would be eligible for either a whole or
partial amount of deduction from their taxable income, before paying
tax.
Moreover, these deductions and exemptions are granted for various
research and project activities. Providing tax benefits for these goes a
long way towards signalling intent and encouraging them to help boost
their viability and eventual success. Scientific achievements and
research and development in a country should always be encouraged
and given more tax benefits and relief measures. These can also be
seen in the way in which special economic zones (SEZ) are set up and
allowed to operate and operate. They go beyond the usual profit-
making objectives and contribute to the goal of nation building. Hence
the above benefits are very much necessary in the Income Tax Act.
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