Minimum Alternative Tax (MAT) and Computation of Book Profits

Provisions of MAT for payment of tax by certain companies (Section 115JB]

Tax payable for any assessment year cannot he less than 15% of book profit: Where in the case of a company, the income-tax payable on the total income as computed under the Income-tax Act, is less than15% of its book profit, such book profit shall be deemed to be the total income of the assessee and the tax payable by the assessee on such total income (book profit) shall be the amount of the income-tax at the rate of 15%.

Allowing tax credit in respect of tax paid on deemed income under MAT provisions against tax liability in subsequent years (Section 115JAA]

Where any amount of tax is paid under section 115J B (1) of Income Tax Act by a company for any assessment year beginning on or after 1-4-2006, credit in respect of the taxes so paid for such assessment year shall be allowed on the difference of the tax paid under section 115J8 of Income Tax Act and the amount of tax payable by the company on its total income computed in accordance with the other provisions of the Act.

The amount of tax credit so determined shall be allowed to be carried forward and set off in a year when the tax becomes payable on the total income computed under the regular provisions. However, no carry forward shall be allowed beyond the seventh assessment year immediately succeeding the assessment year in which the tax credit becomes allowable.… Read the rest

Sales tax provisions relevant for leasing

The major sales tax provisions relevant for leasing are as follows:

  1. The lessor is not entitled for the concessional rate of central sales tax because the asset purchased for leasing is meant neither for resale nor for use in manufacture. (It may be noted that if a firm buys an asset for resale or for use in manufacture it is entitled for the confessional rate of sales tax).
  2. The 46th Amendment Act has brought lease transitions under the purview of ‘sale’ and has empowered the central and state government to levy sales tax on lease transactions. While the Central Sales Tax Act has yet to be amended in this respect, several state governments have amended their sales tax laws to impose sales tax on lease transactions.

a. Levy of Sales Tax:

Sales Tax is leviable when goods are sold. Thus there must be ” Goods and there must be a sale.  “Goods” include all types of movable property. “Sale ” means a transfer of property in goods from one person to another for a consideration. But Sales Tax is leviable only on a person who is a dealer. A casual transaction by a non-dealer is not subject to Sales Tax. Thus, if an individual salary earner sells off his personal car, there is no Sales Tax attracted.  To summarize, Sales Tax is leviable on sale of goods by a dealer.

b. Sales Tax on financial leases:

In a Finance Lease, NBFCs are the owner of the Goods and the lessee only has the right to use the goods on payment of lease rentals.… Read the rest

Disadvantages of Value Added Tax (VAT)

1) VAT is regressive:

It is claimed that the tax is regressive, i.e its burden falls disproportionately on the poor since the poor are likely to spend more of their income than the relatively rich person. There is merit in this argument, particularly if it attempts to replace direct or indirect taxes with steep, progressive rates. However, observation from around the world and even Guyana has shown that steep tax rates lead to evasion, and in the case of income tax act as a disincentive to effort.

Further, there is now a tendency in most countries to reduce this progressivity of taxes as has been done in Guyana where a flat rate of income tax has been introduced. In any case VAT recognises and makes room for progressivity by applying no or low rates of tax on essential items such as food, clothes and medicine. In addition it allows for steep rates of tax on luxury items, although this can create problems for administration and open opportunities for evasion by way of deliberate misclassification, a problem incidentally not peculiar to VAT, and which takes place extensively in the area of customs duties.

2) VAT is too difficult to operate from the position of both the administration and business:

(a) The administration: It is often argued that VAT places a special burden on tax administration. However, it is worth noting that wherever VAT was introduced one of its effects was the rationalization and simplification of the previous indirect tax system and its administration.… Read the rest

Advantages of Value Added Tax (VAT)

In the advantages part we will first look after the broad coverage of VAT in the Indian market. Then we will consider the level of security the Indian VAT is having on our revenues. Obviously the selection of items to be covered by VAT in India will be given a bullet to think upon and at last we will check out the co-ordination VAT in India will be having with our existing direct tax system.

1) Coverage :

If the tax is carried through the retail level, it offers all the economic advantages of a tax that includes the entire retail price within its scope, at the same time the direct payment of the tax is spread out and over a large number of firms instead of being concentrated on particular groups, such as wholesalers or retailers.

If retailers do evade, tax will be lost only on their margins because customers that are registered firms gain nothing if their suppliers fail to collect tax, except delay in payment; they will pay more to the government themselves. Under other forms of sales tax, both seller and customer gain by evading tax. One particular advantage is that of the widening of the tax base by bringing all transactions into the tax net. Specifically, VAT gives the new government the opportunity to bring back into the tax system all those persons and entities who were given tax exemptions in one form or another by the previous regime.

2) Revenue security:

VAT represents an important instrument against tax evasion and is superior to a business tax or a sales tax from the point of view of revenue security for three reasons.… Read the rest

Reasons for the preference of VAT over Sales Tax

While theoretically the amount of revenue collected through VAT is equivalent to sales tax collections at a similar rate, in practice VAT is likely to generate more revenue for government than sales tax since it is administered on various stages on the production – distribution chain. With sales tax, if final sales are not covered by the tax system e.g. due to difficulty of covering all the retailers, particular commodities may not yield any tax.  However, with VAT some revenue would have been collected through taxation of earlier transactions, even if final retailers evade the tax net.

There is also in-built pressure for compliance and auditing under VAT since it will be in the interest of all who pay taxes to ensure that their eligibility for tax credits can be demonstrated. VAT is also a fairer tax than sales tax as it minimizes or eliminates the problem of tax cascading, which often occurs with sales tax.  These are facilitated by the fact that VAT operates through a credit system so that tax is only applied on value added at each stage in the production – distribution chain.  At each intermediate stage credit will be given for taxes paid on purchases to set against taxes due on sales.  Only at consumption stage where there are no further transactions will there be no tax credits.  Lack of input credit facility in sales tax often results in tax on inputs becoming a cost to businesses which are often passed on to consumers.  Sales tax is often applied again to the sales tax element of the cost, thus there is a problem of tax on tax. … Read the rest

Introduction to Value Added Tax (VAT)

Value Added Tax or VAT is a broad-based commodity tax that is levied at multiple stages of production. The concept is akin to excise duty paid by the manufacturer who, in turn, claims a credit on input taxes paid. Excise duty is on manufacture, while VAT is on sale and both work in the same manner, according to the white paper on VAT released by finance minister Chidambaram. The document was drawn up after all states, barring UP, were prepared to implement VAT from April.  It is usually intended to be a tax on consumption, hence the provision of a mechanism enabling producers to offset the tax they have paid on their inputs against that charged on their sales of goods and services.  Under VAT revenue is collected throughout the production process without distorting any production decisions.

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 on the further distribution channel. VAT, in simple terms, is a multi-point levy on each of the entities in the supply chain with the facility of set-off of input tax that is, the tax paid at the stage of purchase of goods by a trader and on purchase of raw materials by a manufacturer. Only the value addition in the hands of each of the entities is subject to tax.

For instance, if a dealer purchases 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.… Read the rest