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21 DIRECT TAXES: TYPES ( य कर के कार)

Direct Taxes of Union Govt. * Means Abolished Of State Govt.

- Corporation tax, Minimum Alternative 1. Agriculture Income tax

On income tax (MAT) 2. Professional tax
- Income Tax (Although Constitutional
(आय पर) - Dividend Distribution Tax (DDT) ceiling of maximum
- Capital Gains Tax (CGT) ₹2500 per year)

On assets, - Securities Transaction Tax (STT) 1. Land Revenue

transactions & Commodities Transaction Tax (CTT) 2. Stamp/Registration duty
( प , लेनदे न - *Wealth Tax 3. Property tax in urban
- *Banking Cash Transaction Tax areas
पर) - *Estate Duty

− *Hotel Receipt Tax, *Gift Tax

On − *Fringe Benefit Tax i.e. When the
expenditure employer give benefits to employee
(खच पर) apart from salary e.g. subscription to
gymkhana or golf-club.
(Full) Budget-2019: (Expected collection-wise): __________________________________

❓MCQ. Corporation tax is imposed by [UPSC-CDS-2013-II]

(a) State Government (b) Central Government
(c) Local Government (d) State as well as Central Government

21.1 DIRECT TAXES: MERITS AND DEMERITS ( य कर के लाभ व ् नक

ु ान)
Merits of Direct Taxes Demerits

1. _ _ _ _ _ _ ( गामी: richer the person 1. Narrow base because large staff will be
required if we try to collect Income
higher the tax)
taxes even from poor people.
So, income inequality can be reduced,
equity can be promoted. 2. _ _ _ _ _ _ _ (बा य ा) not counted:
2. Promotes civic consciousness (नाग रक Academic Books Company vs Film star
promoting cigars [30% Tax on both].
चेतना) as the citizen directly feels the
3. Hardship not counted: Working Carpenter
‘pinch of tax’. [5%] vs sleeping landlord [5%]
3. To encourage savings & investment: 4. High level of direct tax= laziness, less
Income tax deduction/exemptions can foreign investment.
given on NPS/PPF/LIC policy etc. 5. Prone to litigation & loopholes, tax
4. Elasticity: As income level increases, the evasion, avoidance. (More in Blackmoney
tax revenue to the Government also Handout)
increases automatically
5. Certainty (when and how to pay IT)

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6. Can reduce volatility in International

currency exchange rates by imposing
Tobin Tax (More in Pillar#3)

21.2 UNION TAX, CESS AND SURCHARGE (क य कर, उपकर और अ धभार)

Any - Computed on taxable income, profit, transaction. Goes to _ _ _ _ _ _ Fund
Union Tax of India → Later divided between Union and states as per the _ _ _ _ _ _ _ _
( घ कर) _ _ _ _ formula. (except if IGST, then divided based on GST Council’s
formula.)

____ - Computed on Tax amount. So, it is a ‘tax on tax’. This amount will also go
to CFI. It is not shared with States using Finance Commission Formula.
(अ धभार) - Usually, surcharge will not have any clear objective in ‘prefix’, so it may be
used for any objective. Exception is Budget 2018 that introduced 10% Social
Welfare Surcharge (स ाज क याण अ भार) on the customs duty on imported
goods. So, it will be specifically used for social welfare schemes of the
Union.

____ - Computed on [(Tax) + (Surcharge, if any)]

(उपकर) - Clear objective is mentioned. E.g. Krishi Kalyan Cess, Swachh Bharat cess,
Road & infrastructure, Health & Education, GST compensation cess.
- By default, it’ll go to CFI→ from there it may go to a specific fund in Public
Accounts e.g. Central Road Safety Fund, Prarambhik Shiksha Kosh etc.
- Cess is not shared with States using Finance Commission Formula. (Although
some of cess money will goto states as a part of scheme implementation
e.g. Pradhan Mantri Jan Arogya Yojana, etc.)
- GST Compensation Cess is shared with States, as per _ _ _ _ _ formula.
<More in the GST segment of this handout>

21.3 DIRECT TAX → CORPORATION TAX ( नगम कर)

Levied on Company’s profit, under the Income-tax Act, 1961. (Technically levied on “NET
Income” but we’re not here for CA-exam)
_ _% - If Indian company's turnover is upto ₹400 cr.** 99.3% companies fall here.

_ _% If Indian company’s turnover is higher than ₹400 cr.** 0.7% companies fall here.

_ _% foreign company’s profit from India

- Additionally “x%” surcharge (अ भार) amount on above Corporation Tax amount,

depending on the company's turnover.
- Additionally 4% _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ cess (उपकर) on above [Corporation Tax +
Surcharge] amount. (Before Budget-2018, there was only 3% Education Cess).
- **Before Full Budget-2019 limit was 250 cr, but Nirmala S. raised to 400 cr so majority
of Indian companies have to pay less tax → more funds left to Company for investing in
business expansion → jobs → growth.
- Full Budget-2019:

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- Additional tax benefits to companies producing solar power, electric batteries,

computer server, laptop etc. in any part of India.
- Companies operating from GIFT-city-IFSC given 100% exemption from
Corporation Tax for 10 years. (previously this ‘tax holiday’ was for 5 years;
We’ll learn GIFT-City-IFSC in Pillar#3.)).
- Interim-Budget-2019: Gave some tax benefits to real-estate sector for their unsold-
inventories. Exact provisions not important.
Related Topics: Laffer Curve, Base Erosion and Profit Shifting (BEPS), MDR relief etc. in
black money handout.

21.4 EQUALISATION LEVY / GOOGLE TAX ( मकार लेवी/ गग

ू ल टै )
- If a foreign company makes profit in India, they have to pay 40% Corporation Tax.
- If an Indian businessman purchases digital advertisement slots in google-adsense /
facebook = those (foreign) e-ad companies are making profit. But earlier, they did not
pay tax on that profit, claiming their business activity (of displaying digital-ads) is
done outside India on global servers.
- So, Budget-2016 imposed 6% tax on such income of foreign technology companies.
Officially called “Equalisation Levy”, unofficially nicknamed “Google Tax”. It’s not
part of “Income Tax” or “Corporation Tax” under the Income Tax Act 1961, but a
separate levy altogether imposed by the Finance Bill 2016.
- Foreign Company can’t dodge it saying we’re protected under the Double Taxation
Avoidance Agreement (DTAA) in our home country.
Related terms:
- OECD has used a phrase ‘Tax challenges of digitisation’ to denote above type of
problems where digital services type MNC companies are avoiding taxes.
- France has implemented tax on large technology companies called GAFA Tax (Google
Apple Facebook Amazon) from 1st Jan 2019.

❓MCQ-Prelim-2018: With reference to India’s decision to levy an equalization tax of

6% on online advertisement services offered by non-resident entities, which of the
following statements is/are correct?
1. It is introduced as a part of the Income Tax Act.
2. Non-resident entities that offer advertisement services in India can claim a tax
credit in their home country under the “Double Taxation Avoidance Agreements”.
Answer Codes: a) 1 only b) 2 only c) Both 1 and 2 d) Neither 1 nor 2

21.5 MINIMUM ALTERNATIVE TAX (MAT: यन

ू तम वैक पक कर)
- Some industrialists use tax-deduction-exemptions-depreciations and accounting tricks
to become “_ _ _ _ _ _ _ Companies” & escape paying Corporation Tax. So,
- Budget-1996 (Chidambaram) introduced 18.5% MAT on book profit using a different
type of formula. (What was the formula, not important).
- Budget 2017: not possible to reduce or abolish MAT at present.
- Budget 2018: IF such company is in GIFT city IFSC, then for them MAT only 9%.

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