Income tax

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Posted by r2d2 03/02/2009 @ 07:02

Tags : income tax, taxes, finance

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Income tax in India

The Indian Income Tax department is governed by the Central Board for Direct Taxes (CBDT) and is part of the Department of Revenue (managed by Indian Revenue Service (IRS), under the Ministry of Finance, Govt. of India.

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.

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.

All residents are taxable for all their income, including income outside India. Non residents are taxable only for the income received in India or Income accrued in India. Not Ordinarily residents are taxable in relation to income received in India or income accrued in India and income from business or profession controlled from India.

Income from salary is net of all the above deductions.

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 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.

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 non-residents. Section 44AA deals with maintenance of books and section 44AB deals with audit of accounts.

The computation of income under the head "Profits and Gains of Business or Profession" depends on the particulars and information available.

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 companies abroad, the tax liability is 20% of such gains suitably indexed (since STT is not paid).

This is a residual head, under this head income which does not meet criteria to go to other heads is taxed. Also there are also some specific incomes which are to be taxed under this head.

Sections 10,10A, 10AA, 10B, 10BA, and 13A deal with income which does not form part of an assessee's total income. While section 10 provides a list of income absolutely exempt from tax, sections 10A, 10AA, 10B, 10BA, and 13A deal with specific exemptions available to newly established industrial undertakings in free trade zones, and political parties. These exemptions are provided from social, political, Constitutional considerations, for avoiding double taxation, on the basis of casual and non-recurring nature ,on the basis of non-residents and non-citizens status, on the basis of Certain specific securities, bonds, certificates, funds and the like, on the basis of Education, science, research, achievements, rewards, sports, charity, on the basis of certain types of bodies, funds and institutions, Subsidies to promote business, and international, economic, and other considerations. Sikkim is the only state of India where citizens do not pay income tax. Residents of Sikkim are eligible for this exemption but excluding the non-Sikkimese spouse of a Sikkimese.

Agricultural Income Eligible Assesses :- All assesses Exempt income  :- Agricultural income Other points :- Agricultural income means as it is defined in Section 2(1A) In case of individual, HUF, AOP, BOI, unregistered firms and artificial juridical persons, agricultural income is to be aggregated for the purpose of determining the rate of tax on Non-Agricultural income and they would get tax rebate or relief.

While exemptions is on income some deduction is calculation of taxable income is allowed for certain payments.

The investment can be from any source and not necessarily from income chargeable to tax.

Medical insurance, popularly known as Mediclaim Policies, provide deduction up to Rs 15000 . This deduction is additional to Rs.1,00,000 savings. For senior citizens, the deduction up to Rs. 20,000 is allowable. This deduction is available for premium paid on medical insurance for oneself, spouse, parents and children.It is also applicabe to the cheques paid by properiter firms.

For self occupied properties, interest paid on a housing loan up to Rs 150,000 per year is exempt from tax. 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.

For let out properties, the entire interest paid is deductible under section 24 of the Income Tax act.

If the house is not occupied due to employment, the house will be considered self occupied.

In India, Individual income tax is a progressive tax with three slabs.

All taxes in India are subject to an education cess, which is 2% of the total tax payable. With effect from assessment year 2008-09, Secondary and Higher Secondary Education Cess of 1% is applicable on the subtotal of taxable income.

There are special rates prescribed for Firms, Corporates, Local Authorities & Co-operative Societies.

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. .

For companies, income is taxed at a flat rate of 30% for Indian companies, with a 10% surcharge applied on the tax paid by companies with gross turnover over Rs. 1 crore (10 million). Foreign companies pay 40%..An education cess of 3% (on both the tax and the surcharge) are payable, yielding effective tax rates of 33.99% for domestic companies and 41.2% for foreign companies.

From 2005-06, electronic filing of company returns is mandatory.

Fringe Benefit Tax is a tax payable by companies against benefits that are seen by employees but cannot be attributed to them individually. This tax is paid as 33.99% of the benefit, which is only a percentage of the actual amount paid.

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Income tax in Australia

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Broadly, Australia levies tax on three sources of income for individual taxpayers: personal earnings (for example, salary and wages), business income, and capital gains. Income received by individuals is taxed at progressive rates. Income derived by companies is taxed at a flat rate of 30%. Generally, capital gains are only subject to tax at the time the gain is realised.

In Australia the financial year runs from July 1st to June 30th the following year and is most commonly referred to by the year that it finishes in (e.g. 1 July 2005 - 30 June 2006 is the 2006 financial year).

Income tax is applied to the taxable income of a taxable entity. Taxable income is calculated, in a broad sense, by applying allowable deductions against the income of a taxable entity.

Tasmania was the first state to introduce income tax. It did so in 1880. It took the form of a withholding tax on distributed income of companies. The tax was seen as necessary due to a fiscal crisis. For much the same reason, South Australia followed suit in 1884. By 1907, all states had introduced income tax.

Income tax on personal income is a progressive tax. The current tax-free threshold is AUD6,000 and the highest marginal rate for individuals is 45% (plus medicare levy).

As with many other countries, income taxes are withheld from wages and salaries in Australia, often resulting in refunds payable to taxpayers. A nine-digit Tax File Number must be quoted to employers for employees to have withholdings calculated using the various tax brackets. In the absence of this number employers are required to withhold tax at the highest marginal rate from the first dollar. Likewise, banks must also withhold the highest marginal rate of income tax on interest earned on bank accounts if the individual does not provide their tax file number to the bank. Corporate and business taxpayers are required to provide their tax file number or "Australian Business Number" to the bank, otherwise the bank will be required to withhold income tax at the highest rate of tax. It is not an offence to fail to provide a bank or financial institution with a tax file number or Australian Business Number, however the bank or financial institution will be required to withhold income tax at the highest marginal rate of income tax.

The Low Income Tax Offset is an offset applicable in full for those earning up to $30,000. Since the 2008-09 Budget it provides low income earners with a tax rebate of up to $1200. The rebate phases out for those earning over $30,000 at 4c for every dollar of taxable income over $30,000. Thus the threshold ends at $60,000. The LITO affects the amount of income per child that can be diverted to children through family trusts. The LITO creates an effective tax-free threshold of $14,000 for low income earners, but an increased effective marginal tax rate (EMTR) for middle income earners (an increase of 4% in the effective marginal tax rate for incomes up to $60000 per annum).

The company tax rate is a flat 30%, though through the Dividend imputation system Australian residents effectively do not pay this company income tax upon the profits distributed as dividends by Australian-resident corporations. When an Australian corporation pays corporate income tax, 'franking credits' are generated and can then be applied to dividend payments at a maximum rate of 30 cents per dollar of dividend. Shareholders may then use these credits to offset their own personal income tax payable, including claiming a refund for excess credits left over after offsetting all payable income tax.

Capital gains tax in Australia is part of the income tax system rather than a separate tax. Net capital gains (after concessions are applied) are included in a taxpayer's taxable income and taxed at marginal rates. Capital Gains applies to Individuals, Companies and any other entity which can legally own an asset. Trusts usually pass on their CGT (Capital Gains Tax) liability to their beneficiaries. Partners are taxed separately on the CGT made by partnerships.

In 1999 indexation on capital gains ceased and subsequently gains on assets held for more than one year are usually reduced by a discount of 50% for individuals, and 33% for superannuation funds. However, in some cases where an indexed cost base applies (where an asset was acquired before indexation ceased) applying the old indexation rules gives a better tax result. Capital gains realised by companies are not discounted. Capital gains made by trust structures are usually taxed as if they were made in the hands of the ultimate beneficiary, though there are exceptions.

The disposal of assets which have been held since before 20 September 1985 (pre-CGT assets) is exempt from CGT.

For families with dependent children the income tax system includes a supplementary set of rules known as Family Tax Benefits (FTB) that are applied in a more complex way. The benefits and thresholds for FTB vary depending on the number of children and which of the married partners earns the additional income.

There are two key components relating to total family income (FTB-A) and relating to the income of the lower income earner (FTB-B). In essence low income families receive a government benefit of around $6000 per annum per child and this benefit is phased out at varying rates depending on whether extra income is earned by the higher or the lower income earner. The combined phase out rate varies between 20% and 50% (combining part A and part B). The total effective marginal tax rates for families (once these benefit phase outs are combined with the normal rates of tax on income) are often as high as 75%. In essence for some families out of each additional dollar they earn they are only allowed to retain 25 cents. The impact of Family Tax Benefit thresholds generally affects all families with a combined income under $100,000 but also affects many families with higher incomes.

The work disincentive effect of the high effective marginal tax rates produced by the Family Tax Benefit rules have been widely criticised in the media as well as by opposition parties and even on occasion by members of the government.

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Earned income tax credit

Under traditional welfare, a dollar-for-dollar decrease of benefits corresponded to an increase in earnings. Standard indifference curve analysis shows that this creates a "spiked" budget constraint of OABC, making it very likely that an individual's utility maximizing bundle includes no work.

The United States federal Earned Income Tax Credit (EITC or EIC) is a refundable tax credit. For tax year 2008, a claimant with one qualifying child can receive a maximum credit of $2,917. For two or more qualifying children, the maximum credit is $4,824. Grandparents, aunts, uncles, and siblings can also claim a child as their qualifying child provided they shared residence with the child for more than six months of the tax year. However, in tie-breaker situations in which more than one filer claims the same child, priority will be given to the parent. A foster child also counts provided the child has been officially placed by an agency or court. There is a much more modest EIC for persons and couples without children that reaches a maximum of $438.

A qualifying child can be up to and including age 18 at the end of the tax year, up to and including age 23 if classified as a full-time student for one long semester or equivalent, or any age if classified as 'totally disabled' for the tax year.

Enacted in 1975, the initially modest EIC has been expanded by tax legislation on a number of occasions, including the more widely-publicized Reagan EIC expansion of 1986. The EIC was further expanded in 1990, 1993, and 2001 regardless of whether the act in general raised taxes (1990, 1993), lowered taxes (2001), or eliminated other deductions and credits (1986). Today, the EITC is one of the largest anti-poverty tools in the United States (despite the fact that most income measures, including the poverty rate, do not account for the credit), and enjoys broad bipartisan support.

Other countries with programs similar to the EITC include the United Kingdom (see: working tax credit), Canada, Ireland, New Zealand, Austria, Belgium, Denmark, Finland, France and the Netherlands. In some cases, these are small (the maximum EITC in Finland is 290 euros), but others are larger than the U.S. credit (the UK's working tax credit is worth up to £7782).

In the United States as of tax year 2006, some 20 states and the District of Columbia had their own EICs. These state plans generally mimic the federal structure on a smaller scale, with individuals receiving a state credit equal to a fixed percentage—generally between 15 and 30 percent—of what they are eligible to receive from the federal credit. A few small local EICs have been enacted in San Francisco, New York City, and Montgomery County, Maryland.

If a person is disabled, he or she can be any age and still count as a qualifying "child." The IRS uses the phrase "permanently and totally disabled." However, they go on to define this such that the person was disabled at any time during the tax year such that he or she could not engage in substantial gainful activity and a physician determined that the condition has lasted or is expected to last a year or more.

If a person is enrolled as a full-time student during some part of five calendar months, he or she can be up to and including age 23. For example, the standard Fall semester of an university in which classes start in late August and continue through September, October, November, and early December counts as part of five calendar months. A similar conclusion applies to the standard Spring semester. However, the five months need not be consecutive and can be obtained by any combination of shorter periods. Full-time status is often defined as ten semester hours, although the IRS defers to how each specific educational institution defines full-time status. Schools also includes technical and trade schools.

In all other cases, a person can be up to and including age 18 and can still count as a child for purposes of EIC.

You must be related to your qualifying child(ren) through blood, marriage, or officialdom. In addition, the child must be either in your same generation or a later generation. A foster child counts provided he or she has been officially placed by an agency, court, or Native American tribal government. An adopted child counts and can be in the process of being adopted provided he or she has been lawfully placed. And so, for the relatively complete list, your qualifying child can be your daughter, son, stepdaughter, stepson, grandchild, great-grandchild, sister, brother, stepsister, stepbrother, half sister, half brother, niece, nephew, great niece, great nephew, or any further descendant of these related persons.

You must live with your qualifying child(ren) within the fifty states of the United States for more than half the tax year (six months and one day). Persons on active military duty are considered to be living within the United States. Temporary absences, for either you or the child, due to school, hospital stays, business trips, vacations, periods of military service, or jail or detention counts as time lived at home. "Temporary" is perhaps unavoidably vague and generally hinges or whether you or the child are expected to return, although the IRS is somewhat lenient and can count rather lengthy periods as temporary.

Investment income cannot be greater than $2,900.

A claimant must be either a United States citizen or resident alien. In the case of married filing jointly where one spouse is and one isn't, the couple can elect to treat the nonresident spouse as resident and have their entire worldwide income subject to U.S. tax, and will then be eligible for EIC.

Filers both with and without qualifying children must have lived in the United States for more than half the tax year. Perhaps surprisingly, Puerto Rico, American Samoa, the Northern Mariana Islands, and other U.S. territories do not count in this regard. A person on extended military duty is considered to have met this requirement for that period of time.

For persons without a qualifying child, there is an age requirement in that the person must be from age 25 to 64.

Persons without a qualifying child must themselves not be claimable as a dependent; persons with qualifying children must merely not be claimable as a qualifying child. This is a subtle distinction that sometimes plays out.

For all filers, married filing separately acts as a disqualifying status and a person filing under that status will not be eligible for EIC. However, if the person has lived apart from their spouse for the last six months of the year, has jointly or individually paid more than half the cost of keeping up a main home (or several main homes) for six months for themselves and their qualifying child, and can claim that child as a dependent (or could claim, but are waiving the dependency to the other parent), the person can file as head of household and thus be eligible for EIC. Alternatively, if a person obtains a divorce by December 31, that will carry, since it is marital status on the last day of the year that controls for tax purposes. In addition, if a person is "legally separated" by December 31, that will also carry.

EIC phases out by the greater of earned income or adjusted gross income.

Since the maximum $4716 EIC is significantly higher than the allowed investment income of $2900, low income homes having an investment income between $2901 and $4715 will actually lose money. For example, a couple that makes $14,912 and has an investment income of $2901 will find that their investment income has actually cost them $1815 in after tax dollars.

The Government acknowledges that fraud occurs regularly through these parameters, and is increasing IRS auditing and awareness.

The credit is characterized by a three-stage structure that consists of phase-in, plateau, and phase-out.

The same data, in words: for a person with two qualifying children, the credit is equal to 40% of the first $11,790 of earned income, thus reaching a plateau of $4,716 and staying there until earnings increase beyond $15,399, at which point the credit begins to phase out at 21%, reaching zero as earnings pass $37,782. The dollar amounts are indexed annually for inflation.

For married filing jointly, the plateaus travel $2,000 further.

This table, and the graph below, might make it appear as though EITC moves smoothly. In actuality, the amount of the credit is given by an IRS table that divides earned income into fifty dollar increments from $1 to $39,783 (the three cases of no child, one child, and two or more children all end at somewhat awkward numbers).

The EITC is the largest poverty reduction program in the United States. Almost 21 million American families received more than $36 billion in refunds through the EITC in 2004. These EITC dollars had a significant impact on the lives and communities of the nation’s lowest paid working people, lifting more than 5 million of these families above the federal poverty line.

Further, economists suggest that every increased dollar received by low and moderate-income families has a multiplier effect of between 1.5 to 2 times the original amount, in terms of its impact on the local economy and how much money is spent in and around the communities where these families live. Using the conservative estimate that for every $1 in EITC funds received, $1.50 ends up being spent locally, would mean that low income neighborhoods are effectively gaining as much as $18.4 billion.

It is apparent that the EITC offers incentives to work more hours during the phase-in period, when individuals receive an increased tax credit the more hours they work. However, once the income threshold of $14,400 (for single parent families) or $16,400 (for two parent families) is attained; participants in the program have a disincentive to work. They receive less tax credit the more hours worked. Regression analysis shows a small but statistically significant negative coefficient. While the positive incentives of the phase-in period outweigh the negative incentives of the phase-out period; some economists argue that slight changes to the program and integration with other tax advantages, such as the child tax credit, can make it an even more effective work incentive.

Due to its structure, the EIC is effective at targeting assistance to low-income families. By contrast, only 30% of minimum wage workers live in families near or below the federal poverty line, as most are teenagers, young adults, students, or spouses supplementing their studies or family income. Opponents of the minimum wage argue that it is a less efficient means to help the poor than adjusting the EITC.

It is difficult to measure the cost of the EITC to the Federal Government. At the most basic level, federal revenues are decreased by the lower, and often negative, tax burden on the working poor for which the EITC is responsible. In this basic sense, the cost of the EITC to the Federal Government was more than $36 billion in 2004.

At the same time, however, this cost may be at least partially offset by several factors: 1) any new taxes (such as payroll taxes paid by employers) generated by new workers drawn by the EITC into the labor force, 2) any reductions in entitlement spending that result from individuals being lifted out of poverty by the EITC (the poverty line is sometimes a watermark for eligibility for state and federal benefits), and 3) taxes generated on additional spending done by families receiving earned income tax credit.

Millions of American families who are eligible for the EITC do not receive it, leaving billions of additional tax credit dollars unclaimed. Research by the Government Accountability Office (GAO) and Internal Revenue Service indicates that between 15% and 25% of households who are entitled to the EITC do not claim their credit, or between 3.5 million and 7 million households.

The average EITC amount received per family in 2002 was $1,766. Using this figure and a 15% unclaimed rate would mean that low-wage workers and their families lost out on more than $6.5 billion, or more than $12 billion if the unclaimed rate is 25%.

Many nonprofit organizations around the United States, sometimes in partnership with government and with some public financing, have begun programs designed to increase EITC utilization by raising awareness of the credit and assisting with the filing of the relevant tax forms.

The combination of EIC and Refund Anticipation Loans is the primary engine which has built the storefront tax preparation industry, including the very familiar companies of H&R Block, Jackson Hewitt, and Liberty Tax, as well as smaller chains and independent practitioners. RALs have been criticized on various grounds. The loans are often not as easy to be approved for as the advertising implies. In fact, advertisements such as "Rapid Refund" do not make it clear that it's a loan at all. Customers denied the loans are then required to accept the two-week bank product, in which the account merely sits empty waiting for the IRS refund. And although such customers do not pay interest, they still pay all the other fees. In addition, there is the practice known as "cross-collection," in which the loan-issuing bank, such as HSBC or Santa Barbara Bank & Trust in recent years, engages in debt collection for other companies, notably credit card companies. That is, HSBC or Santa Barbara will take all or part of a client's tax refund for purposes of third party debt collection. This practice is often not adequately disclosed to the tax preparation client.

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Source : Wikipedia