Taxation interview questions and answers - Taxation FAQs

What is income tax? How is it calculated?

Income tax is an annual tax charged on income of a person by the government. It is charged for the corresponding assessment year at the rates laid down by the Finance Act for the assessment year in respect of the previous year.

Income of the person is categorized under the following five heads
  • Salaries
  • Income from house property
  • Profits and gains of business or profession
  • Capital gains
  • Income from other sources.
Income is calculated under these heads separately and accordingly tax is calculated using the income tax slab issued by the government every financial year.

Define Assessment Year.

Assessment year is the period that starts from 1 April and ends on 31 march. It is the year immediately succeeding the financial year wherein the income of the previous financial year is assessed. Government use assessment year for calculating tax on the previous year.

For example : If the current assessment year is 2015-16, which starts from I April 2015 and ends on 31 March 2016. To this assessment year financial year is 2014-15, starting from I April 2014 and ends on 31 March 2015. You will be calculating income tax for financial year in the assessment year.

Define Previous Year.

Previous Year is the year in which the income earned becomes taxable in the following assessment year. It can be stated as the Financial year preceding the Assessment year. For example- If the present assessment year is 2015-16 then the previous year will be 2014-2015.

Define financial year?

A twelve month period starting from 1 April and ending at 31 March which is used for calculating various annual financial statements in businesses and organization is known as financial year.

Differentiate between Financial Year, Assessment Year and Previous Year?

Assessment year and previous year are the types of financial year which consists of twelve months starting from 1 April to 31 March. Previous financial year is the preceding year of assessment financial year.

Define the term person?

A “person” means an individual, an ordinary partnership, a non-juristic body of person and an undivided estate. The term "person" under the Income Tax Act includes an individual, a Hindu Undivided Family, a Company, a Firm, an Association of Persons, a Local Authority and Artificial Juridical persons.

Who is an assessee?

An "Assessee" is a person who is liable to pay tax or any other sum of money under the Act.

It includes
1. Every person in respect of whom any proceeding under this Act has been taken for the assessment of his income or of the income of any other person in respect of whom he is assessable, or of the loss sustained by him or by such other person, or of the amount of refund due to him or to such other person;
2. Every person who is deemed to be an assessee under any provision of this Act;
3. Every person who is deemed to be an assessee in default under any provision of this Act.

What do you understand by total income?

Total Income is the amount on which the Income Tax is paid. Total income include all income that accrue, arise, earned or received in India (except those income which accrues or arises outside India). Total Income is the total amount earned by an individual or organization, including income from employment or providing services, revenue from sales, payments from pension plans, income from dividends, or other sources. Total income is generally calculated for the assessment of taxes, evaluating the net worth of a company, or determining an individual or organization's ability to make payments on a debt.

How many heads are there under total income? Name them.

There are five heads under total income. They are
  • Income from Salaries
  • Income from house property
  • Profits and gains of business or profession
  • Capital gains
  • Income from other sources

At what rate firms are required to pay tax on their income?

Income Tax is paid at 30% of taxable income. Surcharge is charged at 10% of the Income Tax, where taxable income is more than Rs. 1 crore. (Marginal Relief in Surcharge, if applicable) and Education Cess is 3% of the total of Income Tax and Surcharge.
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Discussion Board
53. What do you understand by dissolution of firm?

53. What do you understand by dissolution of firm?


Dissolution of firm means assets of firm are realized and liabilities are paid off and the surplus, if any is distributed among the partners according to their right. It is to be noted that ‘dissolution of Firm’ involves dissolution of partnership but dissolution of partnership may not lead to dissolution of firm.
Shikha Pandey 02-5-2015
52. What are allowable and dis-allowable expenditure?

52. What are allowable and dis-allowable expenditure?


Allowable expenditure

1. the cost of goods bought for the business
2. the prime costs of running a business asset
3. wages and salaries of employees
4. heat, light and cleaning of business premises
5. repairs to and maintenance of business premises
6. postage and stationery
7. business telephone and rental
8. bank charges and interest on business loans and overdrafts
9. travel and entertaining if the sole purpose is to retain or acquire business
10. legal costs of defending business rights and renewing leases of less than 50 years duration
11. bad debts and specific doubtful debts
12. protective clothes necessary for the business

Dis allowable expenditure

1. private expenditure
2. clothes bought for ordinary everyday wear
3. acquisition and depreciation of business assets
4. your own wages or salary
5. your business partner's wages or salary
6. payments to charities
7. travel expenses between your home and place of business
8. a general (non-specific) provision against doubtful debts
9. legal costs of acquiring land and buildings
10. fines for breaking the law
11. your own life, accident or sickness assurance
12. costs of alterations, additions or improvements to business premises
Shikha Pandey 02-5-2015
51. How will you calculate House Rent Allowance (HRA)?

51. How will you calculate House Rent Allowance (HRA)?


How to Calculate House Rent Allowance ( HRA)-

Minimum of following three amounts is available as HRA exemption:

1. Actual House Rent Allowance provided by employer to employee.

2. House Rent paid in excess of 10% of Salary.

3. 50% of Salary in case House is located in Metro cities (Mumbai, Delhi, Kolkata, Chennai) or 40% in case of any other cities.

For all three conditions mentioned above relevant period is very important. Means if there is any change in Salary, HRA paid to employee, location of rented house and actual rent paid by employee HRA need to calculate from that relevant change Hence one should avoid calculating HRA on annual basis if there is any change in above factors.

Meaning of Salary for calculating HRA (Basic Salary + Dearness allowance if terms of employment so provide + fixed percentage of turnover achieved by employee)
Shikha Pandey 02-5-2015
50. What are the types of Provident funds?

50. What are the types of Provident funds?


Below listed are the 4 types of provident funds:

Recognized Provident Fund (RPF)- RPF schemes must be approved by The Commissioner of Income Tax and pplicable to an organization which employs 20 or more employees.

Unrecognized Provident Fund (URPF)- URPF are not approved by The Commissioner of Income Tax and is started by employer and employees in an establishment.

Statutory Provident Fund (SPF)- This Fund is mainly meant for Government/University/Educational Institutes (affiliated to university) employees.

Public Provident Fund (PPF)- PPF involves minimum contribution of Rs.500 per annum and the maximum contribution is Rs. 100,000 per annum. The contribution made along with interest earned is repayable after 15 years, unless extended.
Shikha Pandey 02-5-2015
49. What do you understand by transfer income?

49. What do you understand by transfer income?


Transfer of Income means when someone retains the ownership of an asset but makes an agreement to transfer its income, but still the income is considered as your income and it will be added to the total income.
Shikha Pandey 02-5-2015
48. What is excise duty?

48. What is excise duty?


Central Excise duty is an indirect tax levied on those goods which are manufactured in India and are meant for home consumption. The taxable event is 'manufacture' and the liability of central excise duty arises as soon as the goods are manufactured. It is a tax on manufacturing, which is paid by a manufacturer, who passes its incidence on to the customers.
Shikha Pandey 02-5-2015
47. What is form c & d in sales tax?

47. What is form c & d in sales tax?


Form C
The sales tax on inter-state sale is 4% or the applicable sales tax rate for sale within the State whichever is lower if the sale is to a dealer registered under CST and the goods are covered in the registration certificate of the purchasing dealer. The purchasing dealer is eligible to get these goods at concessional rate if a declaration in C form is submitted to the selling dealer.

Form D
Sale to government is taxable 4% or applicable sales tax rate for sale within the State whichever is lower. This concession on CST is applicable if Form D is issued by the government department which purchases the goods.
Shikha Pandey 02-5-2015
46. What is Entertainment Tax?

46. What is Entertainment Tax?


Entertainment tax is imposed on every financial transaction that is related to entertainment such as movie tickets, major commercial shows and big private festivals, amusement parks, video games, exhibitions, celebrity stage shows, sports activities,etc.

As per the Indian Constitution, entertainment is included in List 2. Revenue collected from entertainment tax is reserved primarily for the state governments.
Shikha Pandey 02-5-2015
45. What are the deductions under Salary Head? Name the items.

45. What are the deductions under Salary Head? Name the items.


Deductions that are made under salary head are Entertainment allowance and Professional tax.

Entertainment Allowance- Entertainment allowance received is already included in the income of the employee and then a deduction is made only for government employees. A sum equal to 1/5th of salary (excluding all allowances, benefits and other perquisites) or Rs. 5,000, whichever is less is being deducted.

Professional Tax- Professional Tax is imposed by the government on employment by whatever name called, under Article 80C 276 of the Constitution and shall be allowed as a deduction. [Sec. 16(iii)]
Shikha Pandey 02-5-2015
44. What do you mean by Commercial Tax?

44. What do you mean by Commercial Tax?


Commercial Tax is a tax imposed on the scheduled Commercial goods as indirectly collected by the seller or purchaser against his business transaction which now comprises of Sales Tax, Entertainment, Luxury Tax, Entry Tax and Profession Tax.
Shikha Pandey 02-4-2015
43. What is luxury tax?

43. What is luxury tax?


A tax imposed on goods and services that are non-essential or not included in the necessities. Luxury tax is included in the indirect tax and is incurred by those who purchase or use the product. Ad valorem tax or progressive tax are some luxury tax that is imposed on high priced goods such as cars above a certain value or engine size, villas etc.
Shikha Pandey 02-4-2015
42. What is Excise & Service Tax? What is the difference?

42. What is Excise & Service Tax? What is the difference?


Excise tax is an indirect tax that is imposed on the manufacture, sale or use on certain types of goods and products. Excise taxes are generally imposed on goods such as cigarettes or alcohol, also in the price of an activity such as gambling. Excise taxes may be imposed by both Federal and state authorities.

Service tax is an indirect tax imposed by the government on service providers on certain service transactions, but is actually paid by the customers. Services provided by air-conditioned restaurants and short term accommodation provided by hotels, inns, etc are included in the taxable services.

The major difference between excise tax and service tax is that excise tax is charged on manufactured goods and sales tax is imposed on certain services provided.
Shikha Pandey 02-4-2015
41. Explain the procedure to calculate Provident Fund, ESI, VAT and Sales Tax.

41. Explain the procedure to calculate Provident Fund, ESI, VAT and Sales Tax.


Provident Fund- Provident fund is calculated at 12% on the basic salary which is deducted from employee's salary plus 12% on the basic is contributed by the employer. So, the aggregate 12% + 12 % is remitted to the Provident Fund Department.
ESI- stands for Employee State Insurance and is calculated at 1.75% on the gross salary of the employees whose salary is below Rs. 10000 per month and employer contributes 4.75% on the gross salary of the employee and aggregate 1.75% + 4.75% is remitted to the ESI Department
VAT- VAT percentage is 1, 4, 12.5%. It is a tax which is charged on the basic value of the product by the seller from the buyer and the same is remitted to the Sales Tax Department.

Sales tax: Same as VAT
Shikha Pandey 02-4-2015
40. What do you mean by fair rent?

40. What do you mean by fair rent?


Fair rent is the rent charged for a private property that is fixed and registered by a rent officer. Fair rent is decided on the basis of size, condition, and usefulness of the property. Fair rent is calculated in place of mortgage interest, other financing costs and depreciation related to certain property, including land, buildings and non movable equipment. It is calculated only once; at the time the facility begins operation.
Shikha Pandey 02-4-2015
39. What is the difference between the excise duty and the sales tax?

39. What is the difference between the excise duty and the sales tax?


Excise Duty is an indirect tax imposed on goods that are manufactured and produced within the country. This is paid by the manufacturer on the finished good when it goes out of the factory. Excise Duty is levied on all goods, except certain goods that are exempted. There are three types of Central Excise duties collected in India namely: Basic Excise Duty, Additional Duty of Excise, Special Excise Duty.

Sales Tax is imposed on the finished product which is paid by the consumer. Sales tax is imposed on sale or purchase within the State. Different states levy different levels of sales tax, while there is a Central Sales Tax levied on sale or purchase in the course of interstate trade.
Shikha Pandey 02-4-2015
38. Can a person fill a NRI in an Income tax form if he has been out of India for six months though he is Indian citizen?

38. Can a person fill a NRI in an Income tax form if he has been out of India for six months though he is Indian citizen?


He can fill NRI in an Income tax form only if he does not satisfy any of these two conditions:

He is in India in the previous year for a period of 182 days or more or

He is in India for a period of 60 days or more during the previous year and 365 days or more during the four years immediately preceding the previous year.
Shikha Pandey 02-4-2015
37. If a NRI buys property in India, does he has to pay property tax?

37. If a NRI buys property in India, does he has to pay property tax?


Any income or capital gain that the NRI generates from the sale/ rent or lease of a valued property or an asset based in India will be taxed as per the Income Tax rules. f the property is more than 3 years old, long term capital gains tax will be incurred on the sale of the property. On long term capital gains, tax is payable at 20%.
Shikha Pandey 02-4-2015
36. What is the difference in between Fund flow Vs. Cash Flow?

36. What is the difference in between Fund flow Vs. Cash Flow?


Fund Flow:

Cash Flow:

1. Fund flow is based on working capital.

Cash flow is based on only one element of working capital that is cash.

2. Fund flows tells about the various sources from where the funds are generated.

Cash flow starts with the opening balance of cash and closes with the closing balance of cash.

3. Fund flow is useful for understanding long term financial strategy.

Cash flow is useful for understanding short term strategies that affects liquidity of the business.

4. Changes in current assets and current liabilities are shown through the schedule of changes in working capital.

Changes in current assets and current liabilities are shown in the cash flow.
Shikha Pandey 02-4-2015
35. When Deferred Tax Asset & Deferred tax liability arises?

35. When Deferred Tax Asset & Deferred tax liability arises?


Deferred tax asset arises when the expenses are recorded in the income statement before they are required to be recognized by the taxing authority. Also when revenue is being taxed before it is taxable in the income statement.
Deferred tax liability arises from different depreciation methods being used for tax as depreciable assets are reported as non current.
Shikha Pandey 02-4-2015
34. What items fall under the category of ‘securities’?

34. What items fall under the category of ‘securities’?


'Securities' are defined under Section 2(h) of the Securities Contracts (Regulation) Act, 1956 (SCRA) to include:

Shares, scrips, stocks, bonds, debentures, debenture stock or other marketable securities of a like nature in or of any incorporated company or other body corporate

Derivatives

Units or any other instrument issued by any collective investment scheme to the investors in such schemes

Security receipt as defined in Section 2(zg) of the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002

Such other instruments as declared by the central government; and
Rights or interest in securities

Equity-oriented mutual funds (not debt-oriented mutual funds)
Shikha Pandey 02-4-2015