Taxation-direct and indirect DEC 2025

Description

Taxation- Direct and Indirect

Dec 2025 Examination

 

 

Q1. A company engaged in manufacturing and trading activities provides the following data for the financial year 2022-23. Using the information in the table below, compute the total tax liability (including both direct and indirect taxes) for the year, considering the following: (i) The company is eligible for input tax credit (ITC) on GST paid on raw materials and packing materials but not on office equipment. (ii) The applicable corporate income tax rate is 25% plus health and education cess at 4%. (iii) GST rates: Raw materials and finished goods at 18%, packing materials at 12%, office equipment at 18%. (iv) All sales are within India and are subject to GST. (v) Ignore surcharge and any other deductions or exemptions. (vi) All purchases and sales are exclusive of GST. (vii) Calculate the net GST payable after ITC and the net income tax payable after considering GST as not deductible for income tax purposes. Present all intermediate steps and final tax liabilities.

Particulars	Amount (Rs.)
Sales of finished goods	1,20,00,000
Purchase of raw materials	40,00,000
Purchase of packing materials	10,00,000
Purchase of office equipment	5,00,000
Other operating expenses (excluding taxes)	20,00,000

 (10 Marks)

Ans 1.

Introduction

Tax computation for a manufacturing and trading company requires a systematic understanding of both direct and indirect taxes. While GST affects the cost of inputs and the tax collected on outputs, corporate income tax determines the final tax burden on the company’s profits. The interaction between these two tax systems must be carefully handled because GST paid on eligible inputs can be claimed as input tax credit, whereas GST is not deductible when computing taxable income under direct tax laws. In this case, the company purchases raw

 

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Q2. UrbanMart, a national retail chain, regularly makes payments to vendors for services, rent, and commissions. Recently, the finance team encountered confusion over whether certain promotional payments to influencers should be classified as professional fees or commission, leading to uncertainty about the correct TDS rate. The team is under pressure to process payments quickly to maintain supplier relationships but is wary of non-compliance penalties. The CFO must decide whether to prioritize speed or seek legal clarification, which could delay payments. Evaluate the decision-making process of a retail chain’s finance department when faced with ambiguity regarding the nature of payments and applicable TDS rates. Critique their approach to risk management and compliance, and recommend how they should balance operational efficiency with strict adherence to TDS provisions, supporting your answer with relevant statutory references. (10 Marks)

Ans 2.

Introduction

Tax Deducted at Source (TDS) is one of the most critical compliance responsibilities for a retail chain like UrbanMart, especially because vendor payments occur frequently and cover diverse categories such as services, rent, commissions, and emerging expenses like influencer promotions. A single misclassification can result in short deduction of tax, interest under section 201(1A), and possible penalties, exposing the company to significant regulatory risk. The recent confusion regarding whether influencer promotional payments fall under

 

 

Q3(A). A partnership firm engaged in trading has the following details for the previous year: (i) Turnover: Rs.1,50,00,000 (all taxable under GST at 12%). (ii) Purchases from registered dealers: Rs.90,00,000 (GST @12% paid, full ITC claimed). (iii) Purchases from unregistered dealers: Rs.10,00,000 (GST not paid, reverse charge applicable, but GST paid after 4 months of due date). (iv) The firm paid professional fees of Rs.5,00,000 to a resident consultant, but failed to deduct TDS. (v) The firm paid rent of Rs.6,00,000 to a resident individual, deducted TDS @5% but deposited it 2 months late. (vi) The firm received a government grant of Rs.2,00,000, which is exempt from income tax but not from GST. (vii) The firm claimed depreciation of Rs.3,00,000 on fixed assets. Prepare a step-wise computation of: (a) total disallowance under section 40(a)(ia) for TDS defaults, (b) net GST payable in cash after all set-offs and adjustments, and (c) taxable income under the head ‘Profits and Gains of Business or Profession’ for the assessment year. (5 Marks)

Ans 3a.

Introduction

A partnership firm must comply with both TDS regulations under the Income Tax Act and GST provisions under the CGST Act. Any failure to deduct or deposit TDS may lead to disallowance of expenditures under section 40(a)(ia), while incorrect GST credit claims affect net cash liability. In this case, the firm has TDS defaults, delayed GST payments under reverse charge, and exempt income, all of which influence tax calculations. A systematic and legally grounded

 

Q3(B). A registered dealer in Maharashtra makes the following outward supplies in April 2023: (i) Intra-state supply of taxable goods: Rs.20,00,000 (GST @12%), (ii) Inter- state supply of taxable services: Rs.8,00,000 (GST @18%), (iii) Intra-state exempt supply: Rs.4,00,000. The dealer has the following input tax credits available: (a) IGST: Rs.1,20,000, (b) CGST: Rs.60,000, (c) SGST: Rs.60,000. 15% of the inputs and input services are used for exempt supplies. Compute: (a) the amount of ITC to be reversed due to exempt supplies, (b) the order and manner of utilization of ITC for payment of output tax, and (c) the net GST payable under each head (CGST, SGST, IGST) after all adjustments. Show all steps, including apportionment and utilization rules. (5 Marks)

Ans 3b.

Introduction

A registered dealer in Maharashtra must compute GST liability accurately by applying rules relating to outward tax, ITC apportionment for exempt supplies, and the statutory order of ITC utilization. When a dealer supplies both taxable and exempt goods or services, proportionate reversal of ITC becomes mandatory. Additionally, GST must be paid under IGST, CGST, and SGST according to the place-of-supply rules. A structured theoretical understanding followed by precise calculations ensures compliance with GST law and prevents incorrect credit utilization.

Concept and