Tax Structure and Basic Concepts

CORPORATE TAX PLANNING

BHAKTI GADGIL

Why do you have taxation in your syllabus?

Death and taxes are inevitable. But death does not repeat itself

What is the meaning of IRS? What is the meaning of “The IRS”?

“THEIRS”

What is fine (e.g. interest / penalty)? A tax for doing something wrong

What is tax ? A fine for doing something right

Agenda Tax Structure in India

Tax Departments in corporates

Scheme of Direct taxation

Few basic provisions – MAT, DDT, TDS, Set off

Flow of assessments / appeals

Meaning of Tax Planning

TAX STRUCTURE

IN INDIA

Introduction “It was only for the good of his subjects that he

collected taxes from them, just as the Sun draws moisture from the Earth to give it back Thousand fold" – Kalidas

Tax System existed in ancient India as well Kautilya’s Arthashastra Tax on agricultural products King was responsible for collection of taxes

It existed in other European countries as well Direct or Indirect Form Levied by Central as well as State Govt.

Why Taxation?

Generates large revenue

Influence economic activities

Reduction in inequalities

Involves no interest burden like borrowing

No rise in prices like deficit financing

Indian tax system Inadequate tax revenue As a % of GDP only 16%, globally it is 30%, UK –

38%, Canada – 48%, USA – 50%, Australia –60%

Lopsided & regressive – Inequity In the past relied on IDT, burdens poor sections Leads to inequalities

Inflexible – Completely leaves agriculture

Large Evasion Corrupt business practices, ineffective tax enforcements, high rates of taxes

Shortcomings Adverse effect on saving Inverse relationship of tax & savings Higher income groups with huge saving

potential – tax rates have been very high

Discourages employment Incentives for capital investments & not for

labor-intensive investments

Distortion of prices Higher IDT, Multiple rates, multiple points

(every step of production)

Gross Tax Revenue

1995-96

2000-03

2003-04

2004-05

2005-06

2006-07

2007-08

0

10

20

30

40

50

60

70

80

Direct TaxIndirect Tax

Tax Policy Improving revenue elasticity lower DT rates, higher base – large production lower IDT rates – larger sales

Inducing growth Lower excise for recession hit industries Tax Holidays Lower import duty on raw material – growth R&D Incentives – economic performance

Promoting globalization – customs duty on EXIM, Excise duty for globally competitive pricing

Tax Department

in corporates

PROFIT AND LOSS ACCOUNT

Income 1000

Expenditures 874

Profit before Tax 126

Provision for Tax (40)Fringe Benefit Tax (3)Deferred Taxes 1 42

Profit after Tax 84

Role in financials

BALANCE SHEET

Liabilities Asset

Shareholders’ Funds 996 Fixed assets 269 Loan Funds 4 Investments 205

Deferred Tax Asset 55Deferred Tax Liability (29)Net Current Assets 500(Includes Advance Payments of ____ Income Tax) _____1000 1000

NOTES TO ACCOUNTSContingent Liabilities

Role in financials

In respect of certain completed assessments where matters are under appeal by the Company

XXX

In respect of appeals decided in favour of Company, but disputed further by the Income Tax authorities.

XXX

Interactions of Tax Department

Tax Department

Management

Business Divisions

Tax AuthoritiesAccounts Department

Consultants / counsels

Broad functions

Tax planningTax

Management

Prosecution

Interest

Penalty

Cash outflow

Cost

Functions of Tax Department• Return Filing• Payment of TaxCompliance

• Tax Audit, TP Audit• Other CertificationsStatutory Reporting

• Tax Planning• M&A• Contract StructuringAdvisory

• Tax Authorities• Consultants & OthersRepresentations

• Knowledge Management• Tax AccountingOthers

Statutory requirement to obtain Tax Audit Report, if gross receipts exceeds specified limit in a year

Failure results in levy of penalties

Prescribed form - Form 3CD

Covers Business Income, FBT, losses carried forward / set off, deductions claimed, tax deducted at source, some ratios

Compliance – Tax Audit

E-filing procedure for corporate tax returns Form ITR 1 and various schedules thereof Documents to be prepared and maintained for

assessment1.Computation of total income2.Notes to computation of income3.Annexures to Computation4.Tax Audit Report and its annexures5.Transfer Pricing Report and its annexures6.Other documents supporting the return (e.g. TDS

certificates)

Compliance – Return Filing

Scheme of taxation

Major types of taxes Direct Taxation Personal Tax Corporate Tax Wealth Tax

Indirect Tax

Excise & Service Tax VAT – Value Added Tax Customs

Scheme of Income Tax

Domestic

Individual Salary, HP,

CG, OI

Corporate BI, CG, OI

International

Individual Salary

Corporate Royalty,

FTS, Supply

May have implications

of corp. compliance

Tax Legislation in India

I.T. Act, 1961 (ITA) and I.T. Rules, 1962 (ITR) form major part of tax legislation.

Annual Finance Act - Amendments to the tax legislation and tax rates.

CBDT - The apex authority responsible for tax administration.

Tax Recovery Mechanism - penal interest / levy of penalty / in few circumstances, prosecution.

Income Resident Resident but Not Ordinarily

Resident

Non Resident

Received in India

Deemed to be received in India

Accrued in India

Deemed to be accrued in India

Accrued/received outside

India

If derived from bus controlled from India

Charge of Tax

Income from Salary (Sections 15 to 17)

Income from House Property (Sec 23 to 27)

Profits and Gains of Business or Profession (Sections 28 to 44DA)

Capital Gains (Sections 45 to 55A)

Income from Other Sources (Sect 56 to 59)

Heads of Income

Tax collection mechanism

Advance Tax

Self Assessment Tax – SA Tax

Tax Deduction at Source - TDS

Tax Collection at Source - TCS

Dividend Distribution Tax - DDT

Due Date Amount of Tax

15th June 15% of estimated tax

15th September 45% of estimated tax

15th December 75% of estimated tax

15th March 100% of estimated tax

Corporate Advance Tax

Tax Calendar

Few direct tax

provisions

Taxation of Companies - MAT

Step 1 – Compute Tax as per normal provisions

Step 2 – Compute Tax @ 15% on Book Profits

Identify whichever is higher of Step 1 & 2

If step 2 is higher, tax is payable under MAT

Book Profit under MATAdj. Particulars Comments

PAT

Add: Tax Provision, deferred tax

For wealth tax, gift tax, FBT no adjustment is needed

Transfer to reserves

Provision for liabilities

Provision for assets such as doubtful debts, fixed assets, exchange rate fluctuation, damaged stock, etc. is not needed

Losses of subsidiaries

Dividend

Depreciation

Minimum Alternate Tax (MAT)Adj. Particulars Comments

Adjusted profit

Less: Amount withdrawn from reserves

Depreciation not arising on a/c of revaluation

Revaluation reserve

Loss or unabsorbed depreciation whichever is lower

Book Profits

MAT @ 15%

MAT Credit

MAT Credit = MAT - Normal Tax

To be utilized in the year when company falls in normal tax bracket

MAT credit to be carried forward for 10 A.Y.s

Set off = Normal Tax - MAT

Example – Year 1Particulars Normal Tax

(Step 1)MAT

(Step 2)

PBT 100 100

+/- Tax adjustments e.g. exemption -64 0

Taxable Income 36 100

Tax @ 30% / 15% 11 15

Tax Payable (Cash flow) 15

MAT credit 4

Example – Year 5Particulars Normal Tax

(Step 1)MAT

(Step 2)

PBT 100 100

+/- Tax adjustments -40 0

Taxable Income 60 100

Tax @ 30% / 15% 18 15

MAT Credit untilised (18-15) 3

Tax Payable 15

MAT credit carried forward 1

Observations

MAT is a only cash flow item

The tax liability never exceeds the liability under the normal provisions

Cash flow never exceeds tax payable under MAT

Payable by domestic corporate assessee

@ 15% plus surcharge and education cess, as the case may be

On the amount of dividend distributed

At the time of declaration, distribution or payment of dividend whichever is earlier

Within 14 days of the earliest event mentioned above

Dividend Distribution Tax

Dividend Distribution Tax

Holding Co

Subsidiary Co

Subsidiary of subsidiary Co

Cascading effect

No Cascading

effect

Mechanisms to collect taxes in advance

Payer is responsible for the following:1. Deduct the tax as per ITA provisions2. Pay the tax into the Govt’s treasury 3. Issue TDS Certificates to the payee4. File quarterly statements / tax returns

Implications for default Interest, Penalty, Disallowance of expenses on gross basis

TDS Rates

TDS Provisions

Payments covered by TDS provisions:

1. Salary – Section 192

2. Interest other than int on securities – 194A

3. Contractual Payments – Section 194C

4. Payment of Rent – Section 194I

5. Professional Payments – Section 194J

6. Payment to non residents – Section 195

TDS Provisions

Deduction at the time of payment Tax to be estimated for the year and

deducted every month Salary to be computed as per ITA Every year circular is issued by CBDT,

explaining how to deduct tax u/s 192 Employer can consider:1. Loss from Self Occupied House Property2. Income from Other Sources3. Income from previous employment4. Deductions under chapter VI-A as specified

TDS from Salary

Applicable if aggregate payments in an year exceed Rs. 30,000/-

Labour contracts / work contracts

Payment or credit, whichever is earlier

Many clarifications issued by CBDT

Default in deduction / payment results in disallowance of expenditure in the hands of payer

TDS from contractual payments

Case Study – Advertising Contracts Client makes payment to advertising agency

and advertising agency makes payment to media

Direct payment to media When advertising agency makes payments to

artists Payment for putting up hoarding? If space is hired for putting up hoarding?

Payments to airlines / travel agents for purchase of tickets?

TDS u/s 194C - FAQs

TDS u/s 194C - FAQs Sponsorship for debates, sport event, etc. to

earn publicity?

Payment to C&F agents?

Payment to courier agency

Payments to restaurants / cafes

Payments to recruitment agencies

Procurement of orders

TDS u/s 194C - FAQs

Electrical contracts?

Maintenance Contracts?

Reimbursements

Paying any sum

No withholding if: - Two separate bills -Reimbursements supported by vouchers

Applicable if aggregate payments in an year exceed Rs. 1,80,000/-

Rent for land, building, equipment, furniture

Payment or credit, whichever is earlier

Many clarifications have been issued by CBDT

Default in deduction / payment results in disallowance of expenditure in the hands of payer

TDS from Rent

TDS u/s 194I - FAQs

Applicability of limit to joint holders?

If the deposit is to be adjusted against future rent?

Composite agreement for taking premises on lease & provision of manpower?

Non-refundable deposit?

Warehousing charges?

TDS u/s 194I - FAQs If municipal taxes, ground rent borne by the

tenant?

Part use of the premises?

TDS on service tax element?

TDS credit

TDS from advance rent covering two FYs

Subsequent to TDS, advance rent becomes refundable due to cancellation / Transfer, etc.

TDS u/s 194I - FAQs Hotel accommodation

If taken on regular basis? If earmarked rooms made available at

specified rate for specified period? Hotel is under an obligation to provide

specific rooms during the agreement period If agreement is only to fix the room tariffs? If payment made by individual employee?

Joint owners?

If aggregate payments in an year exceed 30K

Payments made to professionals / experts

Recently royalty payments also included

Payment or credit, whichever is earlier

Many clarifications have been issued by CBDT

Default in deduction / payment results in disallowance of expenditure

TDS from professional payments

Similar to 194C

TDS to be deducted on service tax!!

194C & 194J both are for services only

Differentiating factor is whether specialised knowledge / education / training is required to provide the service

TDS u/s 194J

Any sum chargeable under the Act

Payment or credit, whichever is earlier

Many clarifications have been issued by CBDT

Default in deduction / payment results in disallowance of expenditure

Important steps for TDS u/s 195:1. Determine taxability of payments under ITA2. Determine taxability of payments under the DTAA3. Determine most beneficial provisions assessee

TDS from payments to non residents

TDS u/s 195 - procedure

Remitter

15CB – CA certificate

www.tin-nsdl.com

Upload remittance

details

System generates

15CA

15CA to be signed

Submit papers to RBI / AD

RBI / AD remits the

money

15CA / CB to AO

Set off of lossesLoss under the head

Inter-source adjustments

Inter-head adjustment

Carry forward & set off

House Property

House Property All House Property

Business Income

Business Income / Speculation Gain

Other than salary Business Income / Speculation Gain

Short Term CG Capital Gains Capital Gains Capital Gains

Long Term CG Long Term Gain Long Term Gain Long Term Gain

Other Sources Other Sources All Other Sources

Speculation Loss

Speculation Gain Speculation Gain Speculation Gain

Assessment procedure

Return

143(1) Intimation

143(3) Scrutiny

Assessment

147 Reassessment

263 CIT enquiry

Rectification & appeals

can be filed

Appellate Procedure

SC – Matters of Law

Jurisdictional HC – Matters of Law

ITAT – Matters of law & facts

CIT(A) – Matters of law & facts

Penal consequences Interest

Compensation for withholding of taxes payable on due dates Liability is automatic

ProsecutionGrave violations of law

PenaltyMain deterrence against acts of omission and commission in contravention of statutory provisions

Tax Planning

Tax Planning

Tax Avoidance

Tax Evasion

Tax Management

Basic Concepts

Tax Planning Comprises arrangements by which

Tax laws are fulfilled

All legal obligations are met

Statute is followed in strict words

No intention to deceit the legal spirit behind the law

Tax Planning ways

Avoid/ postpone/ spread Income Recognition

Change Tax Jurisdictions

Control the Classification of Income

Location of business, nature of business

Form of organization

Employee compensation

Tax Avoidance

Considers loopholes in law

Has a legal sanction

Intentional

Carries no public disgrace

No mala fide motive

Legitimate arrangement

Tax Evasion

Tax is illegally avoided

Evade tax through unfair means

Tax omission

Unlawful & legally punishable

Tax Management

Mainly compliance

Past, present, future

Effective tax management minimizes risk

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