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Corporate Taxation. Prof. S B Gabhawalla. Course Outline. Taxation. Income Tax: Scheme of the Act. Income. Exemption. Receipt vs. Income Capital vs. Revenue Scope of Income. Exemptions. Heads of Income. H1. H2. H3. H4. H5. Aggregation Rules. Aggregation. Deductions. Deductions. - PowerPoint PPT Presentation
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Corporate TaxationCorporate Taxation
Prof. S B GabhawallaProf. S B Gabhawalla
Course OutlineCourse OutlineSessionSession TopicTopic
1.1. Introduction to Taxation & Broad SchemesIntroduction to Taxation & Broad Schemes
2-4.2-4. Individual TaxationIndividual Taxation
5-6.5-6. Corporate TaxationCorporate Taxation
7-8.7-8. Allied Direct Tax ConceptsAllied Direct Tax Concepts
9-10.9-10. International TaxationInternational Taxation
Commodities Transaction
Tax
BankingCash
TransactionTax
SecuritiesTransaction
Tax
FringeBenefit
Tax
WealthTax
IncomeTax
Dividend Distribution
Tax
Direct Taxes
TaxationTaxation
Indirect Taxes
Centre State Local
Customs
Excise
Service Tax
Sales Tax/VAT
Profession Tax
Stamp Duty
Octroi
Property Taxes
User Charges
Income Tax: Scheme of Income Tax: Scheme of the Actthe Act
Receipt vs. IncomeReceipt vs. Income– Capital vs. RevenueCapital vs. Revenue– Scope of IncomeScope of Income
Income
Exemption
H1 H3H2 H4 H5
Aggregation
Deductions
IncomePerson
TAX
• ExemptionsExemptions
• Heads of IncomeHeads of Income• Aggregation Rules Aggregation Rules
• DeductionsDeductions• Tax LiabilityTax Liability
Scope of IncomeScope of Income
Non TaxableTaxableOutside India
TaxableTaxableIn India
Non ResidentResidentPerson
Income
--Residential Nexus--
--T
erri
tori
al N
exus
--
(To be refined later)
Heads of IncomeHeads of Income
SalariesSalaries Employer – Employee Employer – Employee RelationshipRelationship
Income from Income from House PropertyHouse Property
Buildings not used for Buildings not used for businessbusiness
Business IncomeBusiness Income Frequency & IntentionFrequency & Intention
Capital GainsCapital Gains Transfer of a Capital Transfer of a Capital AssetAsset
Income from Other Income from Other SourcesSources
Residuary Head of Residuary Head of IncomeIncome
Illustrative Format..Illustrative Format..NAME OF THE ASSESSEE:ASSESSMENT YEAR: PREVIOUS YEAR ENDED ON:RESIDENTIAL STATUS: PERMANENT ACCOUNT NUMBER:
COMPUTATION OF INCOME
INCOME FROM SALARIES xxINCOME FROM HOUSE PROPERTY xxBUSINESS INCOME xxCAPITAL GAINS xxINCOME FROM OTHER SOURCES xxGROSS TOTAL INCOME xxLESS DEDUCTIONS xxNET TOTAL INCOME xx
COMPUTATION OF TAX LIABILITY
TAX PAYABLE ON INCOME xxADD SURCHARGE xxADD EDUCATION CESS xxADD SECONDARY & HIGHER EDUCATION CESS xxGROSS TAX PAYABLE xxLESS TAX DEDUCTED AT SOURCE & ADVANCE TAXES xxNET TAX PAYABLE / REFUNDABLE xx
Tax Rates: Individual : Tax Rates: Individual : NormalNormalIncomeIncome TaxTax SCSC ECEC SHESHE
CCTotalTotal
0-1500000-150000 00 00 00 00 00
150001-300000150001-300000 1010 00 22 11 10.3010.30
300001-500000300001-500000 2020 00 22 11 20.6020.60
500001-1000000500001-1000000 3030 00 22 11 30.9030.90
1000001 onwards1000001 onwards 3030 10 10 11 22 11 33.9933.99
1 Applicable from the first rupee of tax (Marginal Relief Available)
Tax Rates: Individual : Tax Rates: Individual : LadiesLadiesIncomeIncome TaxTax SCSC ECEC SHESHE
CCTotalTotal
0-1800000-180000 00 00 00 00 00
180001-300000180001-300000 1010 00 22 11 10.3010.30
300001-500000300001-500000 2020 00 22 11 20.6020.60
500001-1000000500001-1000000 3030 00 22 11 30.9030.90
1000001 onwards1000001 onwards 3030 10 10 11 22 11 33.9933.99
1 Applicable from the first rupee of tax (Marginal Relief Available)
Tax Rates: Individual : Tax Rates: Individual : Senior CitizensSenior CitizensIncomeIncome TaxTax SCSC ECEC SHESHE
CCTotalTotal
0-2250000-225000 00 00 00 00 00
225001-300000225001-300000 1010 00 22 11 10.3010.30
300001-500000300001-500000 2020 00 22 11 20.6020.60
500001-1000000500001-1000000 3030 00 22 11 30.9030.90
1000001 onwards1000001 onwards 3030 10 10 11 22 11 33.9933.99
1 Applicable from the first rupee of tax (Marginal Relief Available)
Tax Rates: OthersTax Rates: Others
Assessee / IncomeAssessee / Income TaxTax SCSC ECEC SHESHECC
TotalTotal
Partnership Firms & Domestic CompaniesPartnership Firms & Domestic Companies
0-100000000-10000000 3030 00 22 11 30.9030.90
10000001 onwards10000001 onwards 3030 10 10 11 22 11 33.9933.99
Foreign CompaniesForeign Companies
0-100000000-10000000 4040 00 22 11 41.2041.20
10000001 onwards10000001 onwards 4040 2.5 2.5 11 22 11 42.2342.23
1 Applicable from the first rupee of tax (Marginal Relief Available)
Salaries: The Starters..Salaries: The Starters.. Test:Test: Employer – Employee RelationEmployer – Employee Relation
Basis of Charge:Basis of Charge: Accrual or Receipt Accrual or Receipt whichever is whichever is
earlierearlier
Scheme (Taxation): Primarily Gross Scheme (Taxation): Primarily Gross BasisBasis
Scheme of TaxationScheme of Taxation Basic SalaryBasic Salary Add Allowances Add Allowances (to the extent not exempt)(to the extent not exempt)
Add Perquisites Add Perquisites (as valued)(as valued)
Add Retirement Benefits Add Retirement Benefits (to the extent (to the extent not exempt)not exempt)
Less Less Profession TaxProfession Tax Entertainment AllowanceEntertainment Allowance
Benefits in Kind: Broad Benefits in Kind: Broad LandscapeLandscape Purely Official – Not PerquisitePurely Official – Not Perquisite Purely Personal & Identifiable - Purely Personal & Identifiable -
PerquisitePerquisite Purely Personal but not Purely Personal but not
Identifiable – Fringe Benefit Identifiable – Fringe Benefit Both Personal as well as official – Both Personal as well as official –
Fringe Benefit Fringe Benefit
AllowancesAllowances Exemption based on expenditure Exemption based on expenditure
and multiple limitsand multiple limits– House Rent AllowanceHouse Rent Allowance– Entertainment AllowanceEntertainment Allowance– Leave Travel Concession/AllowanceLeave Travel Concession/Allowance
Exemption based on expenditure Exemption based on expenditure Exemption based on monetary Exemption based on monetary
limitslimits
Expenditure Expenditure AllowancesAllowances Allowance is based on expenditureAllowance is based on expenditure
– Tour AllowanceTour Allowance– Transfer AllowanceTransfer Allowance– Daily Allowance while on tourDaily Allowance while on tour– Helper AllowanceHelper Allowance– Research AllowanceResearch Allowance– Uniform AllowanceUniform Allowance– Conveyance Allowance (does not include Conveyance Allowance (does not include
from residence to office and back)from residence to office and back)
Monetary AllowancesMonetary Allowances Hill Area AllowanceHill Area Allowance Border Area AllowanceBorder Area Allowance Tribal Area AllowanceTribal Area Allowance Allowance for Allowance for
Transport EmployeesTransport Employees Compensatory Field Compensatory Field
Area AllowanceArea Allowance Compensatory Compensatory
Modified Area Modified Area AllowanceAllowance
Counter Insurgency Counter Insurgency AllowanceAllowance
Underground AllowanceUnderground Allowance High Altitude AllowanceHigh Altitude Allowance Active Field AllowanceActive Field Allowance Island Duty AllowanceIsland Duty Allowance Children Education Children Education
Allowance Allowance Rs. 100Rs. 100 Hostel Allowance Hostel Allowance
Rs.300Rs.300 Conveyance Allowance Conveyance Allowance
(from residence to office (from residence to office & back) & back) Rs. 800Rs. 800
House Rent AllowanceHouse Rent Allowance Exemption is least ofExemption is least of
– Excess of Rent Paid over 10% of SalaryExcess of Rent Paid over 10% of Salary– 50% of salary for metro cities, 40% for 50% of salary for metro cities, 40% for
othersothers– Actual ReceiptActual Receipt
Salary means Basic, DA(if it forms a part Salary means Basic, DA(if it forms a part of retirement benefits) & Commission (if of retirement benefits) & Commission (if it is paid as a specific percentage of it is paid as a specific percentage of sales achieved by the employee)sales achieved by the employee)
Leave Travel Leave Travel ConcessionConcession FareFare
– Based on the mode of travelBased on the mode of travel for self or familyfor self or family
– Spouse, children*, dependentsSpouse, children*, dependents For travel to any place in IndiaFor travel to any place in India For 2 journeys in a block of 4 calender For 2 journeys in a block of 4 calender
yearsyears– From 1986From 1986– Carry Forward to 5Carry Forward to 5thth year if unused year if unused
Perquisites Taxable in Perquisites Taxable in all casesall cases Rent Free/ Concessional AccommodationRent Free/ Concessional Accommodation
– 7.5%-10%-15% of salary or actual hire 7.5%-10%-15% of salary or actual hire charges if lowercharges if lower
– Additional 10% of the cost of furniture or Additional 10% of the cost of furniture or actual higher chargesactual higher charges
– If accommodation in hotel, 24% of the salary If accommodation in hotel, 24% of the salary or charges paid to hotel whichever is loweror charges paid to hotel whichever is lower
– If employee is paying some rent, deduct from If employee is paying some rent, deduct from the valuethe value
Perquisites Taxable in Perquisites Taxable in all casesall cases Obligation of an employee paid by the Obligation of an employee paid by the
employeremployer Premiums Paid for Life Premiums Paid for Life
Assurance/AnnuityAssurance/Annuity Interest Free/ Concessional LoansInterest Free/ Concessional Loans
– Simple Interest on maximum outstanding Simple Interest on maximum outstanding monthly balance except in following cases:monthly balance except in following cases:
Medical Loan for specified diseasesMedical Loan for specified diseases NilNil Petty Loans upto Rs. 20000/-Petty Loans upto Rs. 20000/-
NilNil
Perquisites Taxable in Perquisites Taxable in all casesall cases
Use of an AssetUse of an Asset– 10% of the actual cost or hire charges paid10% of the actual cost or hire charges paid– Exempt in case of laptops and computers, Exempt in case of laptops and computers,
telephones and mobilestelephones and mobiles Transfer of an AssetTransfer of an Asset
– Sale price less the depreciated valueSale price less the depreciated value– Depreciation Rates for this purposeDepreciation Rates for this purpose
Computers & Electronic ItemsComputers & Electronic Items 50% 50% WDVWDV
Motor CarsMotor Cars 20% WDV20% WDV Others Others 10% SLM10% SLM
– Depreciation for completed year Depreciation for completed year
Perquisites taxable for Perquisites taxable for specified employeesspecified employees Medical Facilities Exempt ifMedical Facilities Exempt if
– In a hospital maintained by the employerIn a hospital maintained by the employer– In a Government hospitalIn a Government hospital– In an approved hospital for prescribed diseasesIn an approved hospital for prescribed diseases– Mediclaim Premium, Group MediclaimMediclaim Premium, Group Mediclaim– Other Medical Treatment upto Rs. 15000/-Other Medical Treatment upto Rs. 15000/-– Overseas Medical TreatmentOverseas Medical Treatment
Treatment CostTreatment Cost Cost of Travel & Stay for self & familyCost of Travel & Stay for self & family Cost of Travel & Stay for one attendantCost of Travel & Stay for one attendant Cost of Travel excluded only if gross income < 2 Cost of Travel excluded only if gross income < 2
lakhslakhs
Retirement BenefitsRetirement Benefits Provident FundProvident Fund Superannuation FundSuperannuation Fund PensionsPensions GratuityGratuity Encashment of unutilised leaveEncashment of unutilised leave Retrenchment CompensationRetrenchment Compensation Voluntary Retirement CompensationVoluntary Retirement Compensation
Provident FundProvident Fund
Statutory Statutory Prov. FundProv. Fund
Recognised Recognised Prov. FundProv. Fund
UnrecognisUnrecognised Prov. ed Prov. FundFund
Employers’ Employers’ ContributioContributionn
ExemptExempt Exempt upto 12% of Exempt upto 12% of salarysalary
ExemptExempt
Employees’ Employees’ ContributioContributionn
Eligible for Eligible for deductiondeduction
Eligible for Eligible for deductiondeduction
Not eligible for Not eligible for deductiondeduction
InterestInterest ExemptExempt Exempt upto a Exempt upto a notified ratenotified rate
ExemptExempt
WithdrawalWithdrawalss
ExemptExempt Exempt if completed Exempt if completed 5 years5 years
TaxableTaxable
Approved Approved Superannuation FundSuperannuation Fund Employers’ Contribution exempt upto 27% of Employers’ Contribution exempt upto 27% of
salary salary – Liable for FBT if exceeds Rs. 100000/- per Liable for FBT if exceeds Rs. 100000/- per
employeeemployee Employees’ Contribution eligible for Employees’ Contribution eligible for
deduction deduction Interest is exemptInterest is exempt Pension on retirement is taxablePension on retirement is taxable Commutation on retirement partly exemptCommutation on retirement partly exempt Payment on death totally exemptPayment on death totally exempt In all other cases, taxableIn all other cases, taxable
PensionsPensions Uncommuted PensionsUncommuted Pensions
– Received by the retired employee Received by the retired employee SalariesSalaries– Received by the legal heirReceived by the legal heir I.O.SI.O.S
Commuted Pensions on retirementCommuted Pensions on retirement– If receiving gratuity also, 1/3If receiving gratuity also, 1/3rdrd of non of non
commuted value is exemptcommuted value is exempt– If not receiving gratuity, ½ is exemptIf not receiving gratuity, ½ is exempt– For Government employees, totally exemptFor Government employees, totally exempt
GratuityGratuity Government Employees – ExemptGovernment Employees – Exempt Covered by the Payment of Gratuity ActCovered by the Payment of Gratuity Act
– 15 days salary for each year of service15 days salary for each year of service– Rs. 350000/-Rs. 350000/-– Actual ReceiptActual Receipt
Not Covered by the Payment of Gratuity Not Covered by the Payment of Gratuity ActAct– ½ months’ average salary for each completed ½ months’ average salary for each completed
year of serviceyear of service– Rs. 350000/-Rs. 350000/-– Actual ReceiptActual Receipt
Encashment of Leave Encashment of Leave SalarySalary Government Employees – ExemptGovernment Employees – Exempt OthersOthers
Cash Equivalent of earned unused leaveCash Equivalent of earned unused leave– Earned 30 days for each completed year of Earned 30 days for each completed year of
serviceservice– Salary is average of last 10 monthsSalary is average of last 10 months
10 months average salary10 months average salary Rs. 300000/-Rs. 300000/- Actual ReceiptActual Receipt
Income from House Income from House PropertyProperty Tax on “Notional Income”Tax on “Notional Income” Property can be:Property can be:
– Used for own BusinessUsed for own Business To excludeTo exclude– Used for own Residence (only 1) Used for own Residence (only 1) NILNIL– Let Out Let Out Rent/Mkt RentRent/Mkt Rent– Vacant Vacant Mkt RentMkt Rent
Interest on Borrowed Capital available Interest on Borrowed Capital available as a deduction as a deduction – In case of 1 SO Prop. upto Rs. 150,000/-In case of 1 SO Prop. upto Rs. 150,000/-– In all other cases, without limitIn all other cases, without limit
Capital GainsCapital GainsThe Starters..The Starters.. Capital Receipts not taxable Capital Receipts not taxable
unless specifically includedunless specifically included EssentialsEssentials
– Profits/Losses onProfits/Losses on– Transfer of a Transfer of a – Capital AssetCapital Asset
Profit/Loss..Profit/Loss.. Sale PriceSale Price DeductionsDeductions
– Cost of AcquisitionCost of Acquisition– Cost of ImprovementCost of Improvement– Expenses on TransferExpenses on Transfer
Capital AssetCapital Asset Wide definitionWide definition Cannot however cover Cannot however cover
– Stock in tradeStock in trade– Personal assets & privilegesPersonal assets & privileges– Agricultural Rural Land (Population < 10000)Agricultural Rural Land (Population < 10000)
Classification as short term & long termClassification as short term & long term– Equity/Preference Shares, Other listed Equity/Preference Shares, Other listed
securities & units – 12 monthssecurities & units – 12 months– Other Assets – 36 monthsOther Assets – 36 months
Privileges of Long Privileges of Long TermTerm Indexation BenefitsIndexation Benefits Substitution of Fair Market ValueSubstitution of Fair Market Value Lower Rate of Tax @ 20%Lower Rate of Tax @ 20% Special Scheme for listed Special Scheme for listed
securitiessecurities Eligible for Re-investment Eligible for Re-investment
BenefitsBenefits
Listed Securities…Listed Securities…
Position from 01.10.2004 (if STT is Position from 01.10.2004 (if STT is paid)paid)– Long Term - exemptLong Term - exempt– Short Term – concessional tax rate of 15%Short Term – concessional tax rate of 15%
The concessional regime does not The concessional regime does not apply toapply to– Off Market TransactionsOff Market Transactions– Shares held as “stock in trade”Shares held as “stock in trade”
Privileges of Long Privileges of Long TermTermReinvestment BenefitsReinvestment Benefits Residential House – Residential House –
Residential HouseResidential House– Reinvest Capital GainsReinvest Capital Gains– Purchase 1 year before/2 Purchase 1 year before/2
years after OR years after OR – construct 3 years afterconstruct 3 years after
Any – Residential Any – Residential HouseHouse– Reinvest Sale Reinvest Sale
ConsiderationConsideration– Purchase 1 year Purchase 1 year
before/2 years after OR before/2 years after OR – construct 3 years afterconstruct 3 years after
Any – Specified Capital Gains Bonds Reinvest Capital Gains Within six months Lock in period of
3 years for the re-invested asset
Some Important Some Important ExemptionsExemptions Agricultural IncomesAgricultural Incomes Specified Interest IncomesSpecified Interest Incomes Income of Charitable InstitutionsIncome of Charitable Institutions Dividend IncomeDividend Income Gifts Received upto Rs. 50,000/-Gifts Received upto Rs. 50,000/-
DeductionsDeductions Generally available only to Generally available only to
residentsresidents Subject to the existence of Subject to the existence of
incomeincome Broad CategoriesBroad Categories
– For certain payments For certain payments – For certain incomesFor certain incomes– In certain situationsIn certain situations
Specified InvestmentsSpecified Investments
A maximum amount of Rs. 1,00,000/- is A maximum amount of Rs. 1,00,000/- is deductibledeductible
No inter-sectoral capsNo inter-sectoral caps Eligible InvestmentsEligible Investments
– Provident Fund / Public Provident FundProvident Fund / Public Provident Fund– Contribution to Pension FundContribution to Pension Fund– LIC PremiumsLIC Premiums– National Savings CertificateNational Savings Certificate– Purchase of Residential HousePurchase of Residential House– Repayment of Housing Loan – Principal ComponentRepayment of Housing Loan – Principal Component– Education Expenses of ChildrenEducation Expenses of Children– Contribution to ELSS / ULIPContribution to ELSS / ULIP
Mediclaim PremiumMediclaim Premium Payments coveredPayments covered
– Self & SpouseSelf & Spouse– Dependent ParentsDependent Parents– Dependent ChildrenDependent Children
Deduction available uptoDeduction available upto– Rs. 15000 generallyRs. 15000 generally– Rs. 20000 for senior citizensRs. 20000 for senior citizens
DonationsDonations Calculate Qualifying AmountCalculate Qualifying Amount
– Eligible without limitEligible without limit– Eligible with limit of 10%Eligible with limit of 10%– Not EligibleNot Eligible
Calculate Deductible AmountCalculate Deductible Amount– 100% Deduction100% Deduction– 50% Deduction50% Deduction
Taxability of Business Taxability of Business IncomeIncome Tax on Net Income from BusinessTax on Net Income from Business Net Income = (+) Gross Receipts (-) Net Income = (+) Gross Receipts (-)
ExpensesExpenses Role of Accounting for both (+) & (-)Role of Accounting for both (+) & (-) Net Income is therefore as Net Income is therefore as
determined by the books of determined by the books of accounts & method of accounting accounts & method of accounting followedfollowed
Differing Objectives lead Differing Objectives lead to disturbance of the to disturbance of the basebase
Net Profit as per Profit & Loss AccountNet Profit as per Profit & Loss Account Add:Add:
– Items debited but not allowedItems debited but not allowed– Items not credited but taxableItems not credited but taxable
Less:Less:– Items credited but exempt/ taxable Items credited but exempt/ taxable
elsewhereelsewhere– Items not debited but allowedItems not debited but allowed
Taxable IncomeTaxable Income
What are these What are these adjustments?adjustments? Expenses specifically allowedExpenses specifically allowed Expenses disallowedExpenses disallowed Residuary CategoryResiduary Category
Not CapitalNot Capital Not Violation of LawNot Violation of Law For the Purposes of BusinessFor the Purposes of Business
DepreciationDepreciation
Expenses specifically Expenses specifically allowed:allowed:Expenditure on Scientific Expenditure on Scientific ResearchResearch
Revenue Expenditure related to businessRevenue Expenditure related to business Capital Expenditure related to business Capital Expenditure related to business
(excluding cost of land)(excluding cost of land) Donation to Scientific Research Donation to Scientific Research
Associations/National Laboratory/ Associations/National Laboratory/ University/IIT/Company (1.25 times University/IIT/Company (1.25 times weighted deduction)weighted deduction)
Revenue & Capital Expenditure (not being Revenue & Capital Expenditure (not being land & building) on approved in-house land & building) on approved in-house projects (1.5 times weighted deduction)projects (1.5 times weighted deduction)
Residuary CategoryResiduary Category
Not Capital in NatureNot Capital in Nature For the purposes of businessFor the purposes of business
– Personal Expenditure not allowedPersonal Expenditure not allowed Incurred during the previous yearIncurred during the previous year Not for any Violation of Law (eg. Not for any Violation of Law (eg.
Penalties)Penalties)
Amounts not deductibleAmounts not deductible
Income Tax/ Wealth Tax/Tax on Income Tax/ Wealth Tax/Tax on Perquisites / Fringe Benefit TaxPerquisites / Fringe Benefit Tax
Provisions made for non statutory Provisions made for non statutory employee welfare fundsemployee welfare funds
Payments to partners by a Payments to partners by a partnership firmpartnership firm– Remuneration in excess of limitsRemuneration in excess of limits– Interest on capital in excess of 12% Interest on capital in excess of 12%
p.a.p.a.
Amounts not deductible:Amounts not deductible:Payments to relativesPayments to relatives Payments to relatives in excess Payments to relatives in excess
of fair valueof fair value Relatives defined to include: Relatives defined to include:
spouse, brother, sister, lineal spouse, brother, sister, lineal ascendant and descendantascendant and descendant
Receipts not coveredReceipts not covered No corresponding adjustment in No corresponding adjustment in
the assessment of the relativethe assessment of the relative
Amounts not deductible:Amounts not deductible:Payments without TDSPayments without TDS Overseas / Domestic Payments are Overseas / Domestic Payments are
deductible only if the applicable deductible only if the applicable taxes are deducted at source and taxes are deducted at source and paidpaid
If the payments are disallowed in If the payments are disallowed in the current year because the taxes the current year because the taxes are not deducted or paid, they shall are not deducted or paid, they shall be allowed in the year of paymentbe allowed in the year of payment
Amounts not deductible :Amounts not deductible :Cash ExpenditureCash Expenditure Expenditure above Rs. 20000/- to be Expenditure above Rs. 20000/- to be
made by account payee cheque made by account payee cheque otherwise the expense will be otherwise the expense will be disalloweddisallowed
Exceptions carved out in genuine cases Exceptions carved out in genuine cases likelike– Payments to Government Agencies, Payments to Government Agencies,
payments on a bank holiday, payments in payments on a bank holiday, payments in a village not serviced by a bank, etc.a village not serviced by a bank, etc.
How to move out??How to move out??
Amounts not Amounts not deductible:deductible:Unpaid Statutory DuesUnpaid Statutory Dues Covers the following duesCovers the following dues
– Tax, duty or cessTax, duty or cess– Bonus/Commission to employeesBonus/Commission to employees– Interest on Loan of financial institutionsInterest on Loan of financial institutions– Int. on term loan of scheduled bankInt. on term loan of scheduled bank– Leave Salary to employeeLeave Salary to employee– Contribution to PF/SAF/SWSContribution to PF/SAF/SWS
Deduction available only if paid before the Deduction available only if paid before the due date of filing return of incomedue date of filing return of income
If not paid, can claim deduction in the If not paid, can claim deduction in the year of paymentyear of payment
Depreciation: ConceptDepreciation: Concept Not on individual assets but on block of Not on individual assets but on block of
assetsassets Written Down Value Method at rates Written Down Value Method at rates
specifiedspecified In the year of purchaseIn the year of purchase
– Full year’s depreciation unless the asset put to Full year’s depreciation unless the asset put to use for less than 180 days (half depreciation)use for less than 180 days (half depreciation)
In the year of saleIn the year of sale– No DepreciationNo Depreciation
Block of Assets – Same group & same rateBlock of Assets – Same group & same rate
Depreciation: Depreciation: Block of Assets & RateBlock of Assets & Rate Buildings used for residential Buildings used for residential
purposes (5%)purposes (5%) Other Buildings (10%)Other Buildings (10%) Furniture & Fixtures (10%)Furniture & Fixtures (10%) Plant & Machinery (15%)Plant & Machinery (15%) Motor Cars (15%)Motor Cars (15%) Computers & Software (60%)Computers & Software (60%) Intangible Assets (25%)Intangible Assets (25%) Pollution Control Equipments (100%)Pollution Control Equipments (100%) Energy Saving Devices (80%)Energy Saving Devices (80%)
Depreciation: Written Depreciation: Written Down ValueDown Value
Opening WDV Opening WDV (a)(a) xxxx Add Actual Cost of Assets PurchasedAdd Actual Cost of Assets Purchased
– Used > 180 days Used > 180 days (b)(b) xxxx– Used < 180 daysUsed < 180 days (c)(c) xxxx
Less Sale Price of Assets SoldLess Sale Price of Assets Sold (d)(d) xxxx Closing WDV (e) = ( a + b + c - d)Closing WDV (e) = ( a + b + c - d) xxxx
Depreciation : WDV Depreciation : WDV (Contd.)(Contd.) If Closing WDV is negative If Closing WDV is negative
– Treat the amount as Short Term Capital Treat the amount as Short Term Capital GainsGains Adjustable against business losses to the extent Adjustable against business losses to the extent
of depreciation written offof depreciation written off– No Depreciation will be available even if No Depreciation will be available even if
there are other assets in the blockthere are other assets in the block If Closing WDV is positive but there are If Closing WDV is positive but there are
no assets in the blockno assets in the block– Treat the amount as Short Term Capital Treat the amount as Short Term Capital
LossLoss– No Depreciation will be available even No Depreciation will be available even
though the WDV is positivethough the WDV is positive
Depreciation : WDV Depreciation : WDV (Contd.)(Contd.) If Closing WDV is positive and If Closing WDV is positive and
there are assets in the blockthere are assets in the block– Do not calculate profit or loss but Do not calculate profit or loss but
provide depreciation on (e)provide depreciation on (e)– If e > cIf e > c
Depreciation = full * (a+b-d) + half * cDepreciation = full * (a+b-d) + half * c
– If e < cIf e < c Depreciation = half * eDepreciation = half * e
Tax Deducted at Tax Deducted at SourceSource Deduction at the stage of paymentDeduction at the stage of payment Attempts to plugAttempts to plug
– Non reporting of incomeNon reporting of income– Lower reporting of incomeLower reporting of income
Improves cash flow for the Improves cash flow for the GovernmentGovernment
Additional Burden for the AssesseeAdditional Burden for the Assessee
TDS on SalariesTDS on Salaries
At the “average rate of tax”At the “average rate of tax” Both Residents and Non Resident Both Residents and Non Resident
coveredcovered Allowances to be considered with proofAllowances to be considered with proof
– No proof be insisted for HRA upto Rs. 3000No proof be insisted for HRA upto Rs. 3000 Deductions & Rebates to be allowedDeductions & Rebates to be allowed Multiple Employers?Multiple Employers? Multiple Sources of IncomeMultiple Sources of Income
– Only Loss from HP can be consideredOnly Loss from HP can be considered
TDS on certain TDS on certain paymentspaymentsNature of Payment
Rate for Non Corporate
Rate for Corporate
Interest 10% 20%
Commission 10% 10%
Rent for Immoveable Properties
15% 20%
Rent for Machineries, etc.
10% 10%
Contractors 2% 2%
Subcontractors and Advertisements
1% 1%
Professional Fees 10% 10%
TDS on non residentsTDS on non residents
All incomes coveredAll incomes covered All Payers coveredAll Payers covered At Applicable RatesAt Applicable Rates Application by payer for determination Application by payer for determination
of income of income Application by receiver for non Application by receiver for non
deduction of taxdeduction of tax Application by receiver for lower Application by receiver for lower
deductiondeduction
Procedures: Procedures: TraditionalTraditional Obtain Tax Deduction NumberObtain Tax Deduction Number Deduct TaxDeduct Tax Pay to the GovernmentPay to the Government Issue TDS CertificateIssue TDS Certificate File TDS ReturnsFile TDS Returns
Procedures: DEMATProcedures: DEMAT
Quarterly e-TDS Return to be filed Quarterly e-TDS Return to be filed in soft formatin soft format
The NSDL to consolidate all TDS The NSDL to consolidate all TDS based on PAN based on PAN
Issue a consolidated TDS Issue a consolidated TDS Certificate to each assesseeCertificate to each assessee
Many procedural issues likely to Many procedural issues likely to arisearise
Non Compliance - Non Compliance - ConsequencesConsequences Recovery of the TDS AmountRecovery of the TDS Amount Interest on delayed payment / Interest on delayed payment /
non paymentnon payment Penalty for non compliancePenalty for non compliance Disallowance of ExpenditureDisallowance of Expenditure
Minimum Alternate Minimum Alternate TaxTax To compensate for discrepancies To compensate for discrepancies
between accounting and taxation between accounting and taxation principlesprinciples
Accept the net profit as per Companies Accept the net profit as per Companies Act and make specific adjustments to Act and make specific adjustments to convert it into book profitsconvert it into book profits
Pay minimum tax @ 10 % of the book Pay minimum tax @ 10 % of the book profits if the actual tax liability is lowerprofits if the actual tax liability is lower
Does it really serve the purpose ?Does it really serve the purpose ?
Dividend Distribution Dividend Distribution TaxTax Dividends – Tax Free in hands of Dividends – Tax Free in hands of
shareholders, liable for DDT @ shareholders, liable for DDT @ 15% for the company15% for the company
Brings to light the problems Brings to light the problems relating torelating to– Earnings StrippingEarnings Stripping– Capital GearingCapital Gearing– Cascading Effect on Capital Cascading Effect on Capital
StructuringStructuring
Scope of IncomeScope of Income
Non TaxableTaxableOutside India
TaxableTaxableIn India
Non ResidentResidentPerson
Income
--Residential Nexus--
--T
erri
tori
al N
exus
--
(Simplified Version)
The Genesis of the The Genesis of the Problem..Problem.. Source Based TaxationSource Based Taxation
– Not Acceptable to Developed NationsNot Acceptable to Developed Nations Residence Based TaxationResidence Based Taxation
– Not Acceptable to Developing NationsNot Acceptable to Developing Nations– Prone to MisuseProne to Misuse
Combination of Source & Residence Combination of Source & Residence Based Taxation is a universal Based Taxation is a universal phenomenonphenomenon
This leads to problems of double taxationThis leads to problems of double taxation
Understanding DT Understanding DT ConflictsConflicts Source Resident ConflictsSource Resident Conflicts
– German company offers technical German company offers technical support to Indian company and support to Indian company and charges FTScharges FTS
Resident Resident ConflictsResident Resident Conflicts– A US Citizen stays in India for more A US Citizen stays in India for more
than 182 daysthan 182 days
Resolving R-R ConflictsResolving R-R Conflicts
Successive Tests (for individuals)Successive Tests (for individuals)– Permanent HomePermanent Home– Centre of Vital InterestsCentre of Vital Interests– NationalityNationality– Mutual Agreement ProcedureMutual Agreement Procedure
Successive Tests (for others)Successive Tests (for others)– Place of Effective ManagementPlace of Effective Management
The US Citizen will pay tax in US & not The US Citizen will pay tax in US & not in Indiain India
Resolving S-R ConflictsResolving S-R Conflicts
Sharing of the Tax RevenueSharing of the Tax Revenue Concept of Active & Passive Concept of Active & Passive
IncomesIncomes Allocate these incomes to Allocate these incomes to
respective statesrespective states Remember, Resident State is Remember, Resident State is
always supreme!always supreme!
Resolving S-R ConflictsResolving S-R Conflicts
OECD Model ConventionOECD Model Convention– Source State to tax only active incomesSource State to tax only active incomes– Resident State to tax the passive incomesResident State to tax the passive incomes– Resident State may still tax active Resident State may still tax active
incomes but should eliminate double incomes but should eliminate double taxation taxation
Suitable for developed nations but not Suitable for developed nations but not acceptable to developing countriesacceptable to developing countries
Resolving S-R ConflictsResolving S-R Conflicts
UN Model ConventionUN Model Convention– Source State to tax active incomesSource State to tax active incomes– Source State may tax passive Source State may tax passive
incomes but at concessional rateincomes but at concessional rate– Resident State may tax all incomes Resident State may tax all incomes
but should eliminate double taxationbut should eliminate double taxation Most Indian treaties based on the Most Indian treaties based on the
UN ModelUN Model
Income Distributive Income Distributive Rules – Rights of the Rules – Rights of the Source StateSource State
Full TaxFull TaxFull TaxFull TaxDependent Personal ServicesDependent Personal Services
In case of FBIn case of FBIn case of FBIn case of FBIndependent Personal Independent Personal ServicesServices
Full TaxFull TaxNo TaxNo TaxCapital Gains from SharesCapital Gains from Shares
Full TaxFull TaxFull TaxFull TaxCapital Gains from propertiesCapital Gains from properties
Lower TaxLower TaxNo TaxNo TaxFees for Technical ServicesFees for Technical Services
Lower TaxLower TaxNo TaxNo TaxRoyaltiesRoyalties
Lower TaxLower TaxNo TaxNo TaxInterestInterest
Lower TaxLower TaxNo TaxNo TaxDividendsDividends
In case of PEIn case of PEIn case of PEIn case of PEBusiness ProfitsBusiness Profits
Full TaxFull TaxFull TaxFull TaxFrom Immoveable PropertiesFrom Immoveable Properties
UN ModelUN ModelOECD OECD ModelModel
Nature of IncomeNature of Income
Resident State Resident State TaxationTaxation Right of the resident state to tax Right of the resident state to tax
incomes is unfetteredincomes is unfettered Tax to be paid in Resident State = Tax Tax to be paid in Resident State = Tax
Payable – Tax Paid OverseasPayable – Tax Paid Overseas Therefore tax saved in source state Therefore tax saved in source state
may get nullified in the resident statemay get nullified in the resident state Proper choice of a resident state is Proper choice of a resident state is
therefore the pivot to international tax therefore the pivot to international tax planningplanning
The Solution to one The Solution to one problem germinates problem germinates another problem..another problem..
Tax Havens…Tax Havens…
No Tax JurisdictionsNo Tax Jurisdictions– Bermuda, Cayman IslandsBermuda, Cayman Islands
No Tax on foreign source IncomesNo Tax on foreign source Incomes– Hongkong, PanamaHongkong, Panama
No Tax on foreign source Incomes of No Tax on foreign source Incomes of Companies owned by non residentsCompanies owned by non residents– Barbados, Isle of ManBarbados, Isle of Man
Special Laws make them idealSpecial Laws make them ideal– British Virgin Islands, SwitzerlandBritish Virgin Islands, Switzerland
Treaty Networks can be usedTreaty Networks can be used– Netherlands, MauritiusNetherlands, Mauritius
International Transfer International Transfer PricingPricing Multitude of business entities and Multitude of business entities and
jurisdictions over the value chainjurisdictions over the value chain
R&D Mfg. Testing Mktg. Sales
&Distn.
Fin. Brand
A LtdLuxembourg
B LtdIndia
B LtdIndia
C LtdIndia
D LtdAustria
E LtdMauritius
B LtdChina
Transfer Pricing - Transfer Pricing - FrameworkFramework Any income, Any income,
expense or cost expense or cost sharingsharing
In an In an “International “International Transaction”Transaction”
Shall be determined Shall be determined at at “arms’ length “arms’ length price”price”
Arms’ Length PriceArms’ Length Price
Comparable Uncontrolled Price Comparable Uncontrolled Price (CUP)(CUP)
Resale Price Method Resale Price Method (RPM)(RPM) Cost Plus Method Cost Plus Method (CPM)(CPM)
Transactional Net Margin MethodTransactional Net Margin Method(TNMM)(TNMM)
Profit Split MethodProfit Split Method (PSM)(PSM)
FAR AnalysisFAR Analysis
Indian PartyIndian Party Foreign Foreign PartyParty
FUNCTIONSFUNCTIONS
ASSETSASSETS
RISKSRISKS
Check for a simpler party if it could be categorised as manufacturer or distributor
This was just an This was just an aerial view of the aerial view of the sea, not an exercise sea, not an exercise in swimming…in swimming…
Thank YouThank You