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

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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