corporate taxation prof. s b gabhawalla. course outline sessiontopic 1. introduction to taxation...

Corporate Taxation

Prof. S B Gabhawalla

Course Outline

SessionSession 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

TaxationCommodities Transaction

Tax

BankingCash

TransactionTax

SecuritiesTransaction

Tax

FringeBenefit

Tax

WealthTax

IncomeTax

Dividend Distribution

Tax

Direct Taxes

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 the Act• Receipt vs. Income

– Capital vs. Revenue– Scope 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 Income

Non TaxableTaxableOutside India

TaxableTaxableIn India

Non ResidentResidentPerson

Income

--Residential Nexus--

--T

erri

tori

al N

exus

--

(To be refined later)

Heads 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..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 : Normal

IncomeIncome TaxTax SCSC ECEC SHESHECC

TotalTotal

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 : Ladies

IncomeIncome TaxTax SCSC ECEC SHESHECC

TotalTotal

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 : Senior Citizens

IncomeIncome TaxTax SCSC ECEC SHESHECC

TotalTotal

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: 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..• Test: Employer – Employee Relation

• Basis of Charge: Accrual or Receipt whichever is earlier

• Scheme (Taxation): Primarily Gross Basis

Scheme of Taxation• Basic Salary• Add Allowances (to the extent not exempt)

• Add Perquisites (as valued)

• Add Retirement Benefits (to the extent not exempt)

• Less Profession Tax• Entertainment Allowance

Benefits in Kind: Broad Landscape

• Purely Official – Not Perquisite• Purely Personal & Identifiable - Perquisite• Purely Personal but not Identifiable –

Fringe Benefit • Both Personal as well as official – Fringe

Benefit

Allowances• Exemption based on expenditure and multiple

limits– House Rent Allowance– Entertainment Allowance– Leave Travel Concession/Allowance

• Exemption based on expenditure • Exemption based on monetary limits

Expenditure Allowances

• Allowance is based on expenditure– Tour Allowance– Transfer Allowance– Daily Allowance while on tour– Helper Allowance– Research Allowance– Uniform Allowance– Conveyance Allowance (does not include from residence

to office and back)

Monetary Allowances• Hill Area Allowance• Border Area Allowance• Tribal Area Allowance• Allowance for Transport

Employees• Compensatory Field Area

Allowance• Compensatory Modified

Area Allowance• Counter Insurgency

Allowance

• Underground Allowance• High Altitude Allowance• Active Field Allowance• Island Duty Allowance• Children Education

Allowance Rs. 100• Hostel Allowance Rs.300• Conveyance Allowance

(from residence to office & back) Rs. 800

House Rent Allowance• Exemption is least of

– Excess of Rent Paid over 10% of Salary– 50% of salary for metro cities, 40% for others– Actual Receipt

• Salary means Basic, DA(if it forms a part of retirement benefits) & Commission (if it is paid as a specific percentage of sales achieved by the employee)

Leave Travel Concession

• Fare– Based on the mode of travel

• for self or family– Spouse, children*, dependents

• For travel to any place in India• For 2 journeys in a block of 4 calender years

– From 1986– Carry Forward to 5th year if unused

Perquisites Taxable in all cases

• Rent Free/ Concessional Accommodation– 7.5%-10%-15% of salary or actual hire charges if lower– Additional 10% of the cost of furniture or actual higher

charges– If accommodation in hotel, 24% of the salary or charges

paid to hotel whichever is lower– If employee is paying some rent, deduct from the value

Perquisites Taxable in all cases

• Obligation of an employee paid by the employer• Premiums Paid for Life Assurance/Annuity• Interest Free/ Concessional Loans

– Simple Interest on maximum outstanding monthly balance except in following cases:

• Medical Loan for specified diseases Nil• Petty Loans upto Rs. 20000/- Nil

Perquisites Taxable in all cases

• Use of an Asset– 10% of the actual cost or hire charges paid– Exempt in case of laptops and computers, telephones

and mobiles

• Transfer of an Asset– Sale price less the depreciated value– Depreciation Rates for this purpose

• Computers & Electronic Items 50% WDV• Motor Cars 20% WDV• Others 10% SLM

– Depreciation for completed year

Perquisites taxable for specified employees

• Medical Facilities Exempt if– In a hospital maintained by the employer– In a Government hospital– In an approved hospital for prescribed diseases– Mediclaim Premium, Group Mediclaim– Other Medical Treatment upto Rs. 15000/-– Overseas Medical Treatment

• Treatment Cost• Cost of Travel & Stay for self & family• Cost of Travel & Stay for one attendant• Cost of Travel excluded only if gross income < 2 lakhs

Retirement Benefits• Provident Fund• Superannuation Fund• Pensions• Gratuity• Encashment of unutilised leave• Retrenchment Compensation• Voluntary Retirement Compensation

Provident FundStatutory 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 Superannuation Fund

• Employers’ Contribution exempt upto 27% of salary – Liable for FBT if exceeds Rs. 100000/- per employee

• Employees’ Contribution eligible for deduction • Interest is exempt• Pension on retirement is taxable• Commutation on retirement partly exempt• Payment on death totally exempt• In all other cases, taxable

Pensions• Uncommuted Pensions

– Received by the retired employee Salaries– Received by the legal heir I.O.S

• Commuted Pensions on retirement– If receiving gratuity also, 1/3rd of non commuted value is

exempt– If not receiving gratuity, ½ is exempt– For Government employees, totally exempt

Gratuity• Government Employees – Exempt• Covered by the Payment of Gratuity Act

– 15 days salary for each year of service– Rs. 350000/-– Actual Receipt

• Not Covered by the Payment of Gratuity Act– ½ months’ average salary for each completed year of

service– Rs. 350000/-– Actual Receipt

Encashment of Leave Salary• Government Employees – Exempt• Others

• Cash Equivalent of earned unused leave– Earned 30 days for each completed year of service– Salary is average of last 10 months

• 10 months average salary• Rs. 300000/-• Actual Receipt

Income from House Property• Tax on “Notional Income”• Property can be:

– Used for own Business To exclude– Used for own Residence (only 1) NIL– Let Out Rent/Mkt Rent– Vacant Mkt Rent

• Interest on Borrowed Capital available as a deduction – In case of 1 SO Prop. upto Rs. 150,000/-– In all other cases, without limit

Capital GainsThe Starters..

• Capital Receipts not taxable unless specifically included

• Essentials– Profits/Losses on– Transfer of a – Capital Asset

Profit/Loss..• Sale Price• Deductions

– Cost of Acquisition– Cost of Improvement– Expenses on Transfer

Capital Asset• Wide definition• Cannot however cover

– Stock in trade– Personal assets & privileges– Agricultural Rural Land (Population < 10000)

• Classification as short term & long term– Equity/Preference Shares, Other listed securities & units

– 12 months– Other Assets – 36 months

Privileges of Long Term• Indexation Benefits• Substitution of Fair Market Value• Lower Rate of Tax @ 20%• Special Scheme for listed securities• Eligible for Re-investment Benefits

Listed Securities…

• Position from 01.10.2004 (if STT is paid)– Long Term - exempt– Short Term – concessional tax rate of 15%

• The concessional regime does not apply to– Off Market Transactions– Shares held as “stock in trade”

Privileges of Long TermReinvestment Benefits

• Residential House – Residential House– Reinvest Capital Gains– Purchase 1 year before/2

years after OR – construct 3 years after

• Any – Residential House– Reinvest Sale

Consideration– Purchase 1 year before/2

years after OR – construct 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 Exemptions

• Agricultural Incomes• Specified Interest Incomes• Income of Charitable Institutions• Dividend Income• Gifts Received upto Rs. 50,000/-

Deductions• Generally available only to residents• Subject to the existence of income• Broad Categories

– For certain payments – For certain incomes– In certain situations

Specified Investments• A maximum amount of Rs. 1,00,000/- is deductible• No inter-sectoral caps• Eligible Investments

– Provident Fund / Public Provident Fund– Contribution to Pension Fund– LIC Premiums– National Savings Certificate– Purchase of Residential House– Repayment of Housing Loan – Principal Component– Education Expenses of Children– Contribution to ELSS / ULIP

Mediclaim Premium• Payments covered

– Self & Spouse– Dependent Parents– Dependent Children

• Deduction available upto– Rs. 15000 generally– Rs. 20000 for senior citizens

Donations• Calculate Qualifying Amount

– Eligible without limit– Eligible with limit of 10%– Not Eligible

• Calculate Deductible Amount– 100% Deduction– 50% Deduction

Taxability of Business Income

• Tax on Net Income from Business• Net Income = (+) Gross Receipts (-) Expenses• Role of Accounting for both (+) & (-)• Net Income is therefore as determined by the

books of accounts & method of accounting followed

Differing Objectives lead to disturbance of the base

• Net Profit as per Profit & Loss Account• Add:

– Items debited but not allowed– Items not credited but taxable

• Less:– Items credited but exempt/ taxable elsewhere– Items not debited but allowed

• Taxable Income

What are these adjustments?

• Expenses specifically allowed• Expenses disallowed• Residuary Category

• Not Capital• Not Violation of Law• For the Purposes of Business

• Depreciation

Expenses specifically allowed:Expenditure on Scientific Research

• Revenue Expenditure related to business• Capital Expenditure related to business (excluding

cost of land)• Donation to Scientific Research

Associations/National Laboratory/ University/IIT/Company (1.25 times weighted deduction)

• Revenue & Capital Expenditure (not being land & building) on approved in-house projects (1.5 times weighted deduction)

Residuary Category

• Not Capital in Nature• For the purposes of business

– Personal Expenditure not allowed• Incurred during the previous year• Not for any Violation of Law (eg. Penalties)

Amounts not deductible

• Income Tax/ Wealth Tax/Tax on Perquisites / Fringe Benefit Tax

• Provisions made for non statutory employee welfare funds

• Payments to partners by a partnership firm– Remuneration in excess of limits– Interest on capital in excess of 12% p.a.

Amounts not deductible:Payments to relatives

• Payments to relatives in excess of fair value• Relatives defined to include: spouse, brother,

sister, lineal ascendant and descendant• Receipts not covered• No corresponding adjustment in the

assessment of the relative

Amounts not deductible:Payments without TDS

• Overseas / Domestic Payments are deductible only if the applicable taxes are deducted at source and paid

• If the payments are disallowed in the current year because the taxes are not deducted or paid, they shall be allowed in the year of payment

Amounts not deductible :Cash Expenditure

• Expenditure above Rs. 20000/- to be made by account payee cheque otherwise the expense will be disallowed

• Exceptions carved out in genuine cases like– Payments to Government Agencies, payments on a bank

holiday, payments in a village not serviced by a bank, etc.

• How to move out??

Amounts not deductible:Unpaid Statutory Dues

• Covers the following dues– Tax, duty or cess– Bonus/Commission to employees– Interest on Loan of financial institutions– Int. on term loan of scheduled bank– Leave Salary to employee– Contribution to PF/SAF/SWS

• Deduction available only if paid before the due date of filing return of income

• If not paid, can claim deduction in the year of payment

Depreciation: Concept• Not on individual assets but on block of assets• Written Down Value Method at rates specified• In the year of purchase

– Full year’s depreciation unless the asset put to use for less than 180 days (half depreciation)

• In the year of sale– No Depreciation

• Block of Assets – Same group & same rate

Depreciation: Block of Assets & Rate

• Buildings used for residential purposes (5%)• Other Buildings (10%)• Furniture & Fixtures (10%)• Plant & Machinery (15%)• Motor Cars (15%)• Computers & Software (60%)• Intangible Assets (25%)• Pollution Control Equipments (100%)• Energy Saving Devices (80%)

Depreciation: Written Down Value

• Opening WDV (a) xx• Add Actual Cost of Assets Purchased

– Used > 180 days (b) xx– Used < 180 days (c) xx

• Less Sale Price of Assets Sold (d) xx• Closing WDV (e) = ( a + b + c - d) xx

Depreciation : WDV (Contd.)• If Closing WDV is negative

– Treat the amount as Short Term Capital Gains• Adjustable against business losses to the extent of depreciation

written off– No Depreciation will be available even if there are other

assets in the block• If Closing WDV is positive but there are no assets in

the block– Treat the amount as Short Term Capital Loss– No Depreciation will be available even though the WDV

is positive

Depreciation : WDV (Contd.)

• If Closing WDV is positive and there are assets in the block– Do not calculate profit or loss but provide

depreciation on (e)– If e > c

• Depreciation = full * (a+b-d) + half * c

– If e < c• Depreciation = half * e

Tax Deducted at Source

• Deduction at the stage of payment• Attempts to plug

– Non reporting of income– Lower reporting of income

• Improves cash flow for the Government• Additional Burden for the Assessee

TDS on Salaries

• At the “average rate of tax”• Both Residents and Non Resident covered• Allowances to be considered with proof

– No proof be insisted for HRA upto Rs. 3000

• Deductions & Rebates to be allowed• Multiple Employers?• Multiple Sources of Income

– Only Loss from HP can be considered

TDS on certain paymentsNature 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 residents

• All incomes covered• All Payers covered• At Applicable Rates• Application by payer for determination of income • Application by receiver for non deduction of tax• Application by receiver for lower deduction

Procedures: Traditional

• Obtain Tax Deduction Number• Deduct Tax• Pay to the Government• Issue TDS Certificate• File TDS Returns

Procedures: DEMAT

• Quarterly e-TDS Return to be filed in soft format

• The NSDL to consolidate all TDS based on PAN • Issue a consolidated TDS Certificate to each

assessee• Many procedural issues likely to arise

Non Compliance - Consequences

• Recovery of the TDS Amount• Interest on delayed payment / non payment• Penalty for non compliance• Disallowance of Expenditure

Minimum Alternate Tax

• To compensate for discrepancies between accounting and taxation principles

• Accept the net profit as per Companies Act and make specific adjustments to convert it into book profits

• Pay minimum tax @ 10 % of the book profits if the actual tax liability is lower

• Does it really serve the purpose ?

Dividend Distribution Tax

• Dividends – Tax Free in hands of shareholders, liable for DDT @ 15% for the company

• Brings to light the problems relating to– Earnings Stripping– Capital Gearing– Cascading Effect on Capital Structuring

Scope of Income

Non TaxableTaxableOutside India

TaxableTaxableIn India

Non ResidentResidentPerson

Income

--Residential Nexus--

--T

erri

tori

al N

exus

--

(Simplified Version)

The Genesis of the Problem..

• Source Based Taxation– Not Acceptable to Developed Nations

• Residence Based Taxation– Not Acceptable to Developing Nations– Prone to Misuse

• Combination of Source & Residence Based Taxation is a universal phenomenon

• This leads to problems of double taxation

Understanding DT Conflicts

• Source Resident Conflicts– German company offers technical support to

Indian company and charges FTS

• Resident Resident Conflicts– A US Citizen stays in India for more than 182 days

Resolving R-R Conflicts

• Successive Tests (for individuals)– Permanent Home– Centre of Vital Interests– Nationality– Mutual Agreement Procedure

• Successive Tests (for others)– Place of Effective Management

• The US Citizen will pay tax in US & not in India

Resolving S-R Conflicts

• Sharing of the Tax Revenue• Concept of Active & Passive Incomes• Allocate these incomes to respective states• Remember, Resident State is always supreme!

Resolving S-R Conflicts

• OECD Model Convention– Source State to tax only active incomes– Resident State to tax the passive incomes– Resident State may still tax active incomes but

should eliminate double taxation

• Suitable for developed nations but not acceptable to developing countries

Resolving S-R Conflicts

• UN Model Convention– Source State to tax active incomes– Source State may tax passive incomes but at

concessional rate– Resident State may tax all incomes but should

eliminate double taxation

• Most Indian treaties based on the UN Model

Income Distributive Rules – Rights of the Source 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 Taxation

• Right of the resident state to tax incomes is unfettered

• Tax to be paid in Resident State = Tax Payable – Tax Paid Overseas

• Therefore tax saved in source state may get nullified in the resident state

• Proper choice of a resident state is therefore the pivot to international tax planning

The Solution to one problem germinates another problem..

Tax Havens…

• No Tax Jurisdictions– Bermuda, Cayman Islands

• No Tax on foreign source Incomes– Hongkong, Panama

• No Tax on foreign source Incomes of Companies owned by non residents– Barbados, Isle of Man

• Special Laws make them ideal– British Virgin Islands, Switzerland

• Treaty Networks can be used– Netherlands, Mauritius

International Transfer Pricing

• Multitude of business entities and jurisdictions 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 - Framework

• Any income, expense or cost sharing

• In an “International Transaction”

• Shall be determined at “arms’ length price”

Arms’ Length Price

• Comparable Uncontrolled Price (CUP)• Resale Price Method (RPM)• Cost Plus Method (CPM)

• Transactional Net Margin Method (TNMM)• Profit Split Method (PSM)

FAR 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 aerial view of the sea, not an exercise in swimming…

Thank You