Corporate TaxationProf. S B Gabhawalla

Course Outline

Taxation

Income Tax: Scheme of the ActReceipt vs. IncomeCapital vs. RevenueScope of IncomeIncomeExemptionH1H3H2H4H5AggregationDeductionsIncomePersonTAXExemptionsHeads of IncomeAggregation Rules DeductionsTax Liability

Scope of IncomeNon TaxableTaxableOutside IndiaTaxableTaxableIn IndiaNon ResidentResidentPerson

Income--Residential Nexus----Territorial Nexus--(To be refined later)

Heads of Income

SalariesEmployer Employee RelationshipIncome from House PropertyBuildings not used for businessBusiness IncomeFrequency & IntentionCapital GainsTransfer of a Capital AssetIncome from Other SourcesResiduary Head of Income

Illustrative Format..

Sheet1

NAME OF THE ASSESSEE:

ASSESSMENT YEAR:PREVIOUS YEAR ENDED ON:

RESIDENTIAL STATUS:PERMANENT ACCOUNT NUMBER:

COMPUTATION OF INCOME

INCOME FROM SALARIESxx

INCOME FROM HOUSE PROPERTYxx

BUSINESS INCOMExx

CAPITAL GAINSxx

INCOME FROM OTHER SOURCESxx

GROSS TOTAL INCOMExx

LESS DEDUCTIONSxx

NET TOTAL INCOMExx

COMPUTATION OF TAX LIABILITY

TAX PAYABLE ON INCOMExx

ADD SURCHARGExx

ADD EDUCATION CESSxx

ADD SECONDARY & HIGHER EDUCATION CESSxx

GROSS TAX PAYABLExx

LESS TAX DEDUCTED AT SOURCE & ADVANCE TAXESxx

NET TAX PAYABLE / REFUNDABLExx

Tax Rates: Individual : Normal1 Applicable from the first rupee of tax (Marginal Relief Available)

IncomeTaxSCECSHECTotal0-15000000000150001-3000001002110.30300001-5000002002120.60500001-10000003002130.901000001 onwards3010 12133.99

Tax Rates: Individual : Ladies1 Applicable from the first rupee of tax (Marginal Relief Available)

IncomeTaxSCECSHECTotal0-18000000000180001-3000001002110.30300001-5000002002120.60500001-10000003002130.901000001 onwards3010 12133.99

Tax Rates: Individual : Senior Citizens1 Applicable from the first rupee of tax (Marginal Relief Available)

IncomeTaxSCECSHECTotal0-22500000000225001-3000001002110.30300001-5000002002120.60500001-10000003002130.901000001 onwards3010 12133.99

Tax Rates: Others1 Applicable from the first rupee of tax (Marginal Relief Available)

Assessee / IncomeTaxSCECSHECTotalPartnership Firms & Domestic Companies0-100000003002130.9010000001 onwards3010 12133.99Foreign Companies0-100000004002141.2010000001 onwards402.5 12142.23

Salaries: The Starters..Test:Employer Employee Relation

Basis of Charge:Accrual or Receipt whichever is earlier

Scheme (Taxation): Primarily Gross Basis

Scheme of TaxationBasic SalaryAdd Allowances (to the extent not exempt)Add Perquisites (as valued)Add Retirement Benefits (to the extent not exempt)

Less Profession TaxEntertainment Allowance

Benefits in Kind: Broad LandscapePurely Official Not PerquisitePurely Personal & Identifiable - PerquisitePurely Personal but not Identifiable Fringe Benefit Both Personal as well as official Fringe Benefit

AllowancesExemption based on expenditure and multiple limitsHouse Rent AllowanceEntertainment AllowanceLeave Travel Concession/AllowanceExemption based on expenditure Exemption based on monetary limits

Expenditure AllowancesAllowance is based on expenditureTour AllowanceTransfer AllowanceDaily Allowance while on tourHelper AllowanceResearch AllowanceUniform AllowanceConveyance Allowance (does not include from residence to office and back)

Monetary AllowancesHill Area AllowanceBorder Area AllowanceTribal Area AllowanceAllowance for Transport EmployeesCompensatory Field Area AllowanceCompensatory Modified Area AllowanceCounter Insurgency AllowanceUnderground AllowanceHigh Altitude AllowanceActive Field AllowanceIsland Duty AllowanceChildren Education Allowance Rs. 100Hostel Allowance Rs.300Conveyance Allowance (from residence to office & back) Rs. 800

House Rent AllowanceExemption is least ofExcess of Rent Paid over 10% of Salary50% of salary for metro cities, 40% for othersActual 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 ConcessionFare Based on the mode of travelfor self or familySpouse, children*, dependentsFor travel to any place in IndiaFor 2 journeys in a block of 4 calender yearsFrom 1986Carry Forward to 5th year if unused

Perquisites Taxable in all casesRent Free/ Concessional Accommodation7.5%-10%-15% of salary or actual hire charges if lowerAdditional 10% of the cost of furniture or actual higher chargesIf accommodation in hotel, 24% of the salary or charges paid to hotel whichever is lowerIf employee is paying some rent, deduct from the value

Perquisites Taxable in all casesObligation of an employee paid by the employerPremiums Paid for Life Assurance/AnnuityInterest Free/ Concessional LoansSimple Interest on maximum outstanding monthly balance except in following cases:Medical Loan for specified diseasesNilPetty Loans upto Rs. 20000/-Nil

Perquisites Taxable in all casesUse of an Asset10% of the actual cost or hire charges paidExempt in case of laptops and computers, telephones and mobilesTransfer of an AssetSale price less the depreciated valueDepreciation Rates for this purposeComputers & Electronic Items50% WDVMotor Cars20% WDVOthers 10% SLMDepreciation for completed year

Perquisites taxable for specified employeesMedical Facilities Exempt ifIn a hospital maintained by the employerIn a Government hospitalIn an approved hospital for prescribed diseasesMediclaim Premium, Group MediclaimOther Medical Treatment upto Rs. 15000/-Overseas Medical TreatmentTreatment CostCost of Travel & Stay for self & familyCost of Travel & Stay for one attendantCost of Travel excluded only if gross income < 2 lakhs

Retirement BenefitsProvident FundSuperannuation FundPensionsGratuityEncashment of unutilised leaveRetrenchment CompensationVoluntary Retirement Compensation

Provident Fund

Statutory Prov. FundRecognised Prov. FundUnrecognised Prov. FundEmployers ContributionExemptExempt upto 12% of salaryExemptEmployees ContributionEligible for deductionEligible for deductionNot eligible for deductionInterestExemptExempt upto a notified rateExemptWithdrawalsExemptExempt if completed 5 yearsTaxable

Approved Superannuation FundEmployers Contribution exempt upto 27% of salary Liable for FBT if exceeds Rs. 100000/- per employeeEmployees Contribution eligible for deduction Interest is exemptPension on retirement is taxableCommutation on retirement partly exemptPayment on death totally exemptIn all other cases, taxable

PensionsUncommuted PensionsReceived by the retired employee SalariesReceived by the legal heirI.O.SCommuted Pensions on retirementIf receiving gratuity also, 1/3rd of non commuted value is exemptIf not receiving gratuity, is exemptFor Government employees, totally exempt

GratuityGovernment Employees ExemptCovered by the Payment of Gratuity Act15 days salary for each year of serviceRs. 350000/-Actual ReceiptNot Covered by the Payment of Gratuity Act months average salary for each completed year of serviceRs. 350000/-Actual Receipt

Encashment of Leave SalaryGovernment Employees ExemptOthers

Cash Equivalent of earned unused leaveEarned 30 days for each completed year of serviceSalary is average of last 10 months10 months average salaryRs. 300000/-Actual Receipt

Income from House PropertyTax on Notional IncomeProperty can be:Used for own BusinessTo excludeUsed for own Residence (only 1) NILLet Out Rent/Mkt RentVacant 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 includedEssentialsProfits/Losses onTransfer of a Capital Asset

Profit/Loss..Sale PriceDeductionsCost of AcquisitionCost of ImprovementExpenses on Transfer

Capital AssetWide definitionCannot however cover Stock in tradePersonal assets & privilegesAgricultural Rural Land (Population < 10000)Classification as short term & long termEquity/Preference Shares, Other listed securities & units 12 monthsOther Assets 36 months

Privileges of Long TermIndexation BenefitsSubstitution of Fair Market ValueLower Rate of Tax @ 20%Special Scheme for listed securitiesEligible for Re-investment Benefits

Listed SecuritiesPosition from 01.10.2004 (if STT is paid)Long Term - exemptShort Term concessional tax rate of 15%

The concessional regime does not apply toOff Market TransactionsShares held as stock in trade

Privileges of Long TermReinvestment BenefitsResidential House Residential HouseReinvest Capital GainsPurchase 1 year before/2 years after OR construct 3 years afterAny Residential HouseReinvest Sale ConsiderationPurchase 1 year before/2 years after OR construct 3 years after

Any Specified Capital Gains BondsReinvest Capital GainsWithin six monthsLock in period of 3 years for the re-invested asset

Some Important ExemptionsAgricultural IncomesSpecified Interest IncomesIncome of Charitable InstitutionsDividend IncomeGifts Received upto Rs. 50,000/-

DeductionsGenerally available only to residentsSubject to the existence of incomeBroad CategoriesFor certain payments For certain incomesIn certain situations

Specified InvestmentsA maximum amount of Rs. 1,00,000/- is deductibleNo inter-sectoral capsEligible InvestmentsProvident Fund / Public Provident FundContribution to Pension FundLIC PremiumsNational Savings CertificatePurchase of Residential HouseRepayment of Housing Loan Principal ComponentEducation Expenses of ChildrenContribution to ELSS / ULIP

Mediclaim PremiumPayments coveredSelf & SpouseDependent ParentsDependent ChildrenDeduction available uptoRs. 15000 generallyRs. 20000 for senior citizens

DonationsCalculate Qualifying AmountEligible without limitEligible with limit of 10%Not Eligible

Calculate Deductible Amount100% Deduction50% Deduction

Taxability of Business IncomeTax on Net Income from BusinessNet Income = (+) Gross Receipts (-) ExpensesRole 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 baseNet Profit as per Profit & Loss AccountAdd:Items debited but not allowedItems not credited but taxableLess:Items credited but exempt/ taxable elsewhereItems not debited but allowedTaxable Income

What are these adjustments?Expenses specifically allowedExpenses disallowedResiduary CategoryNot CapitalNot Violation of LawFor the Purposes of BusinessDepreciation

Expenses specifically allowed:Expenditure on Scientific ResearchRevenue Expenditure related to businessCapital 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 CategoryNot Capital in NatureFor the purposes of businessPersonal Expenditure not allowedIncurred during the previous yearNot for any Violation of Law (eg. Penalties)

Amounts not deductibleIncome Tax/ Wealth Tax/Tax on Perquisites / Fringe Benefit TaxProvisions made for non statutory employee welfare fundsPayments to partners by a partnership firmRemuneration in excess of limitsInterest on capital in excess of 12% p.a.

Amounts not deductible:Payments to relativesPayments to relatives in excess of fair valueRelatives defined to include: spouse, brother, sister, lineal ascendant and descendantReceipts not coveredNo corresponding adjustment in the assessment of the relative

Amounts not deductible:Payments without TDSOverseas / Domestic Payments are deductible only if the applicable taxes are deducted at source and paidIf 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 ExpenditureExpenditure above Rs. 20000/- to be made by account payee cheque otherwise the expense will be disallowedExceptions carved out in genuine cases likePayments 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 DuesCovers the following duesTax, duty or cessBonus/Commission to employeesInterest on Loan of financial institutionsInt. on term loan of scheduled bankLeave Salary to employeeContribution to PF/SAF/SWSDeduction available only if paid before the due date of filing return of incomeIf not paid, can claim deduction in the year of payment

Depreciation: ConceptNot on individual assets but on block of assetsWritten Down Value Method at rates specifiedIn the year of purchaseFull years depreciation unless the asset put to use for less than 180 days (half depreciation)In the year of saleNo DepreciationBlock of Assets Same group & same rate

Depreciation: Block of Assets & RateBuildings 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 ValueOpening WDV (a)xxAdd Actual Cost of Assets PurchasedUsed > 180 days (b)xxUsed < 180 days(c)xxLess Sale Price of Assets Sold(d)xxClosing WDV (e) = ( a + b + c - d)xx

Depreciation : WDV (Contd.)If Closing WDV is negative Treat the amount as Short Term Capital GainsAdjustable against business losses to the extent of depreciation written offNo Depreciation will be available even if there are other assets in the blockIf Closing WDV is positive but there are no assets in the blockTreat the amount as Short Term Capital LossNo Depreciation will be available even though the WDV is positive

Depreciation : WDV (Contd.)If Closing WDV is positive and there are assets in the blockDo not calculate profit or loss but provide depreciation on (e)If e > cDepreciation = full * (a+b-d) + half * cIf e < cDepreciation = half * e

Tax Deducted at SourceDeduction at the stage of paymentAttempts to plugNon reporting of incomeLower reporting of incomeImproves cash flow for the GovernmentAdditional Burden for the Assessee

TDS on SalariesAt the average rate of taxBoth Residents and Non Resident coveredAllowances to be considered with proofNo proof be insisted for HRA upto Rs. 3000Deductions & Rebates to be allowedMultiple Employers?Multiple Sources of IncomeOnly Loss from HP can be considered

TDS on certain payments

Nature of PaymentRate for Non CorporateRate for CorporateInterest10%20%Commission 10%10%Rent for Immoveable Properties15%20%Rent for Machineries, etc.10%10%Contractors2%2%Subcontractors and Advertisements1%1%Professional Fees10%10%

TDS on non residentsAll incomes coveredAll Payers coveredAt Applicable RatesApplication by payer for determination of income Application by receiver for non deduction of taxApplication by receiver for lower deduction

Procedures: TraditionalObtain Tax Deduction NumberDeduct TaxPay to the GovernmentIssue TDS CertificateFile TDS Returns

Procedures: DEMATQuarterly e-TDS Return to be filed in soft formatThe NSDL to consolidate all TDS based on PAN Issue a consolidated TDS Certificate to each assesseeMany procedural issues likely to arise

Non Compliance - ConsequencesRecovery of the TDS AmountInterest on delayed payment / non paymentPenalty for non complianceDisallowance of Expenditure

Minimum Alternate TaxTo compensate for discrepancies between accounting and taxation principlesAccept the net profit as per Companies Act and make specific adjustments to convert it into book profitsPay minimum tax @ 10 % of the book profits if the actual tax liability is lower

Does it really serve the purpose ?

Dividend Distribution TaxDividends Tax Free in hands of shareholders, liable for DDT @ 15% for the companyBrings to light the problems relating toEarnings StrippingCapital GearingCascading Effect on Capital Structuring

Scope of IncomeNon TaxableTaxableOutside IndiaTaxableTaxableIn IndiaNon ResidentResidentPerson

Income--Residential Nexus----Territorial Nexus--(Simplified Version)

The Genesis of the Problem..Source Based TaxationNot Acceptable to Developed NationsResidence Based TaxationNot Acceptable to Developing NationsProne to MisuseCombination of Source & Residence Based Taxation is a universal phenomenonThis leads to problems of double taxation

Understanding DT ConflictsSource Resident ConflictsGerman company offers technical support to Indian company and charges FTSResident Resident ConflictsA US Citizen stays in India for more than 182 days

Resolving R-R ConflictsSuccessive Tests (for individuals)Permanent HomeCentre of Vital InterestsNationalityMutual Agreement ProcedureSuccessive Tests (for others)Place of Effective Management

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

Resolving S-R ConflictsSharing of the Tax RevenueConcept of Active & Passive IncomesAllocate these incomes to respective statesRemember, Resident State is always supreme!

Resolving S-R ConflictsOECD Model ConventionSource State to tax only active incomesResident State to tax the passive incomesResident State may still tax active incomes but should eliminate double taxation Suitable for developed nations but not acceptable to developing countries

Resolving S-R ConflictsUN Model ConventionSource State to tax active incomesSource State may tax passive incomes but at concessional rateResident State may tax all incomes but should eliminate double taxationMost Indian treaties based on the UN Model

Income Distributive Rules Rights of the Source State

Resident State TaxationRight of the resident state to tax incomes is unfetteredTax to be paid in Resident State = Tax Payable Tax Paid OverseasTherefore tax saved in source state may get nullified in the resident stateProper choice of a resident state is therefore the pivot to international tax planning

The Solution to one problem germinates another problem..

Tax HavensNo Tax JurisdictionsBermuda, Cayman IslandsNo Tax on foreign source IncomesHongkong, PanamaNo Tax on foreign source Incomes of Companies owned by non residentsBarbados, Isle of ManSpecial Laws make them idealBritish Virgin Islands, SwitzerlandTreaty Networks can be usedNetherlands, Mauritius

International Transfer PricingMultitude of business entities and jurisdictions over the value chain

R&D Mfg. Testing Mktg. Sales&Distn. Fin. BrandA LtdLuxembourgB LtdIndiaB LtdIndiaC LtdIndiaD LtdAustriaE LtdMauritiusB LtdChina

Transfer Pricing - FrameworkAny income, expense or cost sharingIn an International TransactionShall be determined at arms length price

Arms Length PriceComparable Uncontrolled Price (CUP)Resale Price Method (RPM)Cost Plus Method (CPM)

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

FAR AnalysisCheck for a simpler party if it could be categorised as manufacturer or distributor

Indian PartyForeign PartyFUNCTIONSASSETSRISKS

This was just an aerial view of the sea, not an exercise in swimming

Thank You

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