Presentation on theme: "Corporate Taxes - An Overview 5th MSOP :ICSI-Hyderabad Chapter"— Presentation transcript:
1 Corporate Taxes - An Overview 5th MSOP :ICSI-Hyderabad Chapter Ankem Sri PrasadChief Tax Officer - Deloitte U.S. India OfficesMarch 26, 2012
2 The best things in life are free, but soon, the government will find a way to tax them.
3 IndexCorporate TaxesIntroduction – Some Facts, Business & Taxes, Your role with Taxes4 - 7Overview of taxes – Compliance Management8Direct Taxes9 - 15Individual TaxationInternational Taxation – Evolution, Objective, Treaty & Transfer pricingIn-Direct TaxationPractical ChallengesPractical challenges and mitigating strategiesJeffTime: 3 minutesReview Day 1 & 2 agenda
5 Introduction – Some facts In Rs. Lakh CroresActualRev EstimateBudgetRevenueNet Tax5.746.467.76Non Tax3.592.773.35Capital, Public Debt, Loans/Advances recovery, Misc cap receipts32.2941.1443.98Total Consolidated Revenue41.6250.3755.09ExpenditureGeneral, Social, Economic Services, Grants & Payments to Union Territories11.8613.1814.62Capital Expense – Gen, Social & Eco Services1.401.362.25Government Public Debt, Loans/AdvancesTotal Consolidated Disbursements44.1554.3258.59DEFICIT2.533.953.50
6 Business and Taxes - Nexus CompetitionCost ManagementCash flowManagementTaxSavingsTax planning/ ManagementDecisionmakingProfitsAffect
7 Where you play a role YOUR ROLE Tax Planning / Structuring / Due DiligenceShare Capital IssueDividend TaxationCapital GainsMergers & AcquisitionsContracts / AgreementsInvestmentsExpatriate Transactions
8 A. Overview - Corporate Taxes – Compliance Management Direct Taxes (CBDT)Entity Level TaxesAdvance Tax (210 & 211) /Minimum Alternate TaxTax deduction at sourceContractors (194 C)Rent (194 I)Professionals (194J)Foreign payments withholding (195)Individual TaxesSalary TDS (192)Profession TaxInternational TaxesDouble Taxation Avoidance Agreements (Treaty)Transfer Pricing Rules / Arms Length PriceExpatriate TaxationIndirect Taxes (CBEC)Customs duty on ImportsExcise Duty on Domestic ManufacturingServices TaxBonding (Central Excise)Local Sales TaxCentral Sales TaxSoftware Technology Park of India (STPI), SEZ and RBI are regulatory authorities
10 Direct Taxes – Entity Level Taxes (Advance Tax) Advance Tax (Sec 210)Payment of advance tax by the assessee of his own accord or in pursuance of order of Assessing Officer.210. (1) Every person who is liable to pay advance tax under section 208 (whether or not he has been previously assessed by way of regular assessment) shall, of his own accord, pay, on or before each of the due dates specified in section 211, the appropriate percentage, specified in that section, of the advance tax on his current income, calculated in the manner laid down in section 209.…Advance Tax (Sec 211)Installments of advance tax and due dates[(1) Advance tax on the current income calculated in the manner laid down in section 209 shall be payable by (a) all the companies…Amount of Tax PayableDue date of installmentNot < 15% of advance tax.On or before the 15th JunNot < 45% of advance tax, less paid earlier.On or before the 15th SeptNot < 75% of advance tax, less paid earlier.On or before the 15th Dec100% of advance tax, less paid earlier.On or before the 15th Mar
11 Direct Taxes – Minimum Alternate Tax (MAT) (Sec 115JB)Special provision for payment of tax by certain companies115JB. (1) Notwithstanding anything contained in any other provision of this Act, where in the case of an assessee, being a company, the income-tax, payable on the total income as computed under this Act in respect of any previous year relevant to the assessment year commencing on or after the , is less than 18% of its book profit, [such book profit shall be deemed to be the total income of the assessee and the tax payable by the assessee on such total income shall be the amount of income-tax at the rate of 18%..
12 Direct Taxes – Tax Deduction at Source (TDS -194C) TDS on Contractors(Sec 194C)Payments to contractors.15194C. (1) Any person responsible for paying any sum to any resident (contractor) for carrying out any work (including supply of labor for carrying out any work) in pursuance of a contract between the contractor and a specified person shall, at the time of credit of such sum to the account of the contractor or at the time of payment thereof in cash or by issue of a cheque or draft or by any other mode, whichever is earlier, deduct an amount equal to…(Sec194 C)Payment is being made or credit is given to% of TDSIndividual or a Hindu undivided family1%a person other than an individual or a HUF2%
13 Direct Taxes – Tax Deduction at Source (TDS 194 J) TDS on Professional or Technical Services(Sec 194J)Fees for professional or technical services.194J. (1) Any person, not being an individual or a Hindu undivided family, who is responsible for paying to a resident any sum by way of—(a) fees for professional services, or(b) fees for technical services, [or](c) royalty, or(d) any sum referred to in clause (va) of section 28,shall, at the time of credit to the payee or at payment thereof in cash or cheque or any other mode, whichever is earlier, deduct an amount equal to ..Provided …Payment is being made or credit is given to% of TDSIndividual or a Hindu undivided family10%Where payment for services in a tax year to such person does not exceed Rs 30,000/- no tax shall be deducted
14 Direct Taxes – Tax Deduction at Source (TDS -194-I) TDS on Rent(Sec 194-I)Rent194-I. Any person, not being an individual or a Hindu undivided family, who is responsible for paying to [a resident] any income by way of rent, shall, at the time of credit of such income to the account of the payee or at the time of payment thereof in cash or by cheque or any other mode, whichever is earlier, [deduct income-tax thereon at the rate of—…(Sec194-I)Payment is being made or credit is given% of TDSfor use of any machinery or plant or equipment2 %for use of any land / building (including factory building) / land appurtenant to a building (including factory building)/ furniture or fittings10%Where payment for rent in a tax year to such person does not exceed Rs 180,000/- no tax shall be deducted
15 Direct Taxes – Tax Deduction at Source (TDS -195) TDS on Foreign payment(Sec 195)Other sums.195. (1) Any person responsible for paying to a non-resident, not being a company, or to a foreign company, any interest / any other sum chargeable under the Income Tax Act (not being income chargeable under “Salaries” ) shall, at the time of credit or payment of such income in cash or cheque or any other mode, whichever is earlier, deduct income-tax thereon at the rates in force :Provided…Payment is being made to a foreign recipient% of TDSWhere the Foreign Party does not have a PAN20 %10%Where such Income / such payment is not taxable in India, no tax shall be deducted, however it has to be certified by a qualified chartered accountant in prescribed format
17 Individual Taxes - TDS on Salaries (Sec 192) Salary.192 (1) Any person responsible for paying any income chargeable under the head “Salaries” shall, at the time of payment, deduct income-tax on the amount payable at the average rate of income-tax computed on the basis of the [rates in force] for the financial year in which the payment is made, on the estimated income of the assessee under this head for that financial year.…Apr 11 to Mar 12 (Prior Yr)Apr 12 to Mar 13 (Budget)Income SlabsTax RateUp to Rs. 1.8 LNilUp to Rs. 2 LRs. 1.8 L to 5 L10%Rs. 2 L to 5 LRs. 5 L to 8 L20%RS. 5 L to 10 LRs. > 8 Lakhs30%Rs. > 10 LakhsCess % on Tax3%Max Marginal Rate30.9%
18 Individual Taxes - Professional Taxes ANDHRA PRADESH - TAX ON PROFESSIONS, TRADES, CALLINGS AND EMPLOYMENTS ACT, 1987The AP State Legislature empowered the local authorities to levy tax on professions, trades, callings and employments by incorporating that power in the statutes relating to local authorities i.e. the Municipal Corporations, the Municipalities and the Gram Panchayats. Thus, the levy and collection of the tax was administered by the local authoritiesWebsite: apvat.inProfessional Tax)Professional Tax Slabs in AP, Maharastra & KarnatakaGross Income RsAP Tax in RsMaharashtra Tax in Rs.Karnataka Tax in Rs.Up to 5 KNil5K to 6K601756K to 10K8010K to 15K100200* 300 for February15015K to 20K>20K
20 D. International Taxes - Evolution International Law evolvedOut of needs in fields like: Shipping, E-commerce, etcresulting to certain accepted codes of conduct in Domestic Lawthough the transactions are between 2 different countriesInternational Tax can be considered as:The body of legal provisions of different countries, covering tax aspects of cross border transactions (Direct and Indirect Taxes)OECD – Organisation for Economic Co-operation & DevelopmentTo facilitate cross border transactions with ease, without barriers of any kind & to eliminate double taxation of one’s single income, The OECD prepared a draft called as “Model Convention” in 1977.
21 D. International Taxes - Objectives National Wealth MaximisationCountry ensures fair share of revenue in cross border transactionsFor the well being of its citizens,And maintains domestic tax baseTax Equity or fairness :is all about imposing equal taxes on tax payers with equal income orequal ability to payWithout reference to legality or source or type of IncomeEconomic Efficiency:Developing a competitive domestic economy,The pretax return should not distort the after tax return thereby affecting investment decisions
22 D. International Taxes - Treaty Aspects is a formally concluded and ratified agreement between independent nations.Tax Treaties between nations:Is generally a matter of bargain between 2 countries,Keeping in view the economic interests of the countries involvedHow Treaty becomes a Law?Only when it has the sanction of the constitution of the participating nations.Part IV of Indian Constitution setting out the “Directive Principles of State Policy”includes specific provision, covering International Law and treaty obligations in Article 51.
23 D. International Taxes - Double Taxation Double Taxation : It is possible that Tax payers engaged in cross border transactions are taxed more than one (twice) on the same amount of Income, this phenomenon is known as Double Taxation.This led to 2 fundamental methods of Taxation under International Law:Source based taxationResidence based taxation
24 D. International Taxes - Concept of Nexus SubjectConnecting FactorAssesseeResidential StatusIncomeSourceConnecting Factors: Income Connecting Factors:Foreign sourced Income earned by Non residents is not taxable in India – As there is no nexus with IndiaAssesseeTaxableIndian Resident (R)World IncomeNon residents /NOR’sOnly Income sourced in India is TaxableIncomeTaxableIndian sourced Income (irrespective of Assessee status)in IndiaForeign Sourced IncomeOnly if earned by an Indian resident
25 D. International Taxes - Nexus with Income Tax Act * Section 4 – Charging sectionSec 4 (1)Income Tax shall be charged,at that rate or those rates, for that year,in accordance with the provisions of this act,In respect of the Total Income, of the previous year,of every personSec 4 (2)In respect of income chargeable under clause (1),Income Tax shall be deducted at source or paid in advance,Where it is so deductible under the Act.
26 D. International Taxes - Nexus with Income Tax Act *** Sec 5 (1)The Total income of any previous year, of aSub sec (1) Resident person ; Sub sec (2) Non Resident personIncludes all incomes from whatever source is derivedIs received or deemed to be received in India in such year,Accrues or arises or is deemed to accrue or arise in India during such year,Accrues or arises to him outside India during such year (For Resident Only)Provided that, in case of a person NOR in India, under Sec 6 (6), income accruing or arising to him outside India shall not be included unless it is derived from a Business controlled or profession set up in India.Explanation 1. Income shall not be deemed to be received by reason of the fact that it is taken into account in the Balance sheet prepared in India.Explanation 2. Income which has been included in the total income on the basis that it is deemed to have accrued or arisen to him shall not again be so included on the basis that it is received or deemed to be received by him in India.
27 D. International Taxes - Income deemed to Accrue/Arise* Sec 9 (1) The following Income shall be deemed to accrue or arise in IndiaSec 9 (I) (i) Income accruing or arising thruFrom a business connection in India,Income from any property in India,Income from any asset or any source in India ,Transfer of capital asset situated in IndiaSec 9 (I) (ii) Income under head Salaries earned in IndiaSec 9 (I) (iii) Income under head Salaries paid by Govt. of India to a citizen outside IndiaSec 9 (I) (iv) Dividends by Indian company outside IndiaSec 9 (I) (v) Income by way of InterestSec 9 (I) (vi) Income by way of RoyaltySec 9 (I) (vii) Income by way of Fees for technical Services
28 D. International Taxes - Business Connection Sec 9 (1) Explanation 2. It is declared that “business connection” shall include any business activity carried out thru a person acting on behalf of a NRa) ..Trader of goods b) ..Stockist c) authorized representativeProvided that such “business connection” shall not include any business withDependant agentIndependent agent acting in the ordinary course of his businessSec 9 (1) Explanation 3. Attribution Rule (only so much of income attributable to operations carried out in India shall be deemed to accrue or arise in India).Business connectionRequires continuity of action between a R in India and a NR who receives profit ,Transaction must be of a commercial nature intimately linked with the business of a NR, contributing to an NR’s ProfitIsolated transactions between a R and NR will not constitute a business connection.
29 D. International Taxes - Model Treaty Article 1 – Persons Covered :Article 2 – Taxes CoveredArticle 3 – General Definitions : Person, Company, Enterprise of a contracting state, International Traffic, Competent Authority, NationalArticle 4 – ResidentArticle 5 – Permanent EstablishmentBasic rule PE – Criteria is : “Fixed place of Business”Construction PE - Criteria is : “Time and activities carried on”Agency PE - Criteria is : “legal and economic dependence”Service PE – Most India treaties have this clauseArticle 6 – Income from Immovable propertyArticle 7 – Business ProfitsArticle 8 – Shipping, Inland waterways, Transport and Air TransportArticle 9 – Associated Enterprises-
30 D. International Taxes - Model Treaty Article 10 – Dividends :Article 11 – InterestArticle 12 – RoyaltiesArticle 13 – Capital GainsArticle 14 – Independent Professional Services (IPS)Article 15 – Income from EmploymentArticle 16 – Directors Fee’sArticle 17 – Artists & SportsmenArticle 18 – PensionsArticle 19 – Government ServiceArticle 20 – StudentsArticle 21 – Other IncomeArticle 22 – Capital
31 D. International Taxes - Model Treaty Article 23 – Methods for elimination of Double Taxation:Article 24 – Non DiscriminationArticle 25 – Mutual Agreement ProcedureArticle 26 – Exchange of InformationArticle 27 – Assistance in collection of TaxesArticle 28 – Members of Diplomatic MissionArticle 29 – Territorial ExtensionArticle 30 – Entry into forceArticle 31 – Termination
32 D. International Taxes - Article 4 (Tie Breaker Test)
33 D. International Taxes - Transfer Pricing Basics:Transfer Pricing is the process of setting prices for intra-group transactionsAll stakeholders of a business may question intra-group / inter-unit pricesCommonly questioned by Government as a stakeholder and therefore need for specific legislationOECD recommends the Arm's length principle for setting Transfer Prices
34 D. International Taxes - Transfer Pricing Definition and objective:Transfer pricing refers to the pricing of cross-border transactions between two associated entitiesWhen two related entities enter into any cross-border transaction, the price at which they undertake the transaction is ‘transfer price’Due to the special relationship between related companies, the transfer price may be different than the price that would have been agreed between unrelated companiesPrice between unrelated parties in uncontrolled conditions is known as the “arm’s length” price (ALP)To prevent shifting of profits from IndiaCompany ACompany BIndiaOverseas
35 D. International Taxes - Transfer Pricing in India International Transactions between Associated Enterprises at Arms Length Price supported by Extensive contemporaneous documentation
36 D. International Taxes - Transfer Pricing in India International Transaction:Between non-resident and non-residentBetween non-resident and residentNormally not between resident and resident
37 D. International Taxes - Transfer Pricing in India Arms Length Price:Law requires an “Arms Length Price” (‘ALP’) to be establishedALP means price applied in uncontrolled conditions (open market price)Determined as an Arithmetic Mean of uncontrolled prices (or margins)Flexibility accorded to taxpayer to adopt any price within (+/-) 5% of the arithmetic mean(Budget 2012 clarified, cannot be considered a standard deduction)
38 Uncontrolled Transaction Unrelated Enterprise B Controlled Transaction Arm’s length priceAs per Section 92F, “Arm’s length price” means a price which is applied or proposed to be applied in a transaction between persons other than associated enterprises, in uncontrolled conditionsUncontrolled Transaction(ALP)Unrelated Enterprise BEnterprise ARelated Enterprise CControlled Transaction“Arm’s length price” would be similar price charged to Unrelated Enterprise in an uncontrolled TransactionThe ALP can vary by 5% of the Arithmetic Mean of more than one price (Budget 2012 clarified, cannot be considered a standard deduction)
39 Associated Enterprise Equity / Debt>= 26% direct /indirect holding by enterpriseORBy same person in each enterpriseLoan >= 51% of Total AssetsGuarantees > = 10% of debt> 10% interest in Firm / AOP / BOIManagementAppointment > 50% of Directors / one or more Executive Director by an enterpriseAppointment by same person in each enterpriseActivities100% dependence on use of intangibles for manufacture / processing / businessDirect / indirect supply of >= 90% Raw Materials under influenced prices and conditionsSale under influenced prices and conditionsControlOne enterprise controlled by an individual and the other by himself or his relative or jointlyOne enterprise controlled by HUF and the other by itself, a member or his relative or jointly
40 Methods for Arm’s length price determination Indian law provides for application of following methods:Comparable Uncontrolled Price method (CUP): Comparison of actual priceResale Price Method (RPM): Comparison of gross margin for a distributorCost Plus Method (CPM): Comparison of gross margin for a manufacturer / service providerProfit Split Method (PSM): Sharing of profits among entities sharing proportionately in risks in a highly integrated operationTransaction Net Margin Method (TNMM): Comparison on a net (operating) profit basisNo priority of methods; flexibility granted to tax-payer for selection of Most Appropriate Method
41 Transfer Pricing Rules Rule 10A - Defines certain expressionsRule 10B Arms’ Length PriceSets out General Applicability of all five transfer pricing methodsComparability criteria definedRule 10CMost AppropriateMethodFlexibility of choice depending on facts and circumstancesSets out the factors to be considered in selecting the ‘most appropriate’ methodRule 10DDocumentationMandatory / Supplementary Documentation requirements prescribedIf aggregate value of the transactions does not exceed Rs. 10 million -documentation requirements are relaxedRule 10EAccountantsReportAccountant's Report required as prescribedTo assist the Assessing officer in selecting cases for scrutiny
42 Contemporaneous Documentation Group Overview:This section of the TP Report discusses the following:Multinational group profile of which assessee enterprise is a part;Ownership structure and share holding pattern of the assessee enterprise with details of shares or other ownership interestIndustry Analysis:The Industry analysis of the company covers the followingA broad description of the business of the client and the industry in which the client operates, and of the business of the associated enterprises with whom the client has transactedStep wise processEconomic AnalysisFunctional AnalysisGroup Overview andIndustry AnalysisDeterminationof ALP
43 Contemporaneous Documentation Step wise processFunctional Analysis:A functional analysis enables mapping of the economically relevant facts and characteristics of transactions between associated enterprises with regard to their functions, assets and risks. Hence a functional analysis facilitates characterization of the associated enterprises and assists in establishing a degree of comparability with similar transactions in uncontrolled conditions.Economic Analysis:This section provides the following details:Value of international transactionsSelection of MAM (Most Appropriate methodBench markingProcessAdjustmentsDetermination of ALPResult:Maintain Documentation to comply with the Transfer Pricing Regulations in IndiaTo establish that the international transactions of the Company are at arm’s length as prescribed in the Indian Regulations
45 Indirect Taxes – Overview VATTax on commodities/ GoodsService TaxTax on servicesCustoms dutyTax on imports / exportsCentral Excise DutyTax on locally manufactured goods
46 Indirect Taxes – Customs duty on Imports / Exports Customs duty is applicable on Import transactionsRefer to customs tariff act 1975 Part II for rates of duty applicablePart II of the Import tariff act is categorized into 98 chaptersPart II of the Import tariff act also has a list of Generally exempted itemsPart III The second schedule covers Export Tariff & corresponding exemption notifications
47 Indirect Taxes – Central Excise – Manufactured goods Central excise dutyCentral Excise Act 1944,The Levy of Duty on manufactured goods is covered under SECTION 3. of the Central Excisea duty of excise to be called the Central Value Added Tax (CENVAT)] on all excisable goods (excluding goods produced or manufactured in special economic zones) which are produced or manufactured in India as, and at the rates, set forth in the First Schedule to the Central Excise Tariff Act, 1985 (5 of 1986.…Refer to the Central excise Tariff act 1985 for rates of dutyRate of duty at present is 10% basic duty (Budget recommends 12%)Depending on the item manufactured, Additional duties are applied (CVD, Special Duty, etc)Note: Central excise duty is based on valuation rules and the classification of the item manufactured. (Example : Tobacco attracts highest rate of duty while note books attract lower rate of duty)
48 Indirect Taxes – Services Tax Service TaxService Tax is administered under chapter V of the Finance Act and governed by rules of Central Excise ActSec 65 covers the definition of services,121 services are covered, more services are being added in the Budget 2012Budget 2012 introduced the a negative list of 17 services not taxableThere are more exempted services covered by various notifications from time to timeRate applicable for the services is specified in Sec 66 of Finance Act currently specified at 12% w.e.f 1st Apr 2012Service Tax Returns to be filed half yearly in prescribed format (ST 3 return)Service Tax payments have to be made online
49 Indirect Taxes – VAT (Local Sales Tax) AP VAT Act 2005An act to provide for and consolidate the law relating to levy of value added tax on sale or purchase of goods in the state of Andhra Pradesh and for matters connected therewith and incidental thereto..Charging sec is Sec 4..Sale is taxed..Local Sales tax
50 II. Knowledge management, Appellate Hierarchy and Practical challenges
51 Knowledge ManagementRespective ActsIncome Tax Rules, Central Excise Rules, Customs rulesCirculars and notificationsAdvance rulingsCase laws (SC, HC, Tribunal)Concept PapersCommittee reportsClarifications & FAQ’sPress Information Bureau releases
52 Appellate Hierarchy Income Tax Hierarchy Service Tax Hierarchy Tax filingA OCIT (A)ITATHigh CourtSupreme CourtMAPIf selected forauditNormal courseAO — Assessing officer; CIT(A) — Commissioner Income Tax (Appeals); ITAT — Income Tax Appellate Tribunal (Highest Fact finding Authority)MAP — Mutual Agreement Procedure (USA and India Government level negotiation); NA — Not ApplicableService Tax HierarchyRefundApplicationby AssesseeNotice/PHDCCCE(A)High CourtSupreme CourtCESTATRemandCENVAT Refund ProcedureRefund can be sanctioned by any of the authoritiesCENVAT Audit ProcedureEA 2000AuditNotice/PHDC(A)CCE(A)High CourtSupreme CourtCESTATComm.DC — Deputy Commissioner; CCE(A) — Commissioner Customs & Central Excise(Appeals); Comm. – Jurisdictional Commissioner, CESTAT — Customs, Excise & Service Tax Appellate Tribunal (Highest Fact finding Authority)
53 Practical Challenges Generic Challenges Specifics Manage EGO’s of Revenue officials,Systems automation by Revenue wings, not fully automatedSoftware related challengesFrequent changes in forms / formatsStatutory due dates / conflicting holidaysInternal revenue targets – How realistic?Availability of authorized signatoriesTeams knowledge, application of correct rates, classification / chapter issuesRight and appropriate documentationNew notifications, clarifications, advance rulings & court judgmentsRetrospective amendments to lawPAN not available of service providerService Tax Registration #Typographical errors, 95% PAN rule, TAN mismatchApplication of correct TDS sections, rates, amount deducted vs paidCorrectly filling the forms (assessment year, Section, range, lower rates etc)Lower deduction certificate (with amount & period limitation)– Interpretation issuesE-TDS filings center's working hoursOnline filing requirements, not all banks notified to collect taxesRevisions / Revised filing requirementsDigital signature requirements