Page 2 K EY H IGHLIGHTS O F DTC Common threshold limit of ` 2 lakhs for men and women and ` 2.5 lakhs for senior citizens Amount received by employee from NPS trust if tax free Only a ctual rent from house property to be taxed and not on annual value Limit for tax audit for professionals increased from ` 15 lakhs to ` 25 lakhs. Limit for tax audit for business increased from ` 60 lakhs to ` 1 crore. Remission or cessation of liability by way of loan/ deposit/ advance/ credit to be taxed as business income Income from sale of carbon credits to be taxed as business income Short-term capital gain (where equity shares/ units are held for 1 year or less) – deduction of 50% to be allowed and balance 50% taxed. Short- term capital loss to be scaled down by 50% Exemption for Long Term Capital Gain from equity shares/units of equity oriented mutual funds retained. STT to be retained. TDS of 10% on payments in respect of life policies which are not exempt from tax from code Wealth tax threshold limit increased to ` 1 crore
Page 3 K EY H IGHLIGHTS O F DTC – T AX R ATES CategoryTax Rates Indian Company30% Minimum Alternate Tax20% of adjusted book profits Dividend Distribution Tax (DDT)15% DDT on income distributed by mutual fund/ life insurance to unit holder/ policy holder 5% Wealth Tax1% on Net Wealth exceeding ` 1 crore Foreign Company30% Branch Profit Tax15%
Page 4 MINIMUM ALTERNATE TAX
Page 5 M INIMUM A LTERNATE T AX – G ROSS A SSETS VIS - À - VIS B OOK P ROFITS Company liable to pay 20% tax on book profits if such tax is higher than the normal income tax payable MAT applicable to units in Special Economic Zone (SEZ) and SEZ developers MAT not applicable to the companies engaged in core shipping activities of a qualifying shipping company as defined MAT credit can be carried forward upto 15 years Incase of a conversion of a company into LLP, MAT credit would not be available to LLP Restoration of MAT provision on Book Profit (rather than on Gross Assets as proposed under first draft) is a welcome change. However, applicability of MAT to SEZ developers is a dampener
Page 6 Net profit as per P/L A/C prepared in accordance with Parts II and III of Schedule VI to the Cos. Act XXX Add: Tax paid or payable under the code including any interest, tax on distributed profits/income, branch profit tax and wealth tax XXX Amount carried to any reservesXXX Provisions for unascertained liabilityXXX Provision for losses of Subsidiary companiesXXX Dividends paid or proposedXXX DepreciationXXX C OMPUTATION OF B OOK P ROFITS
Page 7 Deferred tax and provision for def. taxXXX Provision for diminution in value of assetsXXX Expenditure in relation to income exempt under the sixth schedule XXX Less: Depreciation debited to PIL excluding depreciation on revaluation of assets XXX Amount withdrawn from revaluation reserve to the extent of depreciation on revaluation of assets XXX Amount withdrawn from any reserve/provision credited to P/L A/C, if earlier considered for computing book profit XXX Profits of a sick industrial co. during the period its net worth is negative XXX
Page 8 Income exempt U/S 10 read with the Sixth ScheduleXXX Deferred tax credited to P/L A/CXXX B/f loss excluding depreciation or unabsorbed depreciation whichever is less XXX BOOK PROFIT XXX
Page 9 DEPRECIATION
Page 10 Asset Business Asset (Cl.314(38)) Investment Asset(Cl.314(141)) Business Capital Asset (Cl.314(39)) Business Trading (Cl.314(42))
Page 11 CLAUSE 314 (42) Business trading asset means stock in trade, consumable store or raw materials held for the purposes of business. CLAUSE 314 (39 ) Business capital asset means (a)Any capital asset self generated in the course of business (b)Any intangible capital asset in the nature of (i)Goodwill of a business (ii)A trade mark or brand name associated with the business (iii)A right to manufacture or produce any article or thing (iv)Right to carry on any business (v)Tenancy right in respect of premises occupied by the assessee and used by him for the purposes of his business or (vi)License, right or permit (by whatever name called) acquired in connection with or in the course of, any business (c)Any tangible capital asset in the nature of a building, machinery, plant or furniture or (d)Any other capital asset not being land connected with or used for the purposes of any business of the assessee.
Page 12 CLAUSE 314 (141) Investment asset means (a)Any capital asset which is not a business capital asset (b)Any security held by a FII (c)Any undertaking or division of a business. Deprecation allowable on adjusted value of the block of assets( Ss 38, 44, 45)
Page 13 W.D.V of the block at the beginning of F.YXXX Add: Actual cost of any asset falling within the block, acquired during the F.Y. XXX (A)XXX Less: Money receivable in respect of any asset falling within the block, which is sold, discarded, destroyed or destructed during the F.Y. XXX Scrap value, if anyXXX Deemed W.D.V of assets transferred by way of gift, etcXXX(B)XXX Adjusted ValueA-B=( C)XXX Less: the rate prescribed for the block in Fifteenth schedule W.D.V at the end of the F.Y. DXXX W.D.V at the end of the F.Y.C-D=( E )XXX
Page 15 CLAUSE 43 In case of business reorganisation, depreciation is allowed to the predecessor and the successor in the ratio of no. of days upto the date of succession and the no. of days in the F.Y. after the date of succession. Depreciation is computed in the manner as if no reorganisation has taken place. CLAUSE 44 Actual cost is determined as under The actual cost of a business capital asset to the person shall be computed in accordance with the formula- A-[B+(C*A/D)] A = cost of business capital asset to the person including the interest paid on the capital borrowed for acquiring the asset if such interest is relatable to the period before the asset is put to use;
Page 16 B = the amount of additional duty leviable U/S 3 of the Customs Tariff Act, 1975 or the amount of duty of excise, in respect of which a claim of credit has been made and allowed under the Central Excise Rule, 1944; C = the amount of subsidy, grant or reimbursement(by whatever name called) received by the assessee, directly or indirectly, from the Central Gov., a State Gov., any authority established under any law for the time being in force or by any person in respect of, or with reference to, any assets including the relevant asset; D = cost of all assets in respect of or with reference to which the amount C is so received.
Page 17 Anti avoidance provisions are proposed to be introduced in Clause 44 on lines similar to the explanations to S.43(1) in the I.T. Act 1961 to restrict depreciation in case assets are transferred at higher value to enable the transferee to claim depreciation on higher value and in cases of sale and lease back. Actual cost of the business assets acquired by way of gift, inheritance, etc shall be the W.D.V. in the hands of the previous owner. Where deduction is allowed in the form of investment based incentives under the Eleventh, Twelfth or Thirteenth Schedules actual cost of such assets shall be taken at NIL for the purposes of depreciation.
Page 18 Initial Depreciation allowable, if the following Conditions are fulfilled: (a)The person is engaged in the business of manufacture or production of any article or thing (b)The asset is new plant & machinery not used in India or outside by any person. (c )The asset is not installed in any office premises or residential accommodation or guest house and the asset is not an office appliance. (d) The whole of the cost of the asset is not allowed as deduction. Initial depreciation is 20% of the actual cost of the asset in the F.Y. in which it is used for the first time for the business. The deduction shall be restricted to 50%, if the asset is used for less than 180 days for the purposes of the business. I NITIAL D EPRECIATION
Page 19 Terminal allowance in respect of a block of assets is allowable, if the block of assets has ceased to exist on being transferred, demolished. Discarded or destroyed and the rate of depreciation specified in the Fifteenth Schedule is zero. A+B-C Where A =the written down value of the book of asset at the beginning of the financial year. B = the actual cost of any asset falling within that block, acquired during the financial year; and C = the amount accrued or received in respect of the assets which are demolished, destroyed, discarded or transferred during the financial year together with the value of the carcass or the scrap, if any. T ERMINAL A LLOWANCE
Page 20 REIMBURSEMENTS OF EXPENSES
Page 21 As per Clause (xxi) of subsection (2) of Section 32, any amount received as reimbursement of expenditure to be treated as Gross Earnings while calculating Income from Business Reimbursement of expenses to be considered while calculating the gross earnings for applicability of tax audit as per clause 88 Tax to be deducted at source on the payment towards reimbursement of expenses The onus to prove that the expenditure has been incurred falls on the assessee R EIMBURSEMENT OF E XPENSES
Page 22 EEE
Page 23 All long term retiral savings schemes moved to EEE regime as against Exempt- Exempt-Tax proposed earlier. The EEE method of taxation to be followed for Government Public Fund (GPF), Public Provident Fund (PPF), Recognized Provident Fund (RPF), Pension scheme administered by Pension Fund Regulatory and Development Authority, Approved pure life insurance products, Annuity Schemes Investments made before commencements of DTC in investments currently enjoying the EEE method of taxation would continue to be so eligible for the full duration of the instrument Receipt under a life insurance policy on death/ maturity exempt from tax Receipt of surrender value from life insurance policy and distributions from equity linked insurance policies exempt subject to prescribed conditions E XEMPT E XEMPT E XEMPT R EGIME
Page 24 Deduction in respect of investment in approved funds such as provident funds, superannuation fund or Pension fund reduced to ` 1 lakh from ` 3 lakhs Any withdrawal there from now not taxable which exemption was earlier confined only to accumulated balance as on 31 st March, An aggregate deduction stipulated to ` 50,000 towards life insurance, health insurance premium, and tuition fees for two children. Deduction to a person with disability and for medical treatment and maintenance of a dependent person with disability stipulated subject to prescribed conditions Deductions in respect of contributions or donations to certain funds or non profits organizations proposed An individual not receiving house rent allowance allowed deduction towards payment of rent up to maximum of ` 2,000 per month, subject to prescribed conditions The deduction for interest paid on loans for higher education for a period of eight years to be restored D EDUCTIONS
Page 25 CONTROLLED FOREIGN COMPANY (CFC)
Page 26 A CFC regime is an anti-avoidance measure aimed to provide for taxation of passive income earned by a foreign company that is directly or indirectly controlled by a resident in India This income is not distributed to its shareholders resulting in deferral of taxes. Under proposal of CFC regime, this income is deemed to have been distributed and therefore, taxed in the hands of the resident shareholders as dividend received from foreign company CFC is a foreign company -Which is resident of a country/ territory where the tax payable on profits is less than half of the corresponding Indian tax. -Which is individually or collectively controlled by persons resident outside India -Which is not engaged in active trade/ business A foreign company is not CFC if -It is listed on a recognized stock exchange of the foreign jurisdiction -Its specified income exceeds ` 2.5 lakhs CFC P ROVISIONS
Page 27 CFC regime applies to a resident that fulfills individually or collectively any of the following criteria in a direct or indirect manner: -Any specific or distinct location of either of the enterprises as may be prescribed -Holds at least 50% of the voting power or capital of CFC -Has the power to secure application of 50% of income or assets of the CFC for its benefits -Has the ability to exercise dominant influence on the CFC due to a special contractual relationship -Exerts decisive influence on the shareholder meeting CFC P ROVISIONS
Page 28 GENERAL ANTI AVOIDANCE RULES (GAAR)
Page 29 The DTC contains GAAR provisions which provides sweeping powers to the tax authorities. The same are applicable to domestic as well as international arrangements. GAAR provisions empower the CIT to declare any arrangement as impermissible avoidance arrangement provided the same has been entered into with the objective of obtaining tax benefit and satisfies any one of the following conditions: It is not at arms length It represents misuse or abuse of the provisions of DTC It lacks commercial substance It is carried out in a manner not normally employed for bonafide business purposes Definition of tax benefit includes reduction in tax bases including increase in revenue loss to government. This coupled with exhaustive source rules strengthens GAAR. GAAR
Page 30 GAAR to override tax treaty provisions Redressal in the form of DRP available to the tax payer where GAAR provisions are invoked GAAR Insertion of these provisions is in line with international trade. However, disregarding the provisions of a tax treaty together with the overriding effect to the code may adversely impact international trade and bona fide tax planning if safeguards (that are yet to be prescribed) prove inadequate to curtail arbitrary invocation of GAAR. Permissible limits of bonafide tax planning will be tested as burden of proving the genuineness of the arrangement rests with the assessee.