1. Corporate Taxation

2. Course Outline Session Topic 1.
Introduction to Taxation & Broad Schemes
2-4.
Individual Taxation
5-6.
Corporate Taxation
7-8.
Allied Direct Tax Concepts
9-10.
International Taxation

3. Taxation

4. Income Tax: Scheme of the Act
Receipt vs. Income
Capital vs. Revenue
Scope of Income
Exemption
Exemptions
Heads of Income H1 H2 H3 H4 H5
Aggregation Rules
Aggregation
Deductions
Deductions
Tax Liability
Income
Person
TAX

5. Scope of Income --Residential Nexus-- Person Income Resident
Non Resident
--Territorial Nexus--
In India
Taxable
Taxable
Outside India
Taxable
Non Taxable
(To be refined later)

6. Heads of Income Salaries Income from House Property Business Income
Employer – Employee Relationship
Income from House Property
Buildings not used for business
Business Income
Frequency & Intention
Capital Gains
Transfer of a Capital Asset
Income from Other Sources
Residuary Head of Income

7. Salaries: The Starters..
Test: Employer – Employee Relation
Basis of Charge: Accrual or Receipt whichever is earlier
Scheme (Taxation): Primarily Gross Basis

8. 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

9. 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

10. 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

11. 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)

12. 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

13. 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)

14. 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

15. 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

16. 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 /- Nil

17. 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

18. 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 /-
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

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

20. Provident Fund Statutory Prov. Fund Recognised Prov. Fund
Unrecognised Prov. Fund
Employers’ Contribution
Exempt
Exempt upto 12% of salary
Employees’ Contribution
Eligible for deduction
Eligible for deduction
Not eligible for deduction
Interest
Exempt upto a notified rate
Withdrawals
Exempt if completed 5 years
Taxable

21. Approved Superannuation Fund
Employers’ Contribution exempt upto 27% of salary
Liable for FBT if exceeds Rs /- 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

22. Pensions Uncommuted Pensions Commuted Pensions on retirement
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

23. Gratuity Government Employees – Exempt
Covered by the Payment of Gratuity Act
15 days salary for each year of service
Rs /-
Actual Receipt
Not Covered by the Payment of Gratuity Act
½ months’ average salary for each completed year of service

24. 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 /-
Actual Receipt

25. 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

26. Capital Gains The Starters..
Capital Receipts not taxable unless specifically included
Essentials
Profits/Losses on
Transfer of a
Capital Asset

27. Profit/Loss.. Sale Price Deductions Cost of Acquisition
Cost of Improvement
Expenses on Transfer

28. 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

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

30. 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”

31. Privileges of Long Term Reinvestment 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

32. Some Important Exemptions
Agricultural Incomes
Specified Interest Incomes
Income of Charitable Institutions
Dividend Income
Gifts Received upto Rs. 50,000/-

33. Deductions Generally available only to residents
Subject to the existence of income
Broad Categories
For certain payments
For certain incomes
In certain situations

34. 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

35. Mediclaim Premium Payments covered Deduction available upto
Self & Spouse
Dependent Parents
Dependent Children
Deduction available upto
Rs generally
Rs for senior citizens

36. Donations Calculate Qualifying Amount Calculate Deductible Amount
Eligible without limit
Eligible with limit of 10%
Not Eligible
Calculate Deductible Amount
100% Deduction
50% Deduction

37. 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

38. 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

39. What are these adjustments?
Expenses specifically allowed
Expenses disallowed
Residuary Category
Not Capital
Not Violation of Law
For the Purposes of Business
Depreciation

40. 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)

41. 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)

42. 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.

43. 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

44. 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

45. Amounts not deductible : Cash Expenditure
Expenditure above Rs /- 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??

46. 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

47. 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

48. 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%)

49. 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

50. 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

51. 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

52. 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

53. 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

54. TDS on certain payments
Nature of Payment
Rate for Non Corporate
Rate for Corporate
Interest
10%
20%
Commission
Rent for Immoveable Properties
15%
Rent for Machineries, etc.
Contractors 2%
Subcontractors and Advertisements 1%
Professional Fees

55. 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

56. Procedures: Traditional
Obtain Tax Deduction Number
Deduct Tax
Pay to the Government
Issue TDS Certificate
File TDS Returns

57. 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

58. Non Compliance - Consequences
Recovery of the TDS Amount
Interest on delayed payment / non payment
Penalty for non compliance
Disallowance of Expenditure

59. 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 10 % of the book profits if the actual tax liability is lower
Does it really serve the purpose ?

60. Dividend Distribution Tax
Dividends – Tax Free in hands of shareholders, liable for 15% for the company
Brings to light the problems relating to
Earnings Stripping
Capital Gearing
Cascading Effect on Capital Structuring

61. Scope of Income --Residential Nexus-- Person Income Resident
Non Resident
--Territorial Nexus--
In India
Taxable
Taxable
Outside India
Taxable
Non Taxable
(Simplified Version)

62. 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

63. 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

64. 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

65. 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!

66. 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

67. 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

68. 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

69. Tax Havens… No Tax Jurisdictions No Tax on foreign source Incomes
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

70. International Transfer Pricing
Multitude of business entities and jurisdictions over the value chain
R&D
Mfg.
Testing
Mktg.
Brand
Fin.
Sales
&
Distn.
A Ltd
Luxembourg
B Ltd
India
B Ltd
India
C Ltd
India
D Ltd
Austria
E Ltd
Mauritius
B Ltd
China

71. Transfer Pricing - Framework
Any income, expense or cost sharing
In an “International Transaction”
Shall be determined at “arms’ length price”

72. Arms’ Length Price Comparable Uncontrolled Price (CUP)
Resale Price Method (RPM)
Cost Plus Method (CPM)
Transactional Net Margin Method (TNMM)
Profit Split Method (PSM)