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Corporate Taxation.

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Presentation on theme: "Corporate Taxation."— Presentation transcript:

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)


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