Corporate Taxation
Prof. S B Gabhawalla
Course Outline
Session
1.
Topic
Introduction to Taxation & Broad Schemes
2-4.
5-6.
7-8.
Individual Taxation
Corporate Taxation
Allied Direct Tax Concepts
9-10.
International Taxation
Commodities
Transaction
Tax
Banking
Cash
Transaction
Tax
Taxation
Dividend
Distribution
Tax
Income
Tax
Direct
Taxes
Securities
Transaction
Tax
Wealth
Tax
Fringe
Benefit
Tax
Indirect Taxes
Centre
State
Local
Customs
Sales Tax/VAT
Octroi
Excise
Profession Tax
Property Taxes
Service Tax
Stamp Duty
User Charges
Income Tax: Scheme of
the Act
Income

Receipt vs. Income
– Capital vs. Revenue
– Scope of Income
•
•
•
•
•
Exemption
Exemptions
Heads of Income
Aggregation Rules
Deductions
Tax Liability
H1
H2
H3
Aggregation
Deductions
Person
TAX
Income
H4
H5
Scope of Income
--Territorial Nexus--
--Residential Nexus-Person Resident
Non Resident
Income
In India
Taxable
Taxable
Outside India
Taxable
Non Taxable
(To be refined later)
Heads of Income
Salaries
Employer – Employee
Relationship
House Buildings not used for
business
Income from
Property
Business Income
Capital Gains
Income from Other
Sources
Frequency & Intention
Transfer of a Capital
Asset
Residuary Head of
Income
Illustrative Format..
NAME OF THE ASSESSEE:
ASSESSMENT YEAR:
RESIDENTIAL STATUS:
PREVIOUS YEAR ENDED ON:
PERMANENT ACCOUNT NUMBER:
COMPUTATION OF INCOME
INCOME FROM SALARIES
INCOME FROM HOUSE PROPERTY
BUSINESS INCOME
CAPITAL GAINS
INCOME FROM OTHER SOURCES
GROSS TOTAL INCOME
LESS DEDUCTIONS
NET TOTAL INCOME
xx
xx
xx
xx
xx
xx
xx
xx
COMPUTATION OF TAX LIABILITY
TAX PAYABLE ON INCOME
ADD SURCHARGE
ADD EDUCATION CESS
ADD SECONDARY & HIGHER EDUCATION CESS
GROSS TAX PAYABLE
LESS TAX DEDUCTED AT SOURCE & ADVANCE TAXES
NET TAX PAYABLE / REFUNDABLE
xx
xx
xx
xx
xx
xx
xx
Tax Rates: Individual :
Normal
Income
Tax
SC
EC
SHEC
Total
0-150000
0
0
0
0
0
150001-300000
10
0
2
1
10.30
300001-500000
20
0
2
1
20.60
500001-1000000
30
0
2
1
30.90
1000001 onwards
30
10
2
1
33.99
1
1 Applicable from the first rupee of tax (Marginal Relief Available)
Tax Rates: Individual :
Ladies
Income
Tax
SC
EC
SHEC
Total
0-180000
0
0
0
0
0
180001-300000
10
0
2
1
10.30
300001-500000
20
0
2
1
20.60
500001-1000000
30
0
2
1
30.90
1000001 onwards
30
10
2
1
33.99
1
1 Applicable from the first rupee of tax (Marginal Relief Available)
Tax Rates: Individual :
Senior Citizens
Income
Tax
SC
EC
SHEC
Total
0-225000
0
0
0
0
0
225001-300000
10
0
2
1
10.30
300001-500000
20
0
2
1
20.60
500001-1000000
30
0
2
1
30.90
1000001 onwards
30
10
2
1
33.99
1
1 Applicable from the first rupee of tax (Marginal Relief Available)
Tax Rates: Others
Assessee / Income
Tax
SC
EC
SHEC
Total
2
1
30.90
2
1
33.99
2
1
41.20
2
1
42.23
Partnership Firms & Domestic Companies
0-10000000
30
0
10000001 onwards
30
10
0-10000000
40
0
10000001 onwards
40
2.5
1
Foreign Companies
1
1 Applicable from the first rupee of tax (Marginal Relief Available)
Salaries: The Starters..



Test:
Employer – Employee Relation
Basis of Charge: Accrual or Receipt
whichever is earlier
Scheme (Taxation): Primarily Gross
Basis
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
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
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
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)
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
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)
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
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
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
Petty Loans upto Rs. 20000/-
Nil
Nil
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
Motor Cars
Others
– Depreciation for completed year
50% WDV
20% WDV
10% SLM
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. 15000/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
Retirement Benefits







Provident Fund
Superannuation Fund
Pensions
Gratuity
Encashment of unutilised leave
Retrenchment Compensation
Voluntary Retirement Compensation
Provident Fund
Statutory
Prov. Fund
Recognised
Prov. Fund
Unrecognised
Prov. Fund
Employers’
Contribution
Exempt
Exempt upto 12% of
salary
Exempt
Employees’
Contribution
Eligible for deduction
Eligible for deduction
Not eligible for
deduction
Interest
Exempt
Exempt upto a notified
rate
Exempt
Withdrawals
Exempt
Exempt if completed 5
years
Taxable
Approved Superannuation
Fund

Employers’ Contribution exempt upto 27% of
salary
– Liable for FBT if exceeds Rs. 100000/- 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
Pensions

Uncommuted Pensions
– 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
Gratuity


Government Employees – Exempt
Covered by the Payment of Gratuity Act
– 15 days salary for each year of service
– Rs. 350000/– Actual Receipt

Not Covered by the Payment of Gratuity Act
– ½ months’ average salary for each completed
year of service
– Rs. 350000/– Actual Receipt
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. 300000/Actual Receipt
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
Capital Gains
The Starters..


Capital Receipts not taxable unless
specifically included
Essentials
– Profits/Losses on
– Transfer of a
– Capital Asset
Profit/Loss..


Sale Price
Deductions
– Cost of Acquisition
– Cost of Improvement
– Expenses on Transfer
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
Privileges of Long Term





Indexation Benefits
Substitution of Fair Market Value
Lower Rate of Tax @ 20%
Special Scheme for listed securities
Eligible for Re-investment Benefits
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”
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 reinvested asset
Some Important
Exemptions





Agricultural Incomes
Specified Interest Incomes
Income of Charitable Institutions
Dividend Income
Gifts Received upto Rs. 50,000/-
Deductions



Generally available only to residents
Subject to the existence of income
Broad Categories
– For certain payments
– For certain incomes
– In certain situations
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
Mediclaim Premium

Payments covered
– Self & Spouse
– Dependent Parents
– Dependent Children

Deduction available upto
– Rs. 15000 generally
– Rs. 20000 for senior citizens
Donations

Calculate Qualifying Amount
– Eligible without limit
– Eligible with limit of 10%
– Not Eligible

Calculate Deductible Amount
– 100% Deduction
– 50% Deduction
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
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
What are these
adjustments?



Expenses specifically allowed
Expenses disallowed
Residuary Category
Not Capital
 Not Violation of Law
 For the Purposes of Business


Depreciation
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)
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)
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.
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
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
Amounts not deductible :
Cash Expenditure


Expenditure above Rs. 20000/- 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??
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
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
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%)
Depreciation: Written Down
Value


Opening WDV
(a) xx
Add Actual Cost of Assets Purchased
– Used > 180 days
– Used < 180 days


(b)
(c)
xx
xx
Less Sale Price of Assets Sold
(d) xx
Closing WDV (e) = ( a + b + c - d) xx
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
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
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
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
TDS on certain payments
Nature of Payment
Rate for Non
Corporate
Rate for Corporate
Interest
10%
20%
Commission
10%
10%
Rent for Immoveable
Properties
15%
20%
Rent for Machineries,
etc.
10%
10%
Contractors
2%
2%
Subcontractors and
Advertisements
1%
1%
Professional Fees
10%
10%
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
Procedures: Traditional





Obtain Tax Deduction Number
Deduct Tax
Pay to the Government
Issue TDS Certificate
File TDS Returns
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
Non Compliance Consequences




Recovery of the TDS Amount
Interest on delayed payment / non
payment
Penalty for non compliance
Disallowance of Expenditure
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 tax @ 10 % of the book
profits if the actual tax liability is lower
Does it really serve the purpose ?
Dividend Distribution Tax


Dividends – Tax Free in hands of
shareholders, liable for DDT @ 15%
for the company
Brings to light the problems relating to
– Earnings Stripping
– Capital Gearing
– Cascading Effect on Capital Structuring
Scope of Income
--Territorial Nexus--
--Residential Nexus-Person Resident
Non Resident
Income
In India
Taxable
Taxable
Outside India
Taxable
Non Taxable
(Simplified Version)
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
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
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
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!
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
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
Income Distributive Rules
– Rights of the Source
State
Nature of Income
OECD Model
UN Model
From Immoveable Properties
Full Tax
Full Tax
Business Profits
In case of PE
In case of PE
Dividends
No Tax
Lower Tax
Interest
No Tax
Lower Tax
Royalties
No Tax
Lower Tax
Fees for Technical Services
No Tax
Lower Tax
Capital Gains from properties
Full Tax
Full Tax
Capital Gains from Shares
No Tax
Full Tax
Independent Personal Services
In case of FB
In case of FB
Dependent Personal Services
Full Tax
Full Tax
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
The Solution to one
problem germinates
another problem..
Tax Havens…

No Tax Jurisdictions
– 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
International Transfer
Pricing

R&D
A Ltd
Luxembourg
Multitude of business entities and
jurisdictions over the value chain
Mfg.
Testing
Mktg.
Brand
Fin.
Sales
&
Distn.
B Ltd
B Ltd
C Ltd
D Ltd
E Ltd
B Ltd
India
India
India
Austria
Mauritius
China
Transfer Pricing Framework



Any income, expense
or cost sharing
In an “International
Transaction”
Shall be determined at
“arms’ length price”
Arms’ Length Price





Comparable Uncontrolled Price
Resale Price Method
Cost Plus Method
(CUP)
(RPM)
(CPM)
Transactional Net Margin Method (TNMM)
Profit Split Method
(PSM)
FAR Analysis
Indian Party
Foreign Party
FUNCTIONS
ASSETS
RISKS
Check for a simpler party if it could be
categorised as manufacturer or distributor
This was just an aerial
view of the sea, not an
exercise in swimming…
Thank You