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Corporate Taxation

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  1. Corporate Taxation Prof. S B Gabhawalla

  2. Course Outline

  3. Taxation

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

  7. Illustrative Format..

  8. Tax Rates: Individual : Normal 1 Applicable from the first rupee of tax (Marginal Relief Available)

  9. Tax Rates: Individual : Ladies 1 Applicable from the first rupee of tax (Marginal Relief Available)

  10. Tax Rates: Individual : Senior Citizens 1 Applicable from the first rupee of tax (Marginal Relief Available)

  11. Tax Rates: Others 1 Applicable from the first rupee of tax (Marginal Relief Available)

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

  13. 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

  14. 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

  15. 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

  16. 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)

  17. 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 Monetary Allowances

  18. 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)

  19. 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

  20. 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

  21. 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. 20000/- Nil

  22. 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

  23. 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

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

  25. Provident Fund

  26. 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

  27. 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

  28. 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

  29. 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

  30. 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

  31. Capital GainsThe Starters.. • Capital Receipts not taxable unless specifically included • Essentials • Profits/Losses on • Transfer of a • Capital Asset

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

  33. 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

  34. 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

  35. 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”

  36. 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 Privileges of Long TermReinvestment Benefits • Any – Specified Capital Gains Bonds • Reinvest Capital Gains • Within six months Lock in period of 3 years for the re-invested asset

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

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

  39. 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

  40. Mediclaim Premium • Payments covered • Self & Spouse • Dependent Parents • Dependent Children • Deduction available upto • Rs. 15000 generally • Rs. 20000 for senior citizens

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

  42. 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

  43. 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

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

  45. 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)

  46. 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)

  47. 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.

  48. 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

  49. 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

  50. 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??