taxation for managers (mba 402) - june 2015 - unit 1

Taxation for Managers (MBA 402) Christ University Institute of Management (CUIM)

Unit I Provisions of Income Tax Act 1961, Planning And Fiscal Policies

Ganesh Krishnamurthy

June 6, 2015

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Learning objectives

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Develop an understanding of taxation concepts;

Managerial understanding and application of concepts;

Develop ability to plan within the ambit of Indian tax laws

Case study based learning

Appreciate ethical and social dimensions of taxation

CONTENTS

Background Definitions Scope of Total income Basis of charge Residential Status

Background Definitions Scope of Total income Basis of charge Residential Status

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Background

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The provisions of Indian Income-tax aregoverned by Indian Income-tax Act, 1961 whichextends to the whole of India and becameeffective from 1st April 1962.

The Income-tax Act 1961 replaces the Indian

Income-tax Act, 1922

The objects of the revision was to simplify the

income tax laws

To simplify the Income-tax Act, 1961, Direct Tax

Code is in the offing

Applicable to whole of India.

S. 2(25A) of the Act defines India .

Includes all States, Union Territories,

Territorial waters and air space above it

Consists of Twenty three chapters 298 sections

and 14 schedules.

S. 2 defines 48 definitions.

Background

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Section 4 of the Act states that income of theprevious year of every person shall be charged toincome tax at the rates prescribed in the annualFinance Bill as applicable to the relevantassessment year

Every year a Budget is presented before theParliament by the Finance Minister. One of themost important components of the Budget is theFinance Bill, which contains various amendmentswhich are sought to be made in the area of DirectTaxes levied by the Central Government.

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Definitions

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S. 2(9) defines assessment year means the period of twelve monthscommencing on the 1st day of April every yea. It is one year head of theprevious year. Though tax is levied in the assessment year, the income that is the subjectmatter of charge is the income of the previous year during which income isearned. As per S. 3, previous year means the financial year immediatelypreceding the assessment year Business set up during the previous year. At the rate or rates prescribed by the Finance Act. S. 4 gives power to deduct tax at source or Advance tax on the principle As you earn

Charge is on a person.

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Definitions Assessee s 2 (7)

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Assessee means a person by whom any tax or any other sum of money is payable under this Act.

It includes every person in respect of whom any proceeding has been taken for the assessment of his income or assessment of fringe benefits.

Sometimes, a person becomes assessable in respect of the income of some other persons. In such a case also, he may be considered as an assessee.

This term also includes every person who is deemed to be an assessee or an assessee in default under any provision of this Act.

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Definitions (contd)

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Assessment s 2 (8)

This is the procedure by which the income of an assessee is determined by the Assessing Officer. It may be by way of a normal assessment or by way of reassessment of an income previously assessed.

Person s 2(31)

The term person is important since the charge of income-tax is on every person:

The definition is inclusive i.e. a person includes the following:(i) an individual,(ii) a Hindu Undivided Family (HUF),(iii) a company,(iv) a firm,(v) an AOP or a BOI, whether incorporated or not,(vi) a local authority, and(vii) every artificial juridical person e.g., an idol or deity.

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Definitions (contd)

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Income s 2(24)

Includes the following:a) Profits and gains;b) Dividend;c) Voluntary contributions from charitable/religious trust etcd) Perquisite.e) Export incentivesf) Any interest, salary, bonus, commission or remuneration earned by a

partner of a firm from such firm;g) capital gainsh) profits and gains of any business of insurance carried on by a mutual

insurance company or cooperative societyi) profits and gains of business of banking carried out by a co-op society with

its membersj) winnings from lotteries..k) any sum received by the assessee from his employees towards welfare fund

e.g. PF, superannuation fund etcl) sum received under a keyman insurance policy including bonus

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Definitions (contd)

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Income s 2(24)

Includes the following:

m) non-compete fee and any compensation for non sharing ofintangible asset such as know-how, patent, trademarkn) any sum of money, moveable or immoveable property received asgift as stipulated in s 56(2)o) consideration received for issue of shares as exceeds the fair marketvalue of the shares

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Definitions (contd)

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Assessment Year s 2 (9)

Means the period of twelve months starting from April 1 of every year and ending on March 31 of the next year e.g. the asssessment year 2015-16 (which has commenced on April 1, 2015) will end on March 31, 2016.

Previous year s 3 read with s 2(34)

Income earned in a year is taxable in the next year. The year in whichincome is earned is known as the previous year and the next year in whichthe income is taxable is known as assessment year.

Terminology Means v Includes

When a definition uses the word means the definition is self-explanatory, restrictive and in a sense exhaustive. e.g. definition of agricultural income, assessment year;

When a definition is intended to be widened in scope, the term includes finds use e.g. Income, Person

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Definitions (contd)

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Previous year s 3 read with s 2(34)

The first previous year commences on the date of setting up of thebusiness/profession and ends on the immediately following March 31. Thesecond and subsequent previous years are always of 12 months each (i.e. Aprilto March)

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Example

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Example:

Mr Shah joins an Indian firm on 15 September 2014. He was not anywhere inemployment prior to this date and does not have any other source of income.

What are the previous years for the assessment years 2015-16 and 2016-17?

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Example

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Example:

Mr D earns interest income (being his only source of income) tillFebruary 28, 2014. On February 28, 2014 he commences a newbusiness of garment exports. Find out the taxable income of Mr D forassessment years 2013-14 to 2015-16 based on the followinginformation:

Interest income Rs 24,000 p.aBusiness income: Rs 55,000 for the period between February 28, 2014to March 31, 2015 (out of which the income was Rs 15,000 betweenFebruary 28 to March 31, 2014)

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Definitions (contd)

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Agricultural income s 2(1A)

- any rent or revenue derived from land, which is situated in India and is usedfor agricultural purposes;- any income derived from such land by agriculture or by the process ofrendering the produce fit for the market or by sale of such product by thecultivator.- any income derived from any building provided - (i) building is in theimmediate vicinity of the agricultural land and, (ii) it is occupied by thecultivator or receiver of rent or revenue and, (iii) it is used as a dwelling houseor store house or out house and; (iv) the land is assessed to land revenue inIndia or is not situated within the specified area

Specified area means any area not within the jurisdiction of a municipality orcantonment board with prescribed population

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Definitions (contd)

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Example

Assessee grows mulberry leaves, feeds them to silk worms and obtains silkcocoons whether income is agricultural income?

Income derived from tilling and sowing and subsequently operations likeweeding, spraying pesticides and tilling

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Definitions (contd)

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Example

Assessee grows mulberry leaves, feeds them tosilk worms and obtains silk cocoons whetherincome is agricultural income?

Answer No, the agricultural process doneshould be only to make the produce cultivated fitfor market and not to bring about an altogethernew commodity. Income attributable to growingmulberry leaves alone should be treated asagricultural income.

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Definitions (contd)

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Example

Income derived from tilling and sowing andsubsequently operations like weeding, sprayingpesticides and tilling

Answer Income derived from cultivation isagricultural income. Income resulting from theaforementioned activities performed togetherwould constitute agricultural income

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Scope of Total Income

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The objective of the Income Tax Act is to only tax income or items that areconstrued as income.

The Act therefore draws a distinction between Revenue and CapitalReceipt.

Revenue receipts are generally received periodically and always treated asincome. Examples of revenue receipt are Salary, Rent, Share in Profit, Dividendetc.

Capital receipts on the other hand are generally represent receipts which are inthe nature of capital. These are not taxed under the Act. Examples of CapitalReceipt will include Loan, Donations to the Corpus, Compensation fortermination of a source of income etc.

However the distinction between revenue and capital receipts is neither fixednor clear. The distinction must be made taking into account the facts andcircumstances.

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Scope of Total Income (contd.)

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A Privy Council judgment in Kamakshya Narain Singh Vs CIT used theanalogy of trees and fruits to define revenue (income) and capital receipts.While fruits were seen as income the fruit giving tree was defined as the sourceor capital.

Section 2 (24) of the Act itself uses illustrations to define income. Some of theillustrations used in the Act are profits and gains, dividend, voluntarycontributions received by a charitable entity, sum received under keymaninsurance policy, non-compete fees, movable or immovable property receivedas gifts.

Compensation received by an employee from his employer on exit is treated asincome though it is in the nature of capital receipt.

Similarly, winnings from lottery though a one-off receipt are treated asincome.

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Diversion of IncomeIf there is an obligation on the recipient to part with a portion of income infavour of the beneficiary who possesses the right to receive such income,income so diverted is not taxed in the hands of the recipient.

Application of IncomeAn assessee voluntarily or otherwise foregoing or utilizing a portion of theincome for any purpose cannot claim exemption from payment of taxes. Onceincome accrues, tax is payable.

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Example A and B prepare an article for a publication on the understandingthat the remuneration shall be shared by them equally. The article ispublished in the June edition. On June 7, A receives the entire remuneration ofRs 20,000 (the publication makes the payment to the first author as perpractice). What will be the income of A and B if any which will be subject toincome tax? Will the answer be different if A invests Rs 5,000 out of hisproceeds for personal expenses?

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Real IncomeThe Act seeks to tax only real income unless specifically provided for in the law.

When an employer provides free interest free housing loan to its employees, itwas held by Supreme Court that notional interest taking a market rate cannotbe deemed as perquisite and taxed as there is no real interest or income.Subsequent to the decision, the law was amended to tax deemed perquisitebased on rate charged by SBI on housing loan.

In general, no notional interest income can be taken as perquisite on interestfree loan given by father to son or parent to group companies.

Income from copy right or trade mark is income and therefore compensationreceived for infringement of copy right or trade mark is also income.

Compensation received for loss of capital or source of income is capital receiptand hence not income. Conversely, compensation received for loss of profit, it isrevenue and hence treated as income.

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Real IncomeIncome does not arise in a transaction between head office and branch office,even if goods are invoiced at a price higher than the cost price (a personcannot make a profit by trading with himself)

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Keyman Insurance

Keyman insurance policy is a cover taken on the life of a person by anotherperson in whose organization the insured plays a key role.

The relationship between the two persons can be that of an employee andemployer or agent and principal or even a contractee and contractor.

The premium paid by the insuring person can be deducted as an expenditure,provided it is to protect the interest of his business.

Unlike claims settled by insurance companies are exempt under section 10(10D), receipts under the keyman insurance policy is treated as income in thehands of the recipient.

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Subsidies

Subsidies can take various forms like refund of sales tax, import duties, powertariff, water tariffs etc

Whether subsidy received constitutes income would depend upon the intentionof the subsidy.

If the subsidy is intended to assist the recipient in carrying on businessactivities profitably, it is revenue in nature and hence income.

If the subsidy is intended to augment capital assets or expand businesscapacity, it is capital in nature and hence not treated as income.

Similarly, subsidies provided with the objective of spurring economic andindustrial development to tackle the problem of unemployment in the State iscapital in nature.

Note that here, no capital asset is being created. June 2015

Basis of charge (contd.)

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Charge of income tax is on Income of previous year, exceptions:(i) Shipping business of non residents - (S. 172)(ii) Persons leaving India (S. 174)(iii) Persons trying to alienate their assets (S. 175)(iv) Discontinued business or dissolution (S. 176)

Charge is on total income S. 2(45) defines Total Income. It means the total amount of income

referred to in S. 5, computed in the manner laid down in this Act. Inclusion in and exclusion from Total Income.

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Subject to the provisions of this Act.

Charge on the basis of status.i) Residentii) Resident but not ordinary resident.iii) Non resident

.In case of resident

i) Income is received or deemed to be received in Indiaii) Accrues or arises or deemed to accrue or arises in India.iii) Accrues or arises to him outside India.

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In case of resident but not ordinary resident.

- Income mentioned in (i) and (ii) of resident and- Income accrues or arises to him outside India if it is derived from a

business controlled in or profession set up in India.

In case of non-resident.i) Income is received or deemed to be received in India.ii) Accrues or arises or deemed to accrue or arise in India

Income from whatever source derived.- source has not been defined.- S. 14 classifies the head of Income Five heads- Each head there could be different sources.- Income to be computed head wise.

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Basis of charge - Heads of income

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Section 14 of the Act defines the following five heads of income subject toincome tax in India:

1. Income from salary2. Income from house property3. Profits and gains from business and profession4. Capital gains5. Income from other sources

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Residential Status

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For an Individual :i) In India for a period or periods amounting in all to 182 days or more in that year.

orii) Present in India for 60 days or more in that year and 365 days or more within the four years preceding that year.

But any person, being citizen of India, who leaves India in any previous year asa member of crew of an Indian ship or for the purpose of employment outsideIndia the period of 182 days instead of 60 days to be considered

orA person being a citizen of India or a person of Indian origin, who being outside India, comes on a visit to India , the period of 182 days instead of 60 days to be considered.

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Residential Status (contd.)

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For HUF/Firm/AOP/BOI

Said to be resident, when control and management of its affairs is situated either wholly or partly in India.

For a company : i) It is an Indian Company; orii) During the year, the control and management of its affairs is situated

wholly in India.

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Residential Status (contd.)

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Not ordinarily residentFor Individual who has been non-resident in India in 9 out of10 previous years preceding that year or has during the 7 previous years preceding that year been in India for less than 730 days.

For HUF Manager/Kartas status be considered.

Control and Management:-Where head and brain is situated - which directs the affairs of policy, finance, disposal of profits etc.- Not only a de jure control and management but a de facto control and management- Control is not shareholding control.

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Income tax rates

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Income Rates of tax

Upto Rs 2.5 lakhs Nil

Rs 2.5 lakhs - Rs 5 lakhs 10%

Rs 5 lakhs Rs 10 lakhs 20%

Above Rs 10 lakhs 30%

Individuals, HUF, AOP, BOI and Artificial juridical person

An assessee being an individual resident in India whose income does not exceed Rs 5 lakhs shall be entitled to a deduction of an amount equal to 100% of the income tax or an amount of Rs 2,000 whichever is less ( s 87A)

Surcharge - 10% on total income above Rs 1 crore

Education cess 2%; Secondary and Higher education cess 1%

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Income tax rates

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Income Rates of tax

Upto Rs 3 lakhs Nil

Rs 3 lakhs - Rs 5 lakhs 10%



Resident individuals aged 60 years and above but less than 80 years

An assessee being an individual resident in India whose income does not exceed Rs 5 lakhs shall be entitled to a deduction of an amount equal to 100% of the income tax or an amount of Rs 2,000 whichever is less ( s 87A)



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Income tax rates

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Income Rates of tax

Upto Rs 5 lakhs Nil



Resident individuals above 80 years (Super senior citizen)



Rounding off of total income s 288A

Total income computed shall be rounded off to nearest multiple of ten rupees.

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Computation of income tax (contd.)

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Example Mr X aged 32 has taxable income of Rs 12,000,000 during AY2015-16. Compute his tax liability.

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Computation of income tax (contd.)

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Particulars Amount(Rs.)

Upto Rs 250,000 Nil

From Rs 250,001 to Rs 5 lakhs @10% 25,000

Rs 5 lakhs Rs 10 lakhs @ 20% 1,00,000

On the balance (Rs. 110,00,000) @30% 33,00,000

Sub total 34,25,000

Add surcharge@ 10% (since income exceeds Rs 1 crore)

3,42,500

Sub total 37,67,500

Add: Education cess @3% of Rs 37,67,500 113,025

Total tax liability 38,80,525

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Residential status (other than individuals)

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Place of control Residential statusof family

Ordinarilyresident or not

Wholly in India Resident Additional 2 conditions of s 6(6)(b) to be fulfilled by the Karta

Wholly outside India Non resident -

Partly in India and partly outside India

Resident Additional 2 conditions of s 6(6)(b) to be fulfilled by the Karta

HUF s 6(2)

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Residential status (other than individuals)

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Place of control Residential status

Wholly in India Resident

Wholly outside India Non resident

Partly in India and partly outside India

Resident

Firm and AOP s 6(2)

Place of control Residential status

Indian company

Other than an Indian company

Wholly in India Resident Resident

Wholly outside India Resident Non resident

Partly in India and partly outside India Resident Non resident

Company s 6(3)

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Incidence of income and tax

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Whether income is received or deemed to be received in India during the relevant years

Whether income accrues or arises or deemed to accrue or arise in India during the relevant years

Status of income

Yes Yes Indian Income

Yes No Indian Income

No Yes Indian Income

No No Foreign Income

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Individual and HUF

Resident and Ordinarily resident in India

Resident but not ordinarily

resident in India

Non resident in India

Indian Income Taxable in India Taxable in India Taxable in India

Foreign Income Taxable in India Only to the extent of the following:Business income where business is controlled wholly or partly from India

and/or ;Income from

profession set up in India

Not taxable in India

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Residential status

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Exercise:

Mr Ram a citizen of Malaysia visited India and stayed for a period of 150 daysduring previous year 2014-15. He stayed in India throughout the previous year2010-11. However, he stayed in his home country for 330 days and 350 daysduring the previous years 2008-09 and 2006-07 respectively. What is hisresidential status during AY 2015-16?

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Residential status

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Solution:

Mr Rams period of stay is summarised as below:

Previous Year No. of days Conclusion

2014-15 150 Satisfies condition in s 6(1) 60 days or more in the previous year and 365 days or more in the 4 years prior to the previous year Hence he qualifies as a resident

2013-14 Nil

2012-13 Nil

2011-12 Nil

2010-11 365

Conditions u/s 6(6) Not ordinarily resident since he is a non-resident for 9 out 10 years preceding the previous year or his period of stay in the 7 preceding previous years is less than 730 days.

Mr Ram would therefore qualify as a resident but not ordinarily resident for AY 2015-16 June 2015


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Exercise:

Sai Engineering Company, a Singapore based company and non-residentunder the Indian Income-tax Act derived the following income by way ofroyalty. Advise about the taxability of these incomes in India:

1. Government of India paid Rs 10,00,000 under approved agreement;2. Chennai based company paid Rs 12,00,000 for import of drawings anddesigns for use in the project executed in Malaysia;

3. A South Korean company paid Rs 500,000 for use of know-how in SouthKorea and Rs 750,000 for the formula used in India

June 2015

Thank You !

taxation for managers (mba 402) - june 2015 - unit 1

Documents

income tax act

indian incometax act

income of theprevious

indianincometax act

advance tax

toincome tax

year head of theprevious

relevantassessment year