Corporate Tax Planning

CORPORATE TAX PLANNING

INCOME -TAX

HISTORY - System of Direct Taxation was in existence even during Hindu period, then during British period 1860 Act, amendments made in 1863,1867, 1871,1873 and 1878 continued till 1918. In 1920 it became a central subject, was overhauled in 1961 and amended from time to time, became effective from 1-4-1962; called Income-Tax Act 1961

Area/Scope – Whole of India. It determines: a. Taxable Income b. Tax Liability c. Procedure of Assessment d. Appeals, Penalties and Prosecution e. Powers & Duties of various I.T. authorities

Amendments are made annually in GeneralBudget, presented by Finance Minister, throughFinance Bill in which proposals for next financialyear are made for various types of assessees,which contains:

• a. Rates of Income-Tax for assessment year• b. Rates of TDS for current financial year• c. Rates of TDS for salaried people• d. Rules for calculating net agricultural incomeTaxable income of an assessee is taxable attwo different rates: 1. Normal Rates – are fixed Annual Finance Act, presented by Finance Minister every year

• Special Rates – on Long & Short-Term Capital • Gain, Lotteries, Cross word puzzle etc. • These rates are fixed under Income-Tax Act• Income Tax Rules 1962 (amended up to date) – • These are notified in Indian Gazette • (Gazette of India). It gives powers to • authorities to implement the Act• Role of CBDT (Sec. 119) – It sends circulars and

clarification for the implementation of I.T. Rule

• Judicial Decisions – Decision given by Supreme Court becomes a law and binding on all courts, Appellate Tribunals, Income-Tax authorities and on all assessees. In case of contradictory ruling, matter is given to a larger bench. Decisions of High Courts are also binding on all assessees as well as on the income tax authorities, but such decisions cannot overrule Supreme Court rulings

• Scheme of Taxation – Every person, whose total income of the previous year exceeds the maximum limit (after deducting exemptions provided in Income Tax Act) for different types of assesses is chargeable for tax on his income. However total income will be determined on the basis of his residential status in India. Income tax is levied in the following manner:

• a. Every person is chargeable to Income-Tax if his • income exceeds the maximum exemption limit• b. I-Tax is charged on Previous Year’s income but is • taxable in the next following assessment year at the • rate applicable to such year• c. I-Tax is charged at two rates viz. Normal rates and • Special rates, stated as above• d. Tax is charged on total income, computed in • accordance with the provisions of the Act• e. Total income of a person is determined on the basis • of his residential status in India

• PERSONS – For taxable purpose, it includes the following: 2(31)

• 1. Individual• 2. H.U.F. (Linear inheritance in the • family)• 3. Firm• 4. Company• 5. Local Authority• 6. Association of persons (AOP) or a • body of individuals (BOI), whether • incorporated or not• 7. Any artificial juridical person not covered • under above categories, such as Idol, Deity • or a University

• INDIVIDUAL – means a natural person (i.e. human being), which includes a male, female, minor and a lunatic

• ASSOCIATON OF PERSONS (AOP) – Though it is not defined under I-T Act, yet it may be construed as ‘joining of two or more persons in an income producing legal activity for a common purpose, may be assessed as AOP, but it should not form partnership

• BODY OF INDIVIDUALS (BOI) – It is a conglomeration of individuals engaged in an activity to earn income. Other than individuals can not become its members. I-Tax is paid by BOI, not by its individuals, on the income received by them from BOI (i.e. firms, companies, H.U.F. and individuals etc.)

• Distinction between AOP and BOI: 1. AOP may consist of non-individuals, while BOI will only consist individuals 2. AOP implies a voluntary getting together for a common purpose/design, but a BOI may or may not have such common purpose or will• LOCAL AUTHORITY – e.g. Panchayat, Municipality, Municipal

Committee, District Board and Cantonment Board etc.• ARTIFICIAL JURIDICAL PERSONS – Which are not natural persons,

but are separate entities in the eyes of law. Though they may not be sued directly in court of law, but can be sued through persons managing them. God, Idols, Deities and Universities are artificial persons. Their incomes such as from offerings and donations are taxable. However, exemption is provided under separate provisions of the I-T Act, if certain requirements are fulfilled.

ASSESSMENT YEAR [2(9)] – The period of12 months, commencing on1st. April, everyyear and ending on 31st. March next

PREVIOUS YEAR [2(34) &3] – Financial Year, immediately precedingthe assessmentyear is called Pr. Yr. For income tax purpose it will endon 31st. March. Although the assessee can close his books of accounton any other date, which may only cover either 12 months.or less than 12 months

Pr. Yr. in case of newly set up business or profession orfor a new source of income shall begin from the date of setting up or coming into existence of new business or profession or new source of income and will end in the same financial year, thereby resulting uniform Pr. Yr. for all assessees and for all source of income

• Cases where Income of Pr. Yr. is assessed in the same year – These exceptions have been provided to safeguard the collection of taxes, so that assessees, who may not be traceable later on, are not allowed to escape the payment of the taxes, such as:

• 1. Income of Non-Resident from shipping business (172) • 2. Income of persons leaving India (174)• 3. Income of an AOP or BOI or Artificial Juridical persons • formed for a particular event or purpose, if likely to be • dissolved (174A)• 4. Income of persons likely to transfer, sell or dispose of • the property to avoid tax (175) • 5. Income of discontinued business or profession (176)

MARGINAL RELIEF – It is provided to ensure that the additional income tax payable, including surcharge, on the excess of taxable income over Rs. 10,00,000 is limited to the amount by which the income is more than Rs. 10,00,000

DIFFERENT HEADS OF INCOME (14): 1. Salary (15-17) 2. Income from House Property (22-27) 3. Profits and Gains of Business and Profession (28-44) 4. Capital Gain (45-55) 5. Income from Other Sources (56-59)INCIDENCE OF TAX (5) – For computing income tax, first of all

residential status of a person is to be decided which is defined as under. Remember only income of Pr. Yr. is taxable in the hands of an assessee

• TAX INCIDENCE AT A GLANCE RESIDENTSParticulars of income derived from sources Ord- Not Non

inary Ordin. Residenta. Income Received or deemed to be Received in India in the Pr. Yr., whether accrued/ earned in India or outside India Yes Yes Yesb. Income Accrues or Arises or deemed to accrue or arise in India in Pr. Yr., whether received in India or outside India Yes Yes Yesc. Income Accrued/earned and received out- side India in Pr. Yr. from a business controlled in or profession set up in India Yes Yes Nod. Income earned and received outside India in Pr. Yr. from a business controlled in or profession set up outside India Yes No Noe. Income earned outside India in preceding years, but remitted to India during Pr. Yr. No No No

• ASSESSEE [2(7)] – is a person who is liable to pay tax or any other sum of money on his income under I.T.Act

• An assessee can either be (a) Resident or (b) Non-Resident in India

• However, for Individuals and H.U.F. a Resident of India will either be (a) Resident & Ordinarily-Resident in India or (b) Resident and Not-Ordinarily Resident in India

• RESIDENTIAL STATUS OF INDIVIDUALS [6(i)] – some key points to be considered are as under:

• Residential status is always determined for the Pr. Yr.• A person may be resident of more than one country for any Pr. Yr.• for income tax purpose• Citizenship of a country and Residential status of that country are

separate concepts.• It is the duty of an assessee to place all material facts before the

assessing officer to enable him to determine his correct Residential status

• As per Section 6(i) an Individual may be either• a. Resident in India – i.e. either Ordinary Resident in • India or Not-Ordinary Resident in India Or,• b. Non-Resident in India• RESIDENT IN INDIA – If any of the following two conditions is

fulfilled:• (i). He has been in India for a period or periods totaling• 182 days or more in Pr. Yr. Or,• (ii). He has been in India for 60 days or more during Pr. • Yr. and has been in India for 365 days or more• during 4 (four) Pr. Yr. immediately preceding the • relevant Pr. Yr.•

Exceptions: a. If he is a citizen of India and leaves India in any Pr. Yr., as a

member of crew of an Indian ship or for the purpose of employment outside India, the period of 60 days as mentioned in above condition no. (ii) shall be substituted by 182 days (i.e. an assessee will not be a Resident in India unless he stays in India at least for 182 days during Pr. Yr. in which he leaves India)

b. If a person is a citizen of India or of Indian origin, he being outside India comes for a visit to India, in any Pr. Yr., the period of 60 days as mentioned in above condition no (ii) will be substituted by 182 days

It is not necessary that the stay in India should becontinuous at one place

• RESIDENT & ORDINARY RESIDENT IN INDIA – If a Resident in India fulfills following 2 (two) conditions in addition to the above one condition, will be called Ordinary- Resident in India:

• a. He should be Resident in India for at least 2 (two) out of 10 (Ten)• Pr. Yrs. preceding the relevant Pr. Yr.• and,• b. He should be in India for at least 730 days during 7 (Seven) yrs. • Preceding the relevant Pr. Yr.• NOT- ORDINARY RESIDENT IN INDIA – If both the above 2 • conditions are not fulfilled, an assessee will be treated as Not-• Ordinary Resident in India in the relevant Pr. Yr.• NON-RESIDENT IN INDIA – If a person does not fulfill either of the

condition laid down for becoming Resident in India, he will be treated as Non-Resident in India for Income-Tax purpose

RESIDENT IN INDIA H.U.F. – If the management andcontrol of its affairs is wholly or partly situated in India inthe relevant Pr. Yr., then H.U.F. will be treated asResident in India ORDINARY-RESIDENT IN INDIA H.U.F. [6(6)b] – If the‘Karta’ or ‘Head’ of H.U.F. fulfills all the conditions requiredto be fulfilled for acquiring Ordinary-Resident in Indiastatus for individual, it will be called Ordinary-Resident inIndia H.U.F. NOT- ORDINARY RESIDENT IN INDIA H.U.F. – Same asmeant for individual assessee i.e. ‘Karta’ or ‘Head’ as anIndividual has to fulfill conditions for becoming Not-Ordinary Resident in IndiaNON-RESIDENT H.U.F. – If no part of the control and

management ofits affairs is situated in India in the relevant Pr. Yr.

RESIDENTIAL STATUS OF A FIRM, AOP AND BOI[6(2&4) – These entities are said to be Resident in India inany Pr. Yr., where during that Pr. Yr. the control andmanagement of its affairs is partly or wholly situated in Indiaand generally the meeting of the management is held inIndiaFirm, AOP and BOI cannot become Ordinary and Not-Ordinary Resident in India Non-Resident in India AOP, BOI and Firm – Theseentities will be called Non-Resident in India, when thecontrol and management of these entities is wholly situatedoutside India during that relevant Pr. Yr.

RESIDENTIAL STATUS OF A COMPANY [6(3)]:RESIDENT IN INDIA – It is Resident in India in Pr. Yr. , if a. It is an Indian company, Or b. During the relevant Pr. Yr. control and management of its affairs is wholly situated in IndiaNON-RESIDENT INDIAN COMPANY – A company is said to be Non-Resident in India if it does not fulfill any of the above mentioned two conditionsA company can not be an Ordinary and Not-OrdinaryResident in India