module 1 – tax management

8/2/2019 Module 1 Tax Management

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Module 1 Tax Management

Basic concepts: assessment year, previous year, person,

assessee.

Income, charges on income, GTI, NI capital and revenue

receipts.

Residential status, receipt & accrual of income, connotation of

income deemed to accrue or arise in India.

Incidence of tax, Tax Planning, Tax Evasion, Tax

Management.


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Basic concepts The GOI has the power to levy tax. The propose of collecting tax is

for the benefit of the society.

Taxation in India is divided into 2

Direct taxesIncome tax

Indirect TaxCST, VAT, Customs, Service tax, CENVAT

Understanding of Income tax law

Income tax act of 1961

Annual Finance Act.

A Finance Bill passed by both the houses of parliament and signed by the president

of India become an Act.

Part A contains proposed policies & Part B contains amendments to Direct taxes

Judicial Decisions.


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Income tax slabs 2011-2012for General tax payers

Income tax slab (in Rs.) Tax

0 to 1,80,000 No tax

1,80,001 to 5,00,000 10%

5,00,001 to 8,00,000 20%

Above 8,00,000 30%

Basic concepts Tax rates


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Income tax slabs 2011-2012

for Women

Income tax slab (in Rs.) Tax0 to 1,90,000 No tax

1,90,001 to 5,00,000 10%

5,00,001 to 8,00,000 20%

Above 8,00,000 30%



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Income tax slabs 2011-2012 for Senior citizen

(Aged 60 years but less than 80 years)


0 to 2,50,000 No tax

2,50,001 to 5,00,000 10%

5,00,001 to 8,00,000 20%

Above 8,00,000 30%



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Income tax slabs 2011-2012 for Very Senior

citizen (Above 80 years)


0 to 5,00,000 0%

5,00,001 to 8,00,000 20%

Above 8,00,000 30%



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Surcharge is tax after the computation of Income tax.

Its a tax on tax.

Form assessment year 2010-11 surcharge is not

applicable.

Education Cess is tax on Income tax.

Its a tax on tax.

Form assessment year 2010-11 education cess is 3% of

Income Tax.

Basic concepts Surcharge, Education Cess


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Basic concepts Tax rates for Companies

Particulars Domestic

Cos up to 1Cr Income

Domestic

Cos withincome > 1

Cr Income

Foreign

Cos withincome up

to 1 Cr

Foreign

Cos withincome >

1 Cr

Tax Rate 30% 30% 40% 40%

Surcharge Nil 7.5% Nil 2.5%

EducationCess

3% 3% 3% 3%

Effective

Rate

30.90% 33.15% 41.20% 42.20%


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Tax rates for Local Authorities

Tax rate30%

SurchargeNil

Education Cess3%

Effective Tax Rate30.9%

Tax rates for Co-op Societies

Tax rates for Local Authorities and Co-op Societies

Total Income Range Tax rate Surcharge Education Cess

Up to Rs 10,000 10%

Nil 3%10,001 to 20,000 20%

Above 20,001 30%


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Particulars Rs Rs

Income from Salaries xxx

Income from House Property xxx

Income from Business and Profession xxx

Income from Capital Gains xxx

Income from Other sources xxx

Gross Total Income xxxx

Less deduction under chapter IV-A (80C to 80U) xx

Net Total Income xxxxTax Liability

Tax on income chargeable @ normal rate xxx

Tax on income chargeable @ special rate xxx

Sub-total xxxxAdd:- Surcharge if applicable xxx

Add:- Education Cess if applicable xx

Total Tax payable xxx

Less:- TDS or advance tax paid xxx

Net Tax payable xxx


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Assessment Year [Sec. 2(9)]

Period of 12 months starting from 1st

April to 31st

March ofevery year.

Income earned in previous year is taxed in the Assessment Yr.

Assessment year succeeds the pervious year.

Previous Year [Sec. 3]

Income earned in previous year is taxed in the Assessment year.Previous year precedes the AY .

All assesses are required to follow financial year as PY.

In case of new business the PY starts from the date of setting

up the business and ending immediately following 31st

March.

Basic concepts


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Exception, when AY and PY are same.

In the following cases PY and AY are.

Shipping business of Non Residents (Sec 172)

Persons leaving India permanently (Sec 174)

Bodies formed for short duration (Sec 174A)

Persons likely to transfer property to avoid tax (Sec 175)

Discontinued business (Sec 176)


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Person [Sec. 2(31)], person means & includes

An individual

A Hindu Undivided Family(HUF)

A Company

A Firm

An Association of persons(AoA) or Body of

Individuals (BoI) whether incorporated or not.

A Local Authority

Every Artificial Judicial Person

Basic concepts


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INDIVIDUAL MEANS

A natural person including males or females

A minor as well as a major

A person of sound and unsound mind.

A living as well as deceased person.

FIRM MEANS

Firm is treated as a separate entity different from its partners

under IT Act A partnership firm assessed as such(PFAS)

A partnership firm assessed as Association of Persons

(PFAOP)

Basic concepts


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HINDU UNDIVIDED FAMILY (HUF) MEANS

All persons lineally descended from a common male &

includes their wives and unmarried daughter

HUF is separate taxed entity other than its members or

karta

2 types of HUF 1) Mitakshara HUF, 2) Dayabhaga HUF

INCOME THAT CONSTITUTES HUF INCOME

Ancestral property

Property built by HUF out of its income

Gifts received by HUF

Accretion to the existing property

Converting self property into the property of HUF

Basic concepts


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COMPANY [Sec. 2(17)] COMPANY MEANS

An Indian company

Foreign company

Institutions, association declared by CBDT as Cos.

DOMESTIC COMPANY [Sec. 2(22A)] MEANS

An Indian company

An other company, w. r. t. its income has paid

dividend within India.

Basic concepts


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Basic Concepts

AoP

Means 2 or more persons

joining in for a common

purpose with a objective to

earn income.

Any person can be member

of AoP

Created voluntarily

BoI

Its a group of individuals

who with a objective to earn

income.

Only individuals can be

members of BoI

Created by operation of

Law.


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ASSESSEE - [Sec 2(7)] Means

A person who is liable to pay tax or any other sum of

money under the act and includes.

Assessment of his own income

Assessment of income of any other person in respect of whom he

is liable to pay tax.

Amt of refund due to him

In short assessee means

Any person who is liable to pay tax or any other sum, such as

fines, penalty or interest.

Basic Concepts


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Basic Concepts

Concept of Income

Income should be regular & definite can be in cash or kind

Illegal income is also an income

Dispute title to any income does not make any difference

Income should be real and not fictional

Income has to differentiated between capital receipts and

revenue receipt.

Income can be taxed either or receipt or accrual bases,

whichever is earlier.


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Basic Concepts

Capital Receipt

Receipt on a/c of fixed

capital

Receipt in lieu of income

Non recurring receipt

Revenue Receipt

Receipt on a/c of circulating

capital

A trading receipt

Recurring receipt

Arising in regular course of

business.


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Basic Concepts

Income [Sec. 2(24)] means

Profit and gain, dividends,

Value of any perquisites or profit in lieu of salary

Profit from insurance business [Sec 44]

Winning from lotteries, crossword puzzles, horse races, gambling

Sum received under keyman insurance policy

Voluntary contribution received by charitable trust.

Special allowance received to cover personal expenses.

Capital gains chargeable u/s Sec 45

Perquisites obtained by a director of a company who has

substantial interest.


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Income [Sec. 2(24)] meansAny sum chargeable u/s 28,41,59

Sum received by employees as contribution to

employees welfare fund

Voluntary contribution received by any university or

other educational institution, hospitals.

Profits and gain of any business of banking carried on

by a co-operative society with its members.

Basic Concepts


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Gross Total Income (GTI)

u/s 14 all income shall be classified under 5 heads

Income from Salaries

Income from House Property

Profit and Gain from business and profession

Income from Capital gains

Income from other sources

The aggregate of all these income is GTI

Net Income (N-I)

N-I = GTIPermissible deduction under chapter VI-A

Basic Concepts


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The scope of total income is governed by the residential status

Residential status is determined separately for each category

of persons for each PY as it may vary from year to year.

The different taxed entities are An individual

HUF

A firm of AoP

A Company

Every other person

Citizenship and Residential Status are 2 different concepts

Basic Concepts Residential Status


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Residential status

Residential status

Resident

Resident and

Ordinarily Resident(ROR)

Resident but Not

Ordinarily Resident(NOR)

Non Resident

(NR)

Residency is determined by physical number of days stay in India


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Residential status ..Contd

None ofthe

conditions

satisfied

Any one ofthe two

conditions

satisfied

ROR / NOR NR

Basic conditions

182 days or more in a financial year

60 days* or more in a financial year plus 365 days or more in fourfinancial years preceding the relevant financial year

*60 days gets substituted for 182 days only in the year of departure for an

Indian citizen proceeding abroad for the purposes of employment. In the

year of arrival to India for resuming employment, the threshold limit is 60da s.


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Residential status...Contd

Additional conditions: Resident in India in at least two out of ten financial years

preceding the relevant financial year; and

Present in India for 730 days or more during the 7 financialyear preceding the relevant financial year

ROR NOR

Both the

conditions

satisfied

One or none

of the

conditions

satisfied

Both the

conditions

to be

satisfied

One or

none of

the

conditions

satisfied


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There are 3 types of Residential Status

Resident (R)

Has to satisfy any one or both the basic conditions.

Resident but not ordinary resident(R NOR)

Has to satisfy any one or both the basic condition and

satisfy both the additional conditions.

Non resident (NR)

Does not satisfy any of the basic conditions.

Basic Concepts Residential Status


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Resident [Sec. 6(1)] means

An individual is said to be a resident in the PY if hesatisfies any ofone or both the basic 2 conditions.

If he is in India in the PY for a period of 182 days or more

E.g. 2011-2012 175 days ( 1stCondition not satisfied, check for next)

OR

If he is in India for a period of 60 in the PY and 365 days or

more during the 4 years immediately preceding the PY.

E.g. 2010

2011 40 days

2009 2010 100 days 370

2008 2009 200 days

20072008 30 days

Residential Status for Individual

R id ti l St t f I di id l


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Resident but Not Ordinary Resident [Sec.6(6)]

An individual is said to be a R NOR in the PY if he

satisfies any ofone or both the basic 2 conditions and

should satisfyboth the additional conditions

He has been resident in India in at least 2 out of 10 PY

immediately preceding the relevant PY.

AND

He has been in India for a period of 730 days or more

during 7 years immediately preceding the relevant PY


2010 11 2009 10 2008 09 200708 2006 -07 2005 06 2004 - 05

40 100 200 30 125 120 125


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Non Resident [Sec. 2(30)]

An individual is said to be a Non Resident in

the PY if he does not satisfies any of the

basic 2 conditions and does not satisfy both

the additional conditions.


R id ti l St t f I di id l


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Key Points

1. Stay in India need not be continuous, total stay in India isto be considered. Stay can be at different places.

2. Stay in territorial waters of India is to be treated as stay

in India.3. Period of stay in India begins from the day on which

source of income comes into existence in case of an

assessee

4. If a person is in India for a part of the day, calculation

should be made on hourly basis (12hrs = Full day and

less than 12 hrs no day to be counted.)


RESIDENTIAL STATUS OF A HUF


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RESIDENTIAL STATUS OF A HUF HUF can be ROR, RNORor NR under following conditions.

Situation I: HUF qualifies as a RESIDENT

Basic

Condition

The Control and Management of affairs of the HUF

is wholly or partly situated in India.

Additional

Condition (a)

Karta has been resident in India in at least 2 out

of 10 PY immediately preceding the PY

Additional

Condition (b)

Karta has been in India for a period of 730 days or

more during 7 years immediately preceding the PY

Status Control and Management of Affairs

RESIDENT Is situated Wholly in India / Partly in India

NON RESIDENT Is situated totally Outside India
http://indiataxes.com/Information/incometax/contents/definitions/typeofresstatus/res_indiv.htmhttp://indiataxes.com/Information/incometax/contents/definitions/typeofresstatus/res_indiv.htmhttp://indiataxes.com/Information/incometax/contents/definitions/typeofresstatus/res_indiv.htmhttp://indiataxes.com/Information/incometax/contents/definitions/typeofresstatus/res_indiv.htm


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RESIDENTIAL STATUS OF FIRMS OR AOP

A Firm or AoP can either be R / NR in India, but cannot be

assessed as ROR or RNOR, under the following conditions:

The term Control and management herein refers to in case a firm

is in the hands of the Partner and in case of AOP in the hands of

the Chief Officer and in no sense refers to the management of day

to day business affairs

Status Control and Management of Affairs

RESIDENT Is situated Wholly in India / Partly in India

NON RESIDENT Is situated totally Outside India


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RESIDENTIAL STATUS OF A COMPANY

A Company can be assessed as R / NR in India under the

following conditions for a PY.

The term Control and management herein refers to Central

Controlling Power and has no reference to the day to day

affairs of the Company

An Indian

Company

A Foreign

Company

Control and Management of Affairs

RESIDENT

RESIDENT

NON

RESIDENT

Is situated Wholly in India

Is situated Partly in India

Is situated totally Outside India

R l ti hi b t


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Relationship between

residential status & incidence of tax

Incidence of tax depends

Residential status

Time of accrual or receipt of income.

Indian Income and foreign income


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Any of the following 3 incomes are Indian Income

1. Income is received or deemed to be received in India,during PY and accrues/arises or deemed to accrue or arise

in India in the PY.

2. Income is received or deemed to be received in India,

during PY but accrues/arises or deemed to accrue or arise

outside India in the PY.

3. Income is received or deemed to be received outside India,

during PY but accrues/arises or deemed to accrue or arise

in India in the PY.

Foreign Income


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Foreign Income

Income is treated as foreign income if it

satisfies 2 conditions

1. Income is not received or not deemed to be received

in India, during PY

2. Income does not accrues/arises or does not deemedto accrue or arise in India in the PY.

I di I d f i i


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Whether Income is

received or deemedto be received in

India, during PY

Whether Income

accrues/arises or deemedto accrue or arise in

India in the PY.

Status ofIncome

YES YESINDIAN

INCOME

YES NOINDIAN

INCOME

NO YESINDIAN

INCOME

NO NOFOREIGN

INCOME


Incidence of tax for Residents


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Incidence of tax for Residents

Individuals and HUF

Residents Residents NoR NonResidents

Indian

Income

Taxable in

India

Taxable in India Taxable in

India

ForeignIncome

Taxable inIndia

Only 2 types (case 1 andcase 2) of income are

taxable the rest are not.

Not Taxable inIndia

Case 1If its a business income and business is controlled wholly

or partly from India.

Case 2 - If its a income from profession that is setup in India

Incidence of tax for Others


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Incidence of tax for OthersCos, firms, co-op societies, AoP, BoI

Residents in India Non Residents in India

Indian Income Taxable in India Taxable in India

Foreign Income Taxable in India Not Taxable in India

K i t


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Key points

1. Indian Income always taxable in India, irrespective of

residential status of taxpayer.

2. Foreign Income is taxable in the hands of resident

(incase ofCos, firms, co-op societies, AoP, BoI)or R-OR

(incase ofIndividuals and HUF) in India and not taxable

for NR in India.

In case of R-NoR, foreign income is taxable only if,

1. If its a business income and business is controlled

wholly or partly from India.

2. If its a income from profession that is setup in India

Taxable income from R / R-NOR / NR


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S. No Income R R-NoR NR

1 Income received or deemed to be

received in India, whether accruing

or arising in India or outside India

Yes Yes Yes

2 Income accruing or deemed to accrue

or arise in India, whether accruing or

arising in India or outside India

Yes Yes Yes

3 Income accruing or arising and

received outside India from a business

controlled or profession setup in India

Yes Yes No

4 Income Accruing/ arising and received

outside India from any other source

Yes No No


T bl i f R / R NOR / NR


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Type of Income ROR R-NOR NR

Foreign Income - Income from abusiness controlled wholly or partly

from India

Taxedin India

Taxed inIndia

Not taxedin India

It is from Income from Profession

which is setup in India

Taxed

in India

Taxed in

India

Not taxed

in India

If it is Business Income & business

is controlled from outside India

Taxed

in India

Not Taxed

in India

Not taxed

in India

It is Income from Profession which

is setup outside India

Taxed

in India

Not Taxed

in India

Not taxed

in India

Any other Foreign Income Taxed Not Taxed Not taxed



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Date Type of Income RO

R

R-

NOR

NR

10/5/10 Rental income of Rs 36,000 is received in

India

Yes Yes Yes

31/3/11 Interest income of Rs 46,000 accrues in

India (maybe received in/outside India)

Yes Yes Yes

20/4/10

Income of Rs 56,000 is deemed to bereceived in India. (may accrue outside

India

Yes Yes Yes

20/5/10 Income of Rs 66,000 is deemed to accrue in

India. (maybe received outside India inthe)

Yes Yes Yes

21/5/10 Business Income of Rs 76,000 is received

and accrued outside India. (business is

controlled from outside India)

Yes No No

Date Type of Income ROR R NR


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Date Type of Income ROR R-

NOR

NR

10/8/10 Business Income of Rs 76,000 is received

and accrued outside India. (business iscontrolled from India)

Yes Yes No

31/3/11 Interest income / rental income / salary

income of Rs 86,000 is received outside

India & accrues outside India

Yes No No

20/4/10 Gift of Rs 2 lac received outside India by

an individual from friend

Yes No No

20/5/10 Gift of Rs 1 lac received in Delhi by an

individual from friend

Yes Yes Yes

21/5/10 Income of Rs 96,000 is earned & received

outside India in 2004-2005 but later

remitted to India.

No No No

RECEIPT OF INCOME REMITTANCE OF INCOME


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RECEIPT OF INCOME vs. REMITTANCE OF INCOME

Receipt of income refers to the 1st occasion when the

recipient gets money under his control. Once an amt is

received as income, any remittance or transmission of the

amt to another place does not result in receipt.

CASH VS KIND

RECEIPT VS ACCRUAL

ACTUAL RECEIPT VS DEEMED RECEIPT

Example


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Example

Mr. A, an Indian Citizen received $4000 in out of Fixed Deposits

made by him in Bank of America, USA. Which he later remittedto India at an exchange rate of 1$= Rs. 40/- (i.e., 1,60,000/-

INR), Is his Income taxed in India or USA?

The Answer is that his Income is not taxed in India but is taxed in

USA. The reason behind this is the Income out of Interest

aroused & was received in USA by the assessee, only later it was

remitted to India. Herein the law clearly states that only receipts

in India are taxed and not remittances made after any receipt of

such Income outside India

Special Case Sec 9


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Special Case Sec 9

Income deemed to accrue/arise in India even though

it may actually accrue /arise outside India.1. Income from BusinessConnectionin India

2. Income from any property, asset or source of income in

India.

3. Capital gain on Transfer of capital asset situated in

India.

4. Income from salary by the GOI, for services rendered

outside India.

5. Dividend paid by an Indian Company outside India, is

deemed to accrue or arise in India., except dividend u/s

2(22)(e).

Special Case Sec 9


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Income by way of Interest [sec 9(1)(v)]

1. FROM GOVT AUTHORITY - Interest received from

Govt. authorities, is deemed to accrue or arise in India,

in the hand of recipient.

2. FROM RESIDENT - Interest received from a residentshall be deemed to accrue/arise in India in the hands of

recipient in all cases except the following,

Interest received from a resident in respect of any debtincurred/ money borrowed and used by the payer of

interest, for business /profession outside India, shall not

taxed in India.

Special Case Sec 9

Special Case Sec 9


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Interest received from a resident in respect of any debt

incurred/ money borrowed and used by the payer of interest,

for the purpose of making /earning any income from any

source outside India.

3. FROM NON REISDENTS - Interest received from a NR

shall be deemed to accrue/arise in India in the hands ofrecipient in respect of any debt incurred for the purpose of

business / profession carried in India.

Special Case Sec 9

Income by way of Interest [sec 9(1)(v)]

Problem E.g


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Problem

E.g Mr. X is NR, During the PY, he receives interest outside. If

interest accrues/arises in India, it shall be treated as Indian

Income, else it shall not be treated as Indian Income.

1. Rs 10.5lac received from GOI.

2. Rs 9lac received from A Ltd. (O-R) & A ltd has used the capital

borrowed form Mr. X for carrying business outside income.

3. Rs 2lac received from B Ltd. (O-R) & B ltd has used the capital

borrowed form Mr. X for carrying business & profession in India.

4. Rs 7lac received from C Ltd. (N-R) & C ltd has used the capital

borrowed form Mr. X for carrying business & profession in India.

5. Rs 3lac received from D Ltd. (O-R) & D ltd has used the capital

borrowed form Mr. X for carrying business & profession outside

India.

Special Case Sec 9


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Income by way of Royalty [sec 9(1)(vi)]

1. FROM GOVT AUTHORITYRoyalty received from

Govt. authorities, is deemed to accrue or arise in India,

in the hand of recipient.

2. FROM RESIDENT - Royalty received from a residentshall be deemed to accrue/arise in India in the hands of

recipient in all cases except the following,

Royalty received from a resident in respect relatable toany business /profession outside India, shall not be taxed

in India.

Special Case Sec 9

Special Case Sec 9


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Royalty received from a resident in respect of any other

source of income outside India, is not taxed in India.

3. FROM NON REISDENTS Royalty received from a

NR shall be deemed to accrue/arise in India in the hands of

recipient if business / profession is carried in India.

Special Case Sec 9

Income by way of Royalty [sec 9(1)(vi)]


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Tax Planning

Tax Planning means devising strategies to minimize

the tax payment to the govt and saving more money

of oneself, by investing in various schemes of the

Income Tax Act such as Sec80D, 80C and 24(b).

The various methods are

Owning the house

By investing on a business premises

By making investments that are exempted from tax

By investing in investments that enjoy treatment of

concessional tax

Tax Evasion


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Tax Evasion

Tax Evasion means efforts made by firms, to avoid paying

taxes by illegal and unfair means. Usually takes place when

taxpayers deliberately hide their incomes to reduce their

liability of tax.

Often occurs when the people report dishonest tax that includes

declaring less gains, profits.

Tax Evasion is a crime and the guilty parties are subjected to

imprisonment and fines. The methods of Tax Evasion are

Smuggling

Customs duty evasion

Value added tax evasion

Illegal income tax evasion

Problem


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Problem X furnishes the following details, of his income, during the PY.

Interest on German bonds(2/5th received in India)Rs 60000

Income from Bangladesh, received there but later on Rs

50,000 is remitted in India, (Agricultural activity controlled

from Bangladesh)Rs 1,81,000

Income from Property in Canada, received outside India(Rs

76,000 is used In Canada for educational expenses and 10000

remitted to India.)Rs86,000

Income earned from business in Singapore, controlled from

Delhi(Rs 15000 is received in India)Rs 65000


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Dividend paid by foreign company but received in India Rs

46,500

Past untaxed profit of 2001-2002, brought to India 2010-11, Rs

10,43,000

Profit from business in Madras and managed from outside India, Rs

27,000

Profit on sale of a building in India but received in Sri Lanka, Rs

10,80,000

Pension from a former employer in India, received in Rangoon, Rs

36,000

Gift in foreign currency from a friend received in India, Rs 80,000

Particulars R-OR R-NoR N-R


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Interest on German bonds

2/5th received in India

3/5th received outside India

24,000

36,000

24,000

-

24,000

-

Income from Bangladesh, received there (Agricultural activity

controlled from Bangladesh) 1,81,000

- -

Income from Property in Canada, received outside India (Rs

76,000 is used In Canada for educational expenses & 10000

remitted to India. 86,000

- -

Income earned from business in Singapore, controlled from

Delhi (Rs 15000 is received in India)

Bal amt taxable for R and R-NoR

15,000

50,000

15,000

50,000

15,000

50,000

Dividend paid by foreign company but received in India 45,000 45,000, 45,000

Past untaxed profit of 2001-2002, brought to India 2010-11, - - -

Profit from business in Madras and managed from outside

India,

27,000 27,000 27,000

Profit on sale of a building in India but received in Sri Lanka,

Rs 10,80,000

10,80,000 10,80,000 10,80,00

0

Pension from a former employer in India, received in

Rangoon

36,000 36,000 36,000

module 1 – tax management

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