Corptax & Fina-planning

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MODULE 1

SESSION 2

3/6/2013 1



ALWAYS REMEMBER

Sr. No. DO NOT CONSIDER THE FOLLOWING

1 Dividend paid by Indian Company. (Exempt u/s 10(34) )

2 Past Untaxed Foreign Income brought to India

3 Gifts from Relatives.( Section 57(vi) )

4 Incomes not related to previous year 2009-10.

5 Share Income received from HUF (Exempt u/s 10(2) )

6 Agricultural Income derived from the land situated in India (Exempt u/s 10(1) )

CONSIDER THE FOLLOWING

1 Loss from foreign business, controlled from India, sales being received in India.

This can be set off against business profits and thereafter against the income of

any other head except income from salary and chance winnings. (Section 70)

2 Depreciation of Foreign Business: It can be set off from business profits and

thereafter against the income of any other head. (Section 32 (2) )

3 Interest received on Compensation of land, acquired by Government of India.

Consider ( 1/ 6) taxable.

3/6/2013 2



INCOME & ITS TAXABILITY

Sr. No. Nature of Income Taxable in India

1Income from business connection in India Yes

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

India

Yes

3 Capital gain on transfer of a capital asset situated in India Yes

4 Income from salary if service is rendered in India Yes

5 Income from salary (not being perquisite/allowance) if

service is rendered outside India (provided the employer is

Government of India and the employee is a citizen of India)

Yes

6 Income from salary if service is rendered outside India (not

being a case stated above)

No

7 Dividend paid by Indian Company No

3/6/2013 3



INTEREST INCOME & ITS TAXABILITY

Sr.

No.

Income From whom Income

is received

Payers Source of Income Taxability

1 Interest Government of India Any Yes

2 Interest A person resident in

India

Borrowed capital is used by the

payer of interest for carrying onbusiness/profession outside India

or earning any income outside

India

No

3 Interest A person resident in

India


payer of interest for any other

purpose

Yes

4 Interest A person nonresident

in India


payer of interest for carrying on

business/profession in India

Yes

5 Interest A person nonresident

in India


payer of interest for any other

purpose.

No

3/6/2013 4



ROYALTY / FEES FOR TECHNICAL

SERVICES & ITS TAXABILITY

Sr.No.

Income From Whom IncomeReceived

Payer’s Source of Income

Taxability

1 Royalty/fees for

technical services

Government of India Any Yes

2 Royalty/fees for

technical services

A person resident in India Payment is relatable to a

business or profession or any other source carried

by the payer outside India

No

3 Royalty/fees for

technical services

A person resident in India Payment is relatable to

any other source of

income

Yes

4 Royalty /fees for technical services A person nonresident inIndia Payment is relatable to abusiness or profession or

any other source carried

by the payer in India

Yes

5 Royalty /fees for

technical services

A person nonresident in

India

Payment is relatable to

any other source of

income

No

3/6/2013 5



PURCHASE OF GOODS IN INDIA

BY NON RESIDENT FOR EXPORT

• No income is deemed to accrue or arise in

India to a non-resident through or form

operations confined to the purchase of

goods in India for export even if thepurchase is made through a regular

agency established in India for that

purpose.

3/6/2013 6



INCOME FROM COLLECTION OF NEWS

AND VIEWS IN INDIA BY NON RESIDENT

• No income is deemed to accrue or arise in

India to a non-resident who is engaged in

the business of running a news agency or

of publishing newspapers, magazines or journals from activities confined to

collection of news and views in India for

transmission out of India. The Finance Act,1983 has made it operative retrospectively

from 1 April 1962.

3/6/2013 7



INCOME FROM SHOOTING OF ANY CINEMATOGRAPH

FILM BY NON REIDENT IN INDIA

• No income is deemed to accrue or arise inIndia to a person through or from operationswhich are confined to the shooting of anycinematograph film in India, provided that such

non-resident person is either:i. an individual who is not a citizen in India; or

ii. a firm which does not have any partner who isa citizen of India or who is resident in India; or

iii. a company which does not have anyshareholder who is a citizen of India or isresident in India.

3/6/2013 8



PROBLEMS & SOLUTIONS

3/6/2013 9



(1)

• Joel Ltd, a foreign company owns a property in Mumbai. It is given on

rent (rent being 5000 Us Dollars per month) to Peter Ltd., another foreign

company. The two companies are non resident in India. The agreement

is made outside India. Rent is payable in foreign currency outside India.

As per the agreement, rent is accrued outside India. Discuss whether the

rental income of Joel Ltd is chargeable to tax in India under Income tax Act, 1961.

Solution:

The rental income of X Ltd is chargeable to Indian Income Tax, as the

property is situated in India, rent of the property will be deemed to accrue

or arise in India and hence be earned in India [Sec. 9(1)(i)]. Any income

earned or deemed to accrue or arise in India during the previous year is

taxable in India for a non-resident foreign company also. [Sec. 9 r.w. Sec

5].

3/6/2013 10



(2)

• A non resident foreign citizen, comes to India for the first time on 10th April, 2012 for a visit of 100 days in the connection with the shooting of cinematograph film in Delhi. For this, he has been paid remuneration of Rs. 1,40,000 in India by A Ltd, a foreign company. None of theshareholders in A Ltd is a citizen of India or resident in India. Decidewhether it is chargeable to tax or not.

Solution:

No income which accrues to a non-resident foreign national from theshooting of any cinematograph film in India, is deemed to accrue or arisein India. However, any income which is received in India is alwaystaxable irrespective of residential status and nationality [Sec.5(2)(a)]. Toavoid tax liability in India, remuneration should have been receivedoutside India.

3/6/2013 11



(3)

• C (HUF) is a Hindu Undivided Family whose Karta is a person of IndianOrigin. During the Previous year 2012-13, C is non Resident (as he is inIndia only for 25 days during April, 2012) .The Family Business iscontrolled by a team of professionals in India under the guidance of Mr.C. Every year C comes to India generally for 25-100 days. Determine theresidential status of the family.

Solution:

An HUF is “resident” in India during the previous year if any part of control and management of its affair is situated in India [Sec. 6(2)].Residential status of its Karta is non relevant.

3/6/2013 12



(4)

• Rahul, an Indian citizen, is employed in the bank of America at its

Kolkatta Office. In June 2011, the bank offers him the post in the Middle

East at a consolidated salary of Rs. 50,000 per month, allowing joining

time before January 2012. Please advise him.

Solution:

He should leave India by 28 September 2011 so that he remains non-

resident in India during the FY 2011-2012 to avoid tax on his foreign

salary in India.

3/6/2013 13



(5)

• How will the income be determined in case of outsourcing of business

process by non residents / foreign companies to BPO units in India under

Section 9 of Income tax Act, 1961?

Solution:

(a) As a Circular No. 5/2004, dated September 28, 2004 income is

determined as follows.

(i) If there is no business connection between the BPO units in India and

non-resident entity and the BPO unit in India is not a Permanent

Establishment (PE) of the non-resident entity, income of BPO unit in India is

taxable in India. However, non-resident / foreign companies is not taxable

because there is no business connection in India.

(ii) If there is business connection between the BPO unit in India and non-

resident entity and the BPO unit in India is a permanent Establishment (PE)

of the non-resident entity, income of BPO unit in India is taxable in hands of

foreign entity in India.

3/6/2013 14



TAX PLANNING

Tax planning can be defined as an arrangement of one's financial and economic affairs

by taking complete legitimate benefit of all deductions, exemptions, allowances and

rebates so that tax liability reduces to minimum.

Essential features of tax planning are as under:

1.It comprises arrangements by which tax laws are fully complied.2.All legal obligations and transactions (both individually and as a whole) are met.

3.Transactions do not take the form of colourable devices (i.e., those devices where

statute is followed in strict words but actually spirit behind the statute is marred would be

termed as colourable devices).

4.There is no intention to deceit the legal spirit behind the tax law.

The line of demarcation between tax planning and tax avoidance is very thin and blurred.

The English courts about eight decades ago recognized the right of a taxpayer to resort

to the legal method of tax avoidance. It is well settled that it is unconstitutional for the

Government to attempt tax collection without the authority of law or legal basis. Similarly,

a taxpayer cannot escape tax payment outside the legal framework, as he renders

himself liable for prosecution as a tax evader.3/6/2013 15



TAX EVASION

• All methods by which tax liability is illegally avoided are termed as tax evasion. An

assessee guilty of tax evasion may be punished under the relevant laws.

• Tax evasion may involve stating an untrue statement knowingly, submitting

misleading documents, suppression of facts, not maintaining proper accounts of

income earned (if required under law), omission of material facts on assessment.

• All such procedures and methods are required by the statute to be abided with but

the assessee, who dishonestly claims the benefit under the statute before complying

with the said abidance by making false statements, would be within the ambit of tax

evasion.

• A person may plan his finances in such a manner, strictly within the four corners of

the taxing statute that his tax liability is minimised or made nil If this is done and as

observed strictly in accordance with and taking advantage of the provisions contained

in the Act, by no stretch of imagination can it be said that payment of tax has been

evaded for. In the context of payment of tax, 'evasion' necessarily means, 'to try

illegally to avoid paying tax’.

3/6/2013 16



TAX AVOIDANCE

Tax avoidance is reducing or negating tax liability in legally

permissible ways and has legal sanction. Essential features

of tax avoidance are as under —

1.Legitimate arrangement of affairs in such a way so as to

minimize tax liability.

2.Avoidance of tax is not tax evasion and carries no public

disgrace with it.

3.An act valid in law cannot be treated as fictitious merely

on the basis of some underlying motive supposedly

resulting in lower payment of tax to authorities.

4.There is no element of mala fide motive involved in tax

avoidance3/6/2013 17



EXAMPLES

Amit deposits Rs.45,000 in P.P.F. account so as to reduce tax payable from Rs. 19,000 to

Rs.10,000.

Ans. Tax Planning.

Ajit Industries Ltd. installed an air conditioner costing Rs.60,000 at the residence of a director

as per terms of his appointment; but treat it as fitted in quality control section in the factory. This

is with the objective to treat it as plant for the purpose of computing depreciation.

Ans. Tax Evasion.

Anil Industries. Ltd. maintains register of tax deduction effected by it to enable timely

compliance.

Ans. Tax Management.

Surbhi Ltd. issues a credit note for Rs.36,000 for brokerage payable to Suresh, who

is the son of Surjit, managing director of the company. The purpose is to increase his income

from Rs.18,000 to Rs.54,000 and reduce its income correspondingly.

Ans. Tax Evasion.

•

3/6/2013 18



DIFFERENCEPoints of

distinction Tax planning Tax Avoidance Tax Evasion Tax

Management Definition It is a way to

reduce tax bill by

using advantages

allowed by the Act

through variousexemptions,

deductions & relief.

It is way to reduce

tax bill by bending

the without

breaking it.

It is the way to

reduce tax bill by

deliberately tax

planning

suppressing incomeor over showing

expenditure etc.

It is a procedure

to fulfill all

requirements of

the Income tax

Act.

Nature It is moral in

nature. It is immoral in

nature but legal It is illegal hence

immoral in nature. It is the duty to

comply with thelaw.

Benefit Benefit arises in

short run as well

as in long run. Benefit arises in

short run but not in

long run. No Benefit arises

but causes penalty

and prosecution. It avoids Penalty,

interest and

prosecution. 3/6/2013 19



DIFFERENCE

Object To reduce tax bill

following script &

moral of law. To reduce tax bill

following script but

not moral of law. To reduce tax bill

without by any

means whether

legal or illegal

To comply with

the requirements

of the law.

Treatment of

Law It takes advantages

gifted by the law. It takes advantages

of loopholes in the

law. It violates the law. It follows the law.

Requirement It is invited. It is to be avoided. It is forbidden. It is the duty. Practice It is a practice of

tax saving. It is a practice of

tax saving. It is a practice of tax

concealment. It is a practice of

Tax

administration. 3/6/2013 20

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