Sales Meeting December-04 TFTs Basic Concepts. TFTs Basic Concepts.
Tax Structure and Basic Concepts
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Transcript of Tax Structure and Basic Concepts
CORPORATE TAX PLANNING
BHAKTI GADGIL
Why do you have taxation in your syllabus?
Death and taxes are inevitable. But death does not repeat itself
What is the meaning of IRS? What is the meaning of “The IRS”?
“THEIRS”
What is fine (e.g. interest / penalty)? A tax for doing something wrong
What is tax ? A fine for doing something right
Agenda Tax Structure in India
Tax Departments in corporates
Scheme of Direct taxation
Few basic provisions – MAT, DDT, TDS, Set off
Flow of assessments / appeals
Meaning of Tax Planning
TAX STRUCTURE
IN INDIA
Introduction “It was only for the good of his subjects that he
collected taxes from them, just as the Sun draws moisture from the Earth to give it back Thousand fold" – Kalidas
Tax System existed in ancient India as well Kautilya’s Arthashastra Tax on agricultural products King was responsible for collection of taxes
It existed in other European countries as well Direct or Indirect Form Levied by Central as well as State Govt.
Why Taxation?
Generates large revenue
Influence economic activities
Reduction in inequalities
Involves no interest burden like borrowing
No rise in prices like deficit financing
Indian tax system Inadequate tax revenue As a % of GDP only 16%, globally it is 30%, UK –
38%, Canada – 48%, USA – 50%, Australia –60%
Lopsided & regressive – Inequity In the past relied on IDT, burdens poor sections Leads to inequalities
Inflexible – Completely leaves agriculture
Large Evasion Corrupt business practices, ineffective tax enforcements, high rates of taxes
Shortcomings Adverse effect on saving Inverse relationship of tax & savings Higher income groups with huge saving
potential – tax rates have been very high
Discourages employment Incentives for capital investments & not for
labor-intensive investments
Distortion of prices Higher IDT, Multiple rates, multiple points
(every step of production)
Gross Tax Revenue
1995-96
2000-03
2003-04
2004-05
2005-06
2006-07
2007-08
0
10
20
30
40
50
60
70
80
Direct TaxIndirect Tax
Tax Policy Improving revenue elasticity lower DT rates, higher base – large production lower IDT rates – larger sales
Inducing growth Lower excise for recession hit industries Tax Holidays Lower import duty on raw material – growth R&D Incentives – economic performance
Promoting globalization – customs duty on EXIM, Excise duty for globally competitive pricing
Tax Department
in corporates
PROFIT AND LOSS ACCOUNT
Income 1000
Expenditures 874
Profit before Tax 126
Provision for Tax (40)Fringe Benefit Tax (3)Deferred Taxes 1 42
Profit after Tax 84
Role in financials
BALANCE SHEET
Liabilities Asset
Shareholders’ Funds 996 Fixed assets 269 Loan Funds 4 Investments 205
Deferred Tax Asset 55Deferred Tax Liability (29)Net Current Assets 500(Includes Advance Payments of ____ Income Tax) _____1000 1000
NOTES TO ACCOUNTSContingent Liabilities
Role in financials
In respect of certain completed assessments where matters are under appeal by the Company
XXX
In respect of appeals decided in favour of Company, but disputed further by the Income Tax authorities.
XXX
Interactions of Tax Department
Tax Department
Management
Business Divisions
Tax AuthoritiesAccounts Department
Consultants / counsels
Broad functions
Tax planningTax
Management
Prosecution
Interest
Penalty
Cash outflow
Cost
Functions of Tax Department• Return Filing• Payment of TaxCompliance
• Tax Audit, TP Audit• Other CertificationsStatutory Reporting
• Tax Planning• M&A• Contract StructuringAdvisory
• Tax Authorities• Consultants & OthersRepresentations
• Knowledge Management• Tax AccountingOthers
Statutory requirement to obtain Tax Audit Report, if gross receipts exceeds specified limit in a year
Failure results in levy of penalties
Prescribed form - Form 3CD
Covers Business Income, FBT, losses carried forward / set off, deductions claimed, tax deducted at source, some ratios
Compliance – Tax Audit
E-filing procedure for corporate tax returns Form ITR 1 and various schedules thereof Documents to be prepared and maintained for
assessment1.Computation of total income2.Notes to computation of income3.Annexures to Computation4.Tax Audit Report and its annexures5.Transfer Pricing Report and its annexures6.Other documents supporting the return (e.g. TDS
certificates)
Compliance – Return Filing
Scheme of taxation
Major types of taxes Direct Taxation Personal Tax Corporate Tax Wealth Tax
Indirect Tax
Excise & Service Tax VAT – Value Added Tax Customs
Scheme of Income Tax
Domestic
Individual Salary, HP,
CG, OI
Corporate BI, CG, OI
International
Individual Salary
Corporate Royalty,
FTS, Supply
May have implications
of corp. compliance
Tax Legislation in India
I.T. Act, 1961 (ITA) and I.T. Rules, 1962 (ITR) form major part of tax legislation.
Annual Finance Act - Amendments to the tax legislation and tax rates.
CBDT - The apex authority responsible for tax administration.
Tax Recovery Mechanism - penal interest / levy of penalty / in few circumstances, prosecution.
Income Resident Resident but Not Ordinarily
Resident
Non Resident
Received in India
Deemed to be received in India
Accrued in India
Deemed to be accrued in India
Accrued/received outside
India
If derived from bus controlled from India
Charge of Tax
Income from Salary (Sections 15 to 17)
Income from House Property (Sec 23 to 27)
Profits and Gains of Business or Profession (Sections 28 to 44DA)
Capital Gains (Sections 45 to 55A)
Income from Other Sources (Sect 56 to 59)
Heads of Income
Tax collection mechanism
Advance Tax
Self Assessment Tax – SA Tax
Tax Deduction at Source - TDS
Tax Collection at Source - TCS
Dividend Distribution Tax - DDT
Due Date Amount of Tax
15th June 15% of estimated tax
15th September 45% of estimated tax
15th December 75% of estimated tax
15th March 100% of estimated tax
Corporate Advance Tax
Tax Calendar
Few direct tax
provisions
Taxation of Companies - MAT
Step 1 – Compute Tax as per normal provisions
Step 2 – Compute Tax @ 15% on Book Profits
Identify whichever is higher of Step 1 & 2
If step 2 is higher, tax is payable under MAT
Book Profit under MATAdj. Particulars Comments
PAT
Add: Tax Provision, deferred tax
For wealth tax, gift tax, FBT no adjustment is needed
Transfer to reserves
Provision for liabilities
Provision for assets such as doubtful debts, fixed assets, exchange rate fluctuation, damaged stock, etc. is not needed
Losses of subsidiaries
Dividend
Depreciation
Minimum Alternate Tax (MAT)Adj. Particulars Comments
Adjusted profit
Less: Amount withdrawn from reserves
Depreciation not arising on a/c of revaluation
Revaluation reserve
Loss or unabsorbed depreciation whichever is lower
Book Profits
MAT @ 15%
MAT Credit
MAT Credit = MAT - Normal Tax
To be utilized in the year when company falls in normal tax bracket
MAT credit to be carried forward for 10 A.Y.s
Set off = Normal Tax - MAT
Example – Year 1Particulars Normal Tax
(Step 1)MAT
(Step 2)
PBT 100 100
+/- Tax adjustments e.g. exemption -64 0
Taxable Income 36 100
Tax @ 30% / 15% 11 15
Tax Payable (Cash flow) 15
MAT credit 4
Example – Year 5Particulars Normal Tax
(Step 1)MAT
(Step 2)
PBT 100 100
+/- Tax adjustments -40 0
Taxable Income 60 100
Tax @ 30% / 15% 18 15
MAT Credit untilised (18-15) 3
Tax Payable 15
MAT credit carried forward 1
Observations
MAT is a only cash flow item
The tax liability never exceeds the liability under the normal provisions
Cash flow never exceeds tax payable under MAT
Payable by domestic corporate assessee
@ 15% plus surcharge and education cess, as the case may be
On the amount of dividend distributed
At the time of declaration, distribution or payment of dividend whichever is earlier
Within 14 days of the earliest event mentioned above
Dividend Distribution Tax
Dividend Distribution Tax
Holding Co
Subsidiary Co
Subsidiary of subsidiary Co
Cascading effect
No Cascading
effect
Mechanisms to collect taxes in advance
Payer is responsible for the following:1. Deduct the tax as per ITA provisions2. Pay the tax into the Govt’s treasury 3. Issue TDS Certificates to the payee4. File quarterly statements / tax returns
Implications for default Interest, Penalty, Disallowance of expenses on gross basis
TDS Rates
TDS Provisions
Payments covered by TDS provisions:
1. Salary – Section 192
2. Interest other than int on securities – 194A
3. Contractual Payments – Section 194C
4. Payment of Rent – Section 194I
5. Professional Payments – Section 194J
6. Payment to non residents – Section 195
TDS Provisions
Deduction at the time of payment Tax to be estimated for the year and
deducted every month Salary to be computed as per ITA Every year circular is issued by CBDT,
explaining how to deduct tax u/s 192 Employer can consider:1. Loss from Self Occupied House Property2. Income from Other Sources3. Income from previous employment4. Deductions under chapter VI-A as specified
TDS from Salary
Applicable if aggregate payments in an year exceed Rs. 30,000/-
Labour contracts / work contracts
Payment or credit, whichever is earlier
Many clarifications issued by CBDT
Default in deduction / payment results in disallowance of expenditure in the hands of payer
TDS from contractual payments
Case Study – Advertising Contracts Client makes payment to advertising agency
and advertising agency makes payment to media
Direct payment to media When advertising agency makes payments to
artists Payment for putting up hoarding? If space is hired for putting up hoarding?
Payments to airlines / travel agents for purchase of tickets?
TDS u/s 194C - FAQs
TDS u/s 194C - FAQs Sponsorship for debates, sport event, etc. to
earn publicity?
Payment to C&F agents?
Payment to courier agency
Payments to restaurants / cafes
Payments to recruitment agencies
Procurement of orders
TDS u/s 194C - FAQs
Electrical contracts?
Maintenance Contracts?
Reimbursements
Paying any sum
No withholding if: - Two separate bills -Reimbursements supported by vouchers
Applicable if aggregate payments in an year exceed Rs. 1,80,000/-
Rent for land, building, equipment, furniture
Payment or credit, whichever is earlier
Many clarifications have been issued by CBDT
Default in deduction / payment results in disallowance of expenditure in the hands of payer
TDS from Rent
TDS u/s 194I - FAQs
Applicability of limit to joint holders?
If the deposit is to be adjusted against future rent?
Composite agreement for taking premises on lease & provision of manpower?
Non-refundable deposit?
Warehousing charges?
TDS u/s 194I - FAQs If municipal taxes, ground rent borne by the
tenant?
Part use of the premises?
TDS on service tax element?
TDS credit
TDS from advance rent covering two FYs
Subsequent to TDS, advance rent becomes refundable due to cancellation / Transfer, etc.
TDS u/s 194I - FAQs Hotel accommodation
If taken on regular basis? If earmarked rooms made available at
specified rate for specified period? Hotel is under an obligation to provide
specific rooms during the agreement period If agreement is only to fix the room tariffs? If payment made by individual employee?
Joint owners?
If aggregate payments in an year exceed 30K
Payments made to professionals / experts
Recently royalty payments also included
Payment or credit, whichever is earlier
Many clarifications have been issued by CBDT
Default in deduction / payment results in disallowance of expenditure
TDS from professional payments
Similar to 194C
TDS to be deducted on service tax!!
194C & 194J both are for services only
Differentiating factor is whether specialised knowledge / education / training is required to provide the service
TDS u/s 194J
Any sum chargeable under the Act
Payment or credit, whichever is earlier
Many clarifications have been issued by CBDT
Default in deduction / payment results in disallowance of expenditure
Important steps for TDS u/s 195:1. Determine taxability of payments under ITA2. Determine taxability of payments under the DTAA3. Determine most beneficial provisions assessee
TDS from payments to non residents
TDS u/s 195 - procedure
Remitter
15CB – CA certificate
www.tin-nsdl.com
Upload remittance
details
System generates
15CA
15CA to be signed
Submit papers to RBI / AD
RBI / AD remits the
money
15CA / CB to AO
Set off of lossesLoss under the head
Inter-source adjustments
Inter-head adjustment
Carry forward & set off
House Property
House Property All House Property
Business Income
Business Income / Speculation Gain
Other than salary Business Income / Speculation Gain
Short Term CG Capital Gains Capital Gains Capital Gains
Long Term CG Long Term Gain Long Term Gain Long Term Gain
Other Sources Other Sources All Other Sources
Speculation Loss
Speculation Gain Speculation Gain Speculation Gain
Assessment procedure
Return
143(1) Intimation
143(3) Scrutiny
Assessment
147 Reassessment
263 CIT enquiry
Rectification & appeals
can be filed
Appellate Procedure
SC – Matters of Law
Jurisdictional HC – Matters of Law
ITAT – Matters of law & facts
CIT(A) – Matters of law & facts
Penal consequences Interest
Compensation for withholding of taxes payable on due dates Liability is automatic
ProsecutionGrave violations of law
PenaltyMain deterrence against acts of omission and commission in contravention of statutory provisions
Tax Planning
Tax Planning
Tax Avoidance
Tax Evasion
Tax Management
Basic Concepts
Tax Planning Comprises arrangements by which
Tax laws are fulfilled
All legal obligations are met
Statute is followed in strict words
No intention to deceit the legal spirit behind the law
Tax Planning ways
Avoid/ postpone/ spread Income Recognition
Change Tax Jurisdictions
Control the Classification of Income
Location of business, nature of business
Form of organization
Employee compensation
Tax Avoidance
Considers loopholes in law
Has a legal sanction
Intentional
Carries no public disgrace
No mala fide motive
Legitimate arrangement
Tax Evasion
Tax is illegally avoided
Evade tax through unfair means
Tax omission
Unlawful & legally punishable
Tax Management
Mainly compliance
Past, present, future
Effective tax management minimizes risk
THANK YOU