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.

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 taxes Income tax Indirect Tax CST, 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.

Basic concepts Tax rates

Income tax slabs 2011-2012 for General tax payers

Income tax slab (in Rs.)

0 to 1,80,000 1,80,001 to 5,00,000 5,00,001 to 8,00,000 Above 8,00,000

Tax
No tax 10% 20% 30%

Basic concepts Tax rates

Income tax slabs 2011-2012 for Women Income tax slab (in Rs.) 0 to 1,90,000 1,90,001 to 5,00,000 Tax No tax 10%

5,00,001 to 8,00,000
Above 8,00,000

20%
30%

Basic concepts Tax rates

Income tax slabs 2011-2012 for Senior citizen (Aged 60 years but less than 80 years)
Income tax slab (in Rs.) 0 to 2,50,000 2,50,001 to 5,00,000 5,00,001 to 8,00,000 Above 8,00,000 Tax No tax 10% 20% 30%

Basic concepts Tax rates

Income tax slabs 2011-2012 for Very Senior citizen (Above 80 years) Income tax slab (in Rs.) 0 to 5,00,000 Tax 0%

5,00,001 to 8,00,000
Above 8,00,000

20%
30%

Basic concepts Surcharge, Education Cess

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 Tax rates for Companies

Particulars Domestic Domestic Cos up to 1 Cos with Cr Income income > 1 Cr Income 30% Nil 3% 30% 7.5% 3% Foreign Cos with income up to 1 Cr 40% Nil 3% Foreign Cos with income > 1 Cr 40% 2.5% 3%

Tax Rate Surcharge Education Cess Effective Rate

30.90%

33.15%

41.20%

42.20%

Tax rates for Local Authorities and Co-op Societies

Tax rates for Local Authorities
Tax rate 30%

Surcharge Nil
Education Cess 3% Effective Tax Rate 30.9%

Tax rates for Co-op Societies

Total Income Range Tax rate Surcharge Education Cess

Up to Rs 10,000 10,001 to 20,000 Above 20,001

10% 20% 30%

Nil

3%

Particulars Income from Salaries Income from House Property Income from Business and Profession Income from Capital Gains Income from Other sources

Rs xxx xxx xxx xxx xxx

Rs

Gross Total Income Less deduction under chapter IV-A (80C to 80U) Net Total Income Tax Liability Tax on income chargeable @ normal rate xxx Tax on income chargeable @ special rate xxx Sub-total Add:- Surcharge if applicable xxx Add:- Education Cess if applicable xx Total Tax payable Less:- TDS or advance tax paid xxx Net Tax payable

xxxx xx xxxx

xxxx

xxx

xxx

Basic concepts
Assessment Year [Sec. 2(9)]
Period of 12 months starting from 1st April to 31st March of every 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.

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)

Basic concepts
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
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
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
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
AoP
Means 2 or more persons joining in for a common purpose with a objective to earn income.

BoI
Its a group of individuals who with a objective to earn income. Only individuals can be

Any person can be member of AoP

members of BoI
Created by operation of Law.

Created voluntarily

Basic Concepts
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
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.

Basic Concepts
Capital Receipt
Receipt on a/c of fixed

Revenue Receipt
Receipt on a/c of circulating

capital
Receipt in lieu of income Non recurring receipt

capital
A trading receipt Recurring receipt Arising in regular course of business.

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.

Basic Concepts
Income [Sec. 2(24)] means
Any 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
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 = GTI Permissible deduction under chapter VI-A

Basic Concepts Residential Status

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

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

Residential status ..Contd

Basic conditions 182 days or more in a financial year 60 days* or more in a financial year plus 365 days or more in four financial years preceding the relevant financial year
Any one of the two conditions satisfied None of the conditions satisfied

ROR / NOR
*

NR

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 60 26 days.

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 financial year preceding the relevant financial year
Both the conditions Both the to be conditions satisfied satisfied One or none none One or of of the the conditions conditions satisfied satisfied

ROR

NOR

Basic Concepts Residential Status

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.

Residential Status for Individual

Resident [Sec. 6(1)] means
An individual is said to be a resident in the PY if he satisfies any of one 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 ( 1st Condition 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
2008 2009 2007 2008

100 days
200 days 30 days

370

Residential Status for Individual

Resident but Not Ordinary Resident [Sec.6(6)]
An individual is said to be a R NOR in the PY if he

satisfies any of one or both the basic 2 conditions and

should satisfy both 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 40 2009 10 100 2008 09 200 2007 08 30 2006 -07 125 2005 06 120 2004 - 05 125

Residential Status for Individual

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.

Residential Status for Individual

Key Points
1. Stay in India need not be continuous, total stay in India is to 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

HUF can be ROR, RNOR or NR under following conditions. Situation I: HUF qualifies as a RESIDENT

Basic Condition
Additional Condition (a)

The Control and Management of affairs of the HUF is wholly or partly situated in India.
Karta has been resident in India in at least 2 out of 10 PY immediately preceding the PY

Additional Condition (b)

Status

Karta has been in India for a period of 730 days or more during 7 years immediately preceding the PY
Control and Management of Affairs

RESIDENT
NON RESIDENT

Is situated Wholly in India / Partly in India

Is situated totally Outside India

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 NON RESIDENT

Is situated Wholly in India / Partly in India Is situated totally Outside India

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 Is situated Wholly in India RESIDENT NON Is situated Partly in India RESIDENT Is situated totally Outside India

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

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
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 deemed

to accrue or arise in India in the PY.

Indian Income and foreign income

Whether Income is Whether Income received or deemed accrues/arises or deemed Status of to be received in to accrue or arise in Income India, during PY India in the PY.
YES YES NO NO YES NO YES NO INDIAN INCOME INDIAN INCOME INDIAN INCOME FOREIGN INCOME

Incidence of tax for Residents

Individuals and HUF Residents Residents NoR
Indian Income Foreign Income

Non Residents

Taxable in Taxable in India Taxable in India India Taxable in Only 2 types (case 1 and Not Taxable in India case 2) of income are India taxable the rest are not.

Case 1 If 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

Cos, firms, co-op societies, AoP, BoI Residents in India Indian Income Foreign Income Taxable in India Taxable in India Non Residents in India Taxable in India Not Taxable in India

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 of Cos, firms, co-op societies, AoP, BoI) or R-OR
(incase of Individuals 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

S. No 1 Income R R-NoR Yes NR Yes Income received or deemed to be Yes

received in India, whether accruing or arising in India or outside India

2 Income accruing or deemed to accrue Yes Yes Yes

or arise in India, whether accruing or arising in India or outside India

3 Income accruing or arising and Yes Yes No

received outside India from a business controlled or profession setup in India

4 Income Accruing/ arising and received Yes No No

outside India from any other source

Taxable income from R / R-NOR / NR

Type of Income ROR R-NOR NR

Foreign Income - Income from a

from India It is from Income from Profession which is setup in India If it is Business Income & business

Taxed

Taxed in
India

Not taxed
in India

business controlled wholly or partly in India

Taxed in India Taxed

Taxed in India Not Taxed

Not taxed in India Not taxed

is controlled from outside India

It is Income from Profession which is setup outside India Any other Foreign Income

in India
Taxed in India Taxed

in India
Not Taxed in India Not Taxed

in India
Not taxed in India Not taxed

Date

Type of Income

RO R

RNOR Yes Yes Yes

NR Yes Yes Yes

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

India

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

India (maybe received in/outside India)

20/4/10 Income of Rs 56,000 is deemed to be Yes

received in India. (may accrue outside India

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

India. (maybe received the) outside India in

Yes

Yes

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

and accrued outside India. (business is controlled from outside India)

No

No

Date

Type of Income

ROR Yes

R-

NR No

NOR
10/8/10 Business Income of Rs 76,000 is received
and accrued outside India. (business is controlled from India)

Yes

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
Yes

No
Yes

No
Yes

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

individual from friend

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 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
Mr. A, an Indian Citizen received $4000 in out of Fixed Deposits made by him in Bank of America, USA. Which he later remitted to India at an exchange rate of 1$= 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

Income deemed to accrue/arise in India even though it may actually accrue /arise outside India.
1. Income from Business Connection in 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

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 resident shall 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 debt incurred/ money borrowed and used by the payer of interest, for business /profession outside India, shall not taxed in India.

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

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 of

recipient in respect of any debt incurred for the purpose of

business / profession carried in India.

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

Income by way of Royalty [sec 9(1)(vi)]
1. FROM GOVT AUTHORITY Royalty received from Govt. authorities, is deemed to accrue or arise in India, in the hand of recipient. 2. FROM RESIDENT - Royalty received from a resident shall 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 to any business /profession outside India, shall not be taxed in India.

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

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.

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
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
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

 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 Interest on German bonds 2/5th received in India 3/5th received outside India Income from Bangladesh, received there (Agricultural activity controlled from Bangladesh) Income from Property in Canada, received outside India (Rs 76,000 is used In Canada for educational expenses & 10000 remitted to India. Income earned from business in Singapore, controlled from Delhi (Rs 15000 is received in India) Bal amt taxable for R and R-NoR Dividend paid by foreign company but received in India Past untaxed profit of 2001-2002, brought to India 2010-11, Profit from business in Madras and managed from outside India, 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 Gift in foreign currency from a friend received in India

R-OR 24,000 36,000

R-NoR 24,000 -

N-R 24,000 -

1,81,000
86,000

15,000 50,000 45,000 27,000 10,80,000 36,000 80,000

15,000 50,000 45,000, 27,000 10,80,000 36,000 80,000

15,000 50,000 45,000 27,000 10,80,00 0 36,000 80,000