Amity CampusUttar PradeshIndia 201303

ASSIGNMENTSPROGRAM: MFC

SEMESTER-II

Subject Name : Corporate Tax PlanningStudy COUNTRY : Sudan LCPermanent Enrollment Number (PEN) : MFC001652014-2016014Roll Number : AMF206 (T)Student Name : SOMAIA TAMBAL YOUSIF ELMALIK

INSTRUCTIONSa) Students are required to submit all three assignment sets.

ASSIGNMENT DETAILS MARKSAssignment A Five Subjective Questions 10Assignment B Three Subjective Questions + Case Study 10Assignment C Objective or one line Questions 10

b) Total weightage given to these assignments is 30%. OR 30 Marksc) All assignments are to be completed as typed in word/pdf.d) All questions are required to be attempted.e) All the three assignments are to be completed by due dates and need to be submitted for

evaluation by Amity University.f) The students have to attached a scan signature in the form.

Signature :

Date : _________________________________

( √ ) Tick mark in front of the assignments submitted

Assignment ‘A’ √ Assignment ‘B’ √ Assignment ‘C’ √

Corporate Tax PlanningAssignment A(10 Marks)

Q.1 Distinguish between tax avoidance and tax evasion? (2 Marks)

TAX PLANNING, TAX MANAGEMENT, TAX AVOIDANCE AND TAX EVASION 1. Over the last eight decades, since the introduction of income-tax, it has been observed that there is a constant struggle between taxpayer and tax collectors, the former trying to reduce (if not negate) their tax liability, and the latter seriously struggling to plug in the loopholes in the statute.

2. To understand the meaning of tax planning, tax avoidance and tax evasion, one can go through the following cases- Case1 - X is an individual for the assessment year 2010-11 his gross total income is Rs. 12,40000 tax on Rs. 12,40,000 is Rs 2,84,280. to reduce his tax liability there of will be reduced to Rs. 11,70,000 and Rs. 2,62,650 respectively. As the tax liability has been reduced within the legal framework it is tax planning

Case2 - X Ltd. is a chemical manufacturing company. it has a factory in Haryana near Delhi border. withing th factory campus a piece of land of 2000 square metere is lying unutilized. the company wants to start a new unit ot manufacture computer components. if this manufacturing unit is started in the existing factory campus, deduction under section 80IB, the company starts the new unit a village near jammu. the company has two option. under one of the options deduction under section 80-IB is not available. However, this deduction is available under the other option. TO get the benefit of deduction under section 80-IB the new unit has been started in jammu & Kashmir. As the tax liability has been reduced to get benefit of deduction available under the income-tax, it is tax planning.

Case3 - Suppose in Case2, the process of manufacturing actually takes place in Haryana. to get the benefit of deduction under section 80-IB, the company takes a factory building on rent in a villagein jammu and only on paper it is shown that the new manufacturing unit is situated in a village near jammu.

as the company wants to reduce the tax liability by making incorrect statement about the location of manufacturing process it is tax evasion.

Case4 - If Rs. 50,000 is gifted by a husband to his wife, income generated therefrom is taxable in the hands of husband under the clubbing provisions of section 64(i) section 64(1) is not applicable if gift is made by same person out of the funds ofhis hindu undivided family in capacity as karta of the family. If gifts is made by karta of the family to his wife, clubbing provisions can e avoided and ultimate tax liability will be reduced, however the tax liability will be reduced by taking the help of a loophole in the law bur within the legal framework. it is tax avoidance. 3. 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 it comprises arrangements by which tax laws are fully complied. all legal obligations and transactions (both individually and as a whole) are met. Transactions donot take the form of colourable devices there is not intention to deceit the legal spirit behind the tax law.

4. 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 payment outside the legal framework as he renders himself liable for prosecutions as a tax evader.

tax avoidance is reducing or negating tax liability in legally permissible ways and has legal sanction Essential features of tax avoidance are as under – Legitimate arrangement affairs in such a way so as to minimize tax liability. Avoidance of tax is not tax evasion and carries not public disgrace with it. an act valid in law cannot treated as fictitious merly on the basis of some underlying motive supposedly resulting in lower payment of tax to authorities. there is not element of mala fide motive involved in tax avoidance.

Over an over again the courts have said that there is nothing sinister in so arranfing one‘s affairs as to keep taxes as low as possible. tax avoidance is ound law and certainly not bad morality for any body to so arrange his affairs in such a way that the brunt of taxation is the minimum. this can be done within the legal framework even by taking help of loopholes in the law. if on account of lacuna in the law or orherwise the assessee is able to avoid a payment of tax within the letter of law, it cannot be said that the action is void because it is intended to save payment of tax so long as the law exists in its present form the taxpayer is entitled to take its advantage. The above meaning of tax avoidance has also now acquired the judicial blessings of the supreme court of India in Union of India v. Azadi Bachoo Andolan[2003]263 ITR 706/132 Taxman 373,whichreversed the findings in its earlier judgment in McDowell & co. Ltd. v.CTO[1985]154 ITR 148/122 Taxman 11 as legally incorrect. If a court finds that not withstanding a series of legal steps taken by as an assessee in case the intended legal result has not been achieved, the court might be justified in overlooking the intermediate steps but it would not be permissible for the court to treat the intervening legal steps as fictitious based upon some hypothetical assessment of the real motive of the assessee the court must deal with what is tangible in an objective manner. In other words, an act which is otherwise valid in law cannot be treated as fictitious merely on the basis of some underlying motive supposedly resulting in some economic detriment or prejudice to the national interests. A transaction or arrangement which is perfectly permissible under law and has the effect of reducing the tax burden of the assesse. should not be looked upon with disfavor. 5. 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 document, 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 before complying with the said abidance by making false statement would be within the ambit of tax evasion.

6. A Person may plan his finances in such a manner strictly within the four corners of the taxing statute that his tax liability is minimized or made nil. if this is done and as observed strictly in accordance with an 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 contest of payment of tax evasion necessarily means to try illegally to avoid paying tax CIT v Sri Abhaynanda Rath Family Benefit Trust [2002 ]123 Taxman 81 (Ori)

7. Tax management involves the procedures of compliance with the statutory provision of law the following are the board area of distinction between tax planning and tax management.

Tax planning Tax management

1. the objective of tax planning is to reduce the tax liability to the minimum. 2. tax planning is futuristic in its approach, 3. tax planning is very wide in its coverage and includes tax management .

1. the objective of tax management is to comply with the provision of law. 2. tax management relates to past , present and future 3. tax management has a limited scope . 4. As a result of effective tax

4. the benefits arising from tax planning are substantial particularly in the long term,

management penalty penal interest prosecution etc, can be avoided

8. The following are the broad areas of distinction the two:

Tax avoidance Tax evasion

1. Any planning of tax which aims at reducing or negating tax liability in legally recognized permissible ways, can be termed as an instance of tax avoidance. 2. tax avoidance takes into account the loop holes of law. 3. tax avoidance is tax hedging with in the framework of law . 4. Tax avoidance has legal sanction 5. Tax avoidance is intentional tax planning before the actual tax liability arises.

1. All methods by which tax liability is illegally avoided is termed as tax evasion. 2. tax evasion is an attempt to evade tax liability with the help of unfair means/method. 3. Tax evasion is tax omission 4. tax evasion is unlawful and an assessee guilty of tax evasion may be punisher under the relevant laws. 5. tax evasion is international attempt to avoid payment of tax after the liability to tax has arisen.

Q.2 What do you understand by control and Management of a Company? (2 Marks)

RESIDENTIAL STATUS OF A COMPANY [SEC.6 (3)] An Indian company is always resident in India. A foreign company is resident in India only if, during the previous year, control and management of its affairs is situated wholly in India. In other words, a foreign company is treated as non resident if during the previous year , control and management of its affairs is either wholly or partly situated out of India. The table given below highlights the same proposition-

Place of control Resident or non-resident

Control and management of the affairs of a company [for meaning see para 28.1] is- Wholly in India Wholly outside India

Partly in India or partly outside India

An Indian company

A company other than an Indian company

Resident Non-resident Non-resident Resident Resident Resident

Note- A Company can never be ―ordinarily‖ or ―not-ordinarily‖ resident in India.Control and management 28.1 In determining residential status of a company, the following broad propositions should be kept in view : Meaning of ―control and management‖ – The term ―control and management‖ refers to ―head and brain‖ which directs affairs of policy, finance, disposal of profits and vital things concerning the management of a company. The place of incorporation of the company may not be the place where control lies-

Control is not necessarily situated in the country in which the company is registered. A company may be resident in more than one country- Under the tax laws a company may have more than one residence. The mere fact that a company is also resident in a foreign country , would not necessarily displace its residence in India. Central control and management lies where meetings of board of directors are held- Usually control and management of a company‘s affairs is situated at the place where meetings of board of directors are held. Moreover, control and management referred to in section 6 is central control and management and not the carrying on of day to day business of servants, employees or agents.

Place of doing business may be different from place of control of business- The whole of business may be done outside India and yet the control and management of that business may be wholly within India. In order to determine the residence of a company, the real test to be applied is, where does the controlling and directing power function, or where is its head and brain. ―Control‖ is different from share holding control- ―Control‖ does not mean share holding control. In the case of a subsidiary company managed by its local board of directors, it is difficult to establish that control and management of its affairs vests at the place where the parent company resides. A non-Indian company‘s de facto control must be in India for residential India-In order to hold that a non-Indian company is resident in India during any previous year, it must be established that such company‘s de facto is in India. Although central management and control has sometimes been stated in the form ―head, seat and directing power‖ the question depends on the facts of the management and not on the physical situation of the thing that is managed. A company is managed by the board of directors and if the meetings of the board of directors are held within India, it may be said that the control and management is situated here. Partial control from outside India -‗control and management‘ does not mean carrying o a day to day business. Even a partial control outside India is sufficient to hold a foreign company as a non-resident. CASE STUDY XYZ ltd. is registered in Srilanka and is a subsidiary of an Indian company. The business of the company is stevedoring in Srilanka. The meetings of the board of directors and general meeting of share holders are held in Bombay. The affairs of the assessee-company are looked after by two mangers under two power of attorney which confer upon them the widest power and authority. The directors retain complete control over the matter delegated to the managers and from time to time give direction to the mangers as to how things should be done and managed.

Discuss whether under these circumstances the control and management of XYZ ltd is situated wholly in India and the company is resident in India within the meaning of section 6.

A company registered outside India is treated as resident in India only if during the previous year. Control and management of its affairs is situated wholly in India. In construing the expression ―control and management‖ it is necessary to bear in mind the distinction between doing business and control and management of business. Business and whole of it may be done outside India and yet the control and management of that business may be wholly situated within India. In the given problem the business of the assessee company is done in Srilanka.However, it is entirely irrelevant where the business is done and where the income has been earned. What is relevant and material is from which place has that business control and management? ―Control and management‖ referred to in section 6 is capital control and management. The control and the management contemplated by this section is not the carrying on of day-to-day business by servants, employs or agents. The real test to be applied is where is the controlling and directing power, or rather, where does the controlling and directing power function, or, to put in a different language there is always a seat of powers or the head and brain and what has got to be ascertained is: where is this seat of power or the head and brain? A business organization has got to work through servants and agents, but it is not the servants and agents that constitute the seat of power or the controlling and directing power. It is that authority to which the servant employs and agents are subject, it is that authority, which controls and manages them which is the central authority, and it is at the place where the central authority concerns, the control and management is situated. In the given problem, it is entirely unacceptable that the control and management is situated at Srilanka where its affairs are carried on and they are carried on by people living there appointed by the company with large power of management. To mangers under two powers of attorney look after all the affairs of the assessee- company in Srilanka. However, it is equally clear from the given facts that the central controls and management has been kept in Bombay and has been exercised by the directors in Bombay. Therefore control and management of the assessee company is situated wholly in India- Narottam and Pereira ltd v. CIT [1953] 23 ITR 454(bom.)

Q.3 What is VAT? (2 Marks)

PREFACE This ‗Corporate tax planning‘ module seeks to enabling the students to make use of legitimate tax shelters, deductions, exceptions, rebates and allowances; with the ultimate aim of minimizing the corporate tax liability. To give an overview of wealth tax provisions pertaining to companies (from a users perspective).To create an awareness of VAT and how the scheme is going to have an impact on the existing sales tax systemCORPORATE TAX PLANNING Course Objective: At the end of this course, the students should be able to demonstrate an understanding of the tax provisions enabling them to make use of legitimate tax shelters, deductions, exceptions, rebates and allowances; with the ultimate aim of minimizing the corporate tax liability. To give an overview of wealth tax provisions pertaining to companies (from a users perspective). To create an awareness of VAT and how the scheme is going to have an impact on the existing sales tax systemModule IV: Indirect Taxation An overview of Sales Tax, (VAT)

MODULE IV: INDERECT TAXATION BACKGROUND AND JUSTIFICATION 530. In the old sales tax structure, there were problems of double taxation of commodities and multiplicity of taxes, resulting in a cascading tax burden. For instance, in the old structure, before a commodity is produced, inputs are first taxed, and then the commodity is produced with input tax load, output is taxed again. This results an unfair double taxation with cascading effects. JUSTIFICATION OF VAT 530.1 The VAT not only provides full set-off for input tax as well as tax on previous purchases, but it also abolishes the burden of several other taxes, such as turnover tax, surcharge on sales tax, additional surcharge, special additional tax, etc. In addition, Central Sales Tax is also going to be phased out. As a result, the overall tax burden

will be rationalized, and prices, in general, will fall. Moreover, VAT has replaced the existing system of inspection by a system of built-in self-assessment by traders and manufacturers. The tax structure has become simple and more transparent. This will significantly improves tax compliance and will also help increase revenue growth. VAT is base on the value addition to the goods, and the related VAT liability of the dealer is calculated by deducting input tax credit from tax collected on sales during the payment period. The essence of VAT is to providing set-off for the tax paid earlier, and this is given effect through the concept of input tax credit/rebate. This input tax credit in relation to any period means setting off the amount of input tax by a registered dealer against the amount of his output tax. In the old sales tax structure in several states, multiplicities of taxes (such as turnover tax, surcharge on sales tax, additional surcharge etc.) were imposed. With the introduction of VAT, these other taxes will be abolished. CASE STUDY 530.2 The following examples are given to give a bird‘s eye view of VAT- Illustration 1 – Assume the goods are taxable at the rate of 12.5 per cent and all the goods have been purchased and sold within the States by a VAT dealer. He will put two nails in the wall and will place all the purchase vouchers in one nail and the sail vouchers in other nail. Suppose-

Total of tax element in respect of sales voucher

A

Total of tax element in respect of purchase voucher

B

VAT payable by dealer A minus B

Illustration 2 – VAT is calculated by deducting tax credit from tax collected during the payment period. Rs. Purchase price 100 Tax paid on purchase (i.e. input tax ) at the rate (assumed) of 10 per cent

10

Sale price 180 Tax on sale price (i.e. output tax) at the rate (assumed) of 12.5 per cent

22.5

VAT payable (Rs. 22.5 – Rs. 10) 12.5

Illustration 3 – X Ltd. is a manufacture company. It purchases raw material from P and Q. Manufactured goods are sold by X Ltd. to a wholesaler Y Ltd. sells goods to retailer Z. Retailer Z sells goods to consumers.

Price without VAT Gross VAT

Net VAT payable by dealer to the government

Rs. Rs. Rs. Raw material supplied by – P to X Ltd. (VAT charged by P @ 12.5%) Q to X Ltd. (VAT charged by Q @ 4%)

1,000 6,000

125 240

125 240

Manufactured goods sold by – X Ltd. to Y Ltd. (VAT charged by X Ltd. from Y Ltd. @ 12.5%) Less : VAT credit available to X Ltd. (Rs. 125 + Rs. 240)

10,000 1,250 365

875

Goods sold by wholesaler – Y Ltd. to Z (retailer) (VAT charged by Y Ltd. from Z @ 12.5%) Less : VAT credit available to Y Ltd.

17,000 2,125 1,250

875

Goods sold by retailer – Z to consumers (VAT charged by Z from consumers @ 12.5%) Less : VAT credit available to Z

22,000 2,750 2,125

625

In the above case, VAT collected by the Government is as follows –

Who will pay VAT to the Government Rs. P Q X Ltd. Y Ltd. Z

125 240 885 875 625

Total VAT collected by the Government 2,750

TAX ON VALUE ADDED 530.3 As commonly levied, the value added tax constitutes a method of taxing final consumer spending in the economy by installments or in stages. The method consists of levying a tax on value added to a product ( or service) at each stage of its production and distribution, for this purpose ‗value added‖ is taken as the difference between the sales and purchases of intermediate products or goods for resale of a business. Like the turnover tax VAT is a multi- stage tax but with the difference that it is levied on the value added at each stage and not on the gross turnover of the dealer. This ensure that each input that goes into a final product is taxed once and only once, and not cumulatively as under a turnover tax and thus avoid causing cascading associated with turnover taxes. On the face of it the simplest way to levy a VAT is to tax the value added in a business process embodied in the difference between business‘s sales and purchases.WHAT ARE THE BENEFITS OF VAT IN BRIEF 531. The benefits of VAT are as follows – a. Set-off will be given for input tax as well as tax paid on previus purchases;

b. Other taxes, such as turnover tax, surcharge, additional surcharge, etc. will be abolished;

c. Overall tax burden will be rationalized

d. Prices will be general fall;

e. There will be self assessment by dealers;

f. Transparency will be increase, and

g. There will be higher revenue growth.

NEED FOR INTRODUCING VAT 532. The following points highlight the critical emergent need for introducing VAT – VAT is more equitable way of taxing as all dealers share the tax burden. VAT is more transparent as easy procedures exist under it and only two rates are there. Simpler – easy computation and easy compliance.

Credit for input taxation leading to cost efficiency. Better compliance through self-policing Prevent cascading effects by providing input rebate. Avoids distortions in trade and economy due to uniform tax rates.

WHAT ARE THE MERITS OF VAT 533. VAT structure is superior to the sales tax system because of the following advantages/ benefits –

1. Eliminates multiple tax – It eliminates cascading effect of sales tax system by setting off the tax paid earlier at every stage of sale (i.e. a set off will be given for input tax as well as tax paid on previous purchases). 2. Simple – VAT helps in simplifying the indirect tax system. Because it is based simply on transactions and not on a base that requires complicated definition like income or wealth. VAT has the merit of certainty and is relatively easy to understand. When levied on a broad base and applied to all sales in business there is little room for differing interpretations. In most countries, the pre- VAT commodity tax systems are found to be very complicated. In fact, all the countries that have gone in for VAT had a genuine need for simplifying their tax system. 3. Lowering of tax burden – VAT reduces tax burden and helps reduce prices. 4. Fairness – VAT is a move towards more efficiency, equal competition and fairness in the taxation system. VAT helps common people, trade, industry and also the Government. Other taxes, such as turnover tax, surcharge, additional surcharge etc. will be abolished as a result of introduction of VAT. Overall tax burden is rationalized. 5. Tax evasion will be reduced – The adoption of VAT helps in reducing evasion of tax. There is self- assessment and therefore, better tax compliance being less chances of tax evasion. It has the merit of ―self-policing‖ in that it induce businesses to demand invoice from their supplier to enable them to obtain credit for the tax paid on their purchases against their total tax liability. Under a system where the tax is levied only at one stage, primarily at the first point of sales has been predominant practice under the state sale tax, shifting the value added to subsequent stage can reduce tax liability. VAT serves to counter this by bringing the value added at all stages under the tax. While the evasion can still occur, compared to single-stage sales tax VAT provides a built-in mechanism, to counter evasion because of audit trail it creates. The application of tax at each point of sales if the tax is evaded at one stage then the tax is realized at the other stage. Evasion can occur only when all companies in the production and distribution chain act collusion to conceal their sales. The sales tax system has the considerable amount of evasion. Studies related to evasion of sales tax in India, for instance, indicate that evasion range between 5 and 85 percent of the tax base depending upon the type of commodity. As again the system of administration of sales tax, VAT requires that all the dealers must issue the tax invoices. The subsequent dealer must maintain these invoices in other to benefit from tax deduction. This would enable the tax authority to cross check the decorated transaction between the taxpayers, consequently reducing the propensity to evade tax. In fact, the requirement to maintain the vouchers (invoices) works as self- policing the evasion of tax.

6. Tax transparency – VAT has a novel feature of tax transparency. That is, the total burden of tax on particular commodity is clearly seen from the transactions. Hence, the economic analysis of the tax structure is convenient. Also, in international trade, this enhances tax neutrality. Under the sales tax system it is difficult to estimate the exact amount of refund for export/. In most cases, the statistical evidence suggests that the tax on inputs and raw material or on capital goods is under-compensated. 7. Higher tax revenue – There is higher revenue growth. 8. Uniformity – There is a greater uniformity in this system. 9. Simpler – VAT system is comparatively simpler that the sales tax system of taxation as there would be no dispute regarding taxable stage of sale and classification of goods taxable at a particular rate of tax and there would be minimum requirement of declaration forms. 10. Neutral – The greatest virtue of VAT lies in its neutrality that is, non – interference with the choices or decisions of economic agents in matter of location of business, as well as business organization. Under VAT, the tax liability does not depend on the number of times a product is traded before reaching the final consumer or how much of the value is added at what stage in vertically or for shunning specialization unlike under a regimes of turnover tax or a sales tax that makes no allowance for taxes paid at earlier stages. Under VAT, the allocation of resources is left to be decided by the free play of market forces and competition and not driven by tax considerations.

11. Stable source of revenue – Because consumption is less volatile than income, it provides a stable and flexible source of Government revenue. In OECD countries it was found that every 1 percentage point of VAT yields 0.4 percent of GDP in revenue. IS THERE ANY DEMERIT OF VAT 534. To get maximum benefits (as given by Cnossen, S.) VAT should – a. Extends through the production and distribution chain right up to the retail stage;

b. Has its base as board as possible;

c. Permits registered firms to obtain full and immediate credit for vat paid on inputs;

d. Limits the extent of rate differential; and

e. Follows the destination principle.

DEMERITS IN INDIAN CONTEXT 534.1 The design of VAT that has been adopted by the states in India meets of the criteria of the good VAT as defined above but is deficient in some crucial respects. Some of these are given below – 1. It does not cover goods as well as services –While VAT extends to the retail stage, its base is not comprehensive enough to compromise all goods and services that go into final

consumption. A grievous shortcoming of base is non – inclusion of services. The Union government taxes services, while VAT is governed by State Governments. The Central Government may delegate the powers to tax some services to the states. But that is yet to come. Besides whether the base of states VATs, which now extends only to goods, can be integrated fully with the tax on services eventually in not clear. Hence, as of now, the states VAT base suffers from major drawback. 2. Exceptions – As power the scheme of the state VATs was expected to be fairly comprehensive as exemptions were supposed to be few. Besides, various concessions extended under the erstwhile sales tax regime for new industries and so on were also to be eased out. However, under continuous pressure from various quarters the number of commodities, which are now being exempted from VAT in various states, is not that small. 3. Floor rate – the other deficiency of the design of VAT being implemented by the states is the one embedded in the structure of the rates. The states have two basic rates; general rate of 12.5 per cent and reduced rate of 4 percent (and 1 percent for gold, etc.). These are supposed to be applied uniformly in all states and so although they are described as ―floor‖ rates, the States will have no discretion to go below or above the prescribed rates, contrary to what a floor rate ordinary implies. There is also an exempted category, which will bear no tax, but no rebate will be given for taxes paid on their purchases at the time of sale to a final consumer. 4. General rate of 12.5 percent is too high - the general VAT rate of 12.5 percent is unduly high. This is supposed to be a ―revenue neutral rate‖, through it is difficult to see how a uniform rate could be reserve neutral for all states. Presumably it was chosen to accommodate the concerns of states with high levels of sales taxation about potential revenue loss from VAT. A high rate became all the more necessary on revenue considerations because a large number of commodities and industrial inputs have been included in the 4 percent categories. Many (not all of them basic necessities) are in the ‗exempt‘ category. 5. Classification of capital goods – classification of goods under different lists is, in many instances, arbitrary- and leaves wide room for doubts and disputes as to whether a particular item comes within the lower rate category or not. This is bound to give rise to distortions and inequalities in the application of the tax (e.g., a crutch or wheelchair is exempt as an aid for handicapped, but not a hearing aid or a heart valve). Even a simple product like paper, which occurs in the 4 % list, requires definition. Otherwise, one may wonder, does it include tissue paper, gift-wrap, writing paper or pad, and drawing paper? 6. Another major flaw of the rate structure is the inclusion of Capital Goods and Industrial inputs in the 4 percent list. No country in the world where VAT is in operation permits concessional rate for inputs, expect in special circumstances. This goes against the basic tenet of VAT that the end use of a product by the customer should not affect the VAT to be charged and paid by a seller; if it is used as business input, for the ‗set-off‘ takes care of

that. Reduced rate of tax on inputs also increases revenue loss from undeclared sales of finished products. ‗Capital Goods‘ are also not defined and dealers may not know whether a particular product sold will be used by the ultimate user as a capital good.

7. The application of VAT on ‗MRP‘ at the first point, e.g., on drugs in West Bengal and Maharashtra, on the plea that there can be no taxable value addition at the subsequent stages, once the MRP is taken as a base in problematic. This is completely misconceived idea and defeats the purpose of VAT, which is to tax sales at all stages with credits for inputs/purchase taxing commodities at the first stage on the MRP also results in from the consuming states to the producing states where the first – point sellers are located. WHAT IS INPUT TAX CREDIT 535. The essence of VAT is in providing set-off for the tax paid earlier, and this is given effect through the concept of input tax credit/rebate. This input tax credit in relation to any period means setting off the amount of input tax by a registered dealer against the amount of his output tax. The Value Added Tax (VAT) is based on the value addition to goods, and the related VAT liability of dealer is calculated by deducting input tax credit from tax collected on sales during the payment period (say, a month). CASE STUDY Examine the following illustrations – 1. X purchases input worth Rs. 15,00,0000 and records sales of 22, 00,000 in the month of January 2008. Input tax rate and output tax rate is 12.5 percent. Input tax credit/set-off shall be computed as follows – Rs. Input procured within the State in a month (a) 15, 00,000 Output sold in the month (b) 22, 00,000 Input tax paid @ 12.5% on (a) (c) 1, 87,500 Tax collected 12.5% on (b) (d) 2, 75,000 VAT payable during the month [(d)-(c)] (e) 87,500

2. X purchased input worth Rs. 16, 00,000 and records sales of Rs. 21, 00,000 in the month of January 2008. Input tax rate and output rate are 12.5 percent respectively. Input tax credit/set-off shall be calculated as follows – Rs. Input purchased during January 2008 (a) 16, 00,000Output sold in the month of January 2008 (b) 21, 00,000 Input tax paid @ 4% of (a) (c) 64,000 Output tax collected during January 2008 @ 12.5% of (b) (d) 2, 62,000 VAT payable for January 2008 after set-off/input tax credit [(d)-(c)] (e) 1, 98,500

COVERAGE OF SET-OFF INPUT TAX CREDIT 535.1 Input tax credit is generally given for entire VAT paid within the State on purchases of taxable goods meant for resale/manufacture of taxable goods. However, generally no credit is available in respect of purchases given below – 1. Goods purchased from unregistered dealers.

2. Goods purchased from other States/countries.

3. Purchase of goods used in manufacture of exempted goods.

4. Purchase of capital goods (in some cases credit is available in installments).

5. Purchase of goods used as fuel in power generation.

6. Purchases of goods to be dispatched as branch transfers outside States.

7. Purchases of goods used in manufacture of goods to be dispatched outside any State as branch transfer/consignments.

8. Purchases of goods in cases where the dealer does not have invoices showing amounts of tax charged separately by the selling dealer.

9. Purchases of non-creditable goods (these goods may be defined in the law regulating VAT in a particular set).

10. Purchases from dealer who has opted for composition scheme (these schemes may be specified in the law regulating VAT in a particular set).

CARRYING OVER OF TAX CREDIT 535.2 If the tax credit exceeds the tax payable on sales in a tax period, it shall be carried over the next tax period. If there is any excess unadjusted input tax credit at the credit at the end of the financial year, it shall be eligible for refund. In some cases, if VAT collected in a tax period is lower than input tax credit in respect of local purchases and inter – State purchases, only the balancing amount is carried forward to the next tax period and it will be adjusted in the next tax period on the same basis. However, unadjusted tax credit at the end of financial year is generally refunded. Input tax credit on capital goods is also be available for traders and manufactures. Tax credit on capital goods may be adjusted over a maximum of 36 equal monthly installments. The States may at their option reduce this number of installments. Generally, there is a negative list for capital goods not eligible for input tax credit.Provision illustrated – the following data pertains to X Ltd., a manufacturing company situated in State A where tax period is monthly. Input VAT credit on capital goods is State A is available in 36 months. However, in state A input tax credit in respect of capital goods is not available in some cases. X Ltd. purchases input from State A as well as States B. Manufactured goods are sold by X Ltd. in State A as well as State C. Rs. VAT paid on procurement of input/supplies within State A in January 2008

(a) 4,00,000

CST paid on procurement of input/supplies within State B in January 2008

(b) 3,00,000

VAT paid on procurement of capital goods within State A in January 2008

(c) 21,60,000

VAT paid on procurement of capital goods in January 2008 from State A as well as other State (bit not eligible for tax credit)

(d) 9,10,000

VAT collected in respect of sale within State A during January 2008

(e) 3,12,000

CST collected in respect of inter-State sales to dealers in State C during January 2008

(f) 72,000

Input tax credit for January 2008 [i.e., (a) + 1/36 of (c)

(g) 4,60,000

CST and VAT payable by X Ltd. in State A for January 2008 if no tax credit is available [(e) + (f)]

(h) 3,84,000

CST and VAT payable by X Ltd. in State A for January 2008 after adjusting tax credit [(h) – (g), since it is negative no CST and VAT is payable in State A for January 2008]

(i) Nil

Surplus which is carried over as tax credit for set-off during February 2008 [(g) – (h)]

(j) 76,000

Notes –

1. CST paid by X Ltd. on procurement of input supplies from State B (i.e., Rs. 3, 00, 000) is not eligible for tax credit. 2. The surplus of Rs. 76,000 as calculated above will be available for tax credit in February 2008. 3. Any surplus at the end of March 2008 will be refunded to X Ltd.

TREATMENT OF EXPORT 535.3 For all exports made out of the country, VAT paid within the State will be generally refunded in full within a stipulated period (generally it is 3 months). Moreover, units located in SEZ and EOU will be generally granted either exemption from payment of input tax or refund of the input tax paid within the aforesaid period. INPUTS PROCURED FROM OTHER STATES 535.4 Taxes paid on inputs procured from other States through inter – State sale and stock transfer will not be eligible for credit. However, it appears that a decision has been taken for duly phasing out central sales tax. WHAT ARE VARIANTS OF VAT 536. Theoretically, VAT could be levied with three specific variants, viz, (a) Gross product variant, (b) Income type variant, and (c) Consumption type variant. These variants could be further distinguished through their methods of calculation, viz, addition method and subtraction method. The subtraction method could be further analyzed into (a) direct, (b) intermediate, and (c) indirect subtraction method. GROSS PRODUCT VARIANT 536.1 This variant allows deductions for all purchases of raw materials and components but no deduction is allowed for capital inputs. In this way capital goods such as plant and machinery are not deductible from the tax base in the year of purchase and depreciation on the plant and machinery is not deductible in the subsequent years. One may say that the economics base of gross product variant is equivalent to GNP (gross national product). Under this system, capital goods carry a heavier tax burden as they are taxed twice. Modernization and upgrading of plant and machinery is delayed due to this dual tax treatment. INCOME VARIANT 536.2 in this variant of VAT, deduction are allowed for purchases of raw materials and components as well as depreciatio0n on capital goods. The economics base of the income variant is equivalent to net national product. However, in practice, there are many difficulties connected with the specification of any method of measuring depreciation, which basically depend on the life of an asset as well as on the r\ate of inflation. CONSUMPTION VARIANT 536.3 Under this variant, deduction is allowed for all business purchases including capital assets. In other words, the economics base of the tax is equivalent to total private consumption. It does not distinguish between capital and capital expenditures. Moreover, under this system, there is no need to specify the life of asset or depreciation allowance for different assets. This form is neutral between different modes of production. In other words, there will not be any effect on tax liability due to method of production.Among the three variants of VAT stated above, the consumption variant is widely used in Europe and other continents (in our country generally income variant is adopted). The reason for preference of consumption variant is that it does not affect decision regarding investment because the tax on capital goods is also set-off against VAT liability. The tax is neutral n respect of techniques of production. The consumption variant is more in harmony with the destination principle. In the foreign – trade sector, this variant relieves all the exports from taxation while imports are taxed. Finally, this variant is convenient from the point of the administrative expediency as it simplifies tax administration by obviating the need to distinguish between purchases of immediate or capital goods on the one hand and consumption goods on the other. WHAT ARE DIFFERENT MODES OF COMPUATION OF VAT 537. As stated earlier VAT is nothing but a form of sales tax only and is charged at each stage of sale on the value added to the goods. ―Value Added‖ is the difference between sale and purchase of a business. A straight forward way to compute the base of a VAT for given period, says a quarter, is, in the case of a manufacturer, to deduct the total cost of the inputs used in the production from the amount for which the manufactured goods are sold. Theoretically, VAT is computed by adopting three alternative methods. These are (i) addition method (ii) subtraction method (iii) tax credit or invoice method. These methods can be used to arrive at the VAT liability.ADDITION METHOD.

537.1 This method is based on the identification of value-added, which can be estimated by summation of all the elements of value- added (i.e., wages, profits, rent and interest). This method is known as addition method or income approach. This is in line with the income method of calculating national income. The chief drawback of this method is that it does not require matching of invoices in order to check tax evasion. SUBTRACTION METHOD 537.2 The subtraction method estimates value-added by means of difference between outputs and inputs [i.e. T= t (output – input)]. This is also known as product approach and has further variants in the way subtraction is attempted from among (a) direct subtraction method, (b) intermediate subtraction method, and (c) indirect subtraction method . Direct subtraction method is equivalent to a business transfer tax whereby tax is levied on the difference between the aggregate tax- exclusive value of sales and aggregate tax – exclusive value of purchases. Intermediate subtraction method is based on deduction of aggregate tax-inclusive value of purchases from the aggregate tax inclusive value of sales and taxing the difference between them.TAX CREDIT METHOD 537.3 Under the tax credit method, the tax on inputs is deducted from the tax on the sales to arrive at the VAT payable by the dealer. The indirect subtraction method entails deduction of tax on inputs from tax on sales for each tax period [i.e. t (output) – t(input)]. This method is also known as tax credit method or invoice method. In practice, most countries use this method and employ net-consumption VAT.

VAT payable = Total tax charged on the output or sales minus Total tax paid to the supplies on inputs or purchases

Tax Credit to invoice method has been adopted universally because of the inherent advantages in the credit method of calculating tax liability. The other methods namely addition method and subtraction method are not calculating tax liability. The other methods namely addition method and subtraction method are not worldwide in the case of a manufacturer when the rate of tax is different in respect of inputs and outputs.ADVANTAGES AND ADOPTION OF TAX CREDIT METHOD 573.3.1 The following points may be noted in this regard: 1. It makes cross – checking of tax paid at earlier stage, more amenable, as dealers are required to state the amount of tax in invoices.

2. Tax burden being dependent upon the tax rate at the final stage, dealers at intermediate stages do not have any incentive to seek treatment in tax rate.

3. Under the invoice method, exports can easily be relieved of domestic indirect taxes through zero rating of exports.

Provision illustrated 537.4 The following examples are given to understand the implication under the aforesaid methods – A COMPARISON OF INPUT TAX CREDIT METHOD AND SUBTRACTION METHOD WHEN TAX RATE IS SAME 537.4.1 In the able given below value addition is 100percent in the hands of a manufacturer, 30 percent in the hands of a wholesaler and 20 percent in the hands of retailer. A uniform tax rate of VAT of 12.5 percent is adopted – Computing VAT by two methods with uniform tax rate of 12.5 % Raw materials supplier

Manufacturer Wholesaler Retailer

Rs. Rs. Rs. Rs. The economy Purchase value Value added Sales value

0 0 100

100 100 200

200 60 260

260 52 312

Input tax credit method

100 12.5 0

200 25

260 32.5

312 39

Sales value Tax on sales (a) Purchase value Tax on purchase (b) VAT [i.e. (a) – (b)]

0 12.5

100 12.5 12.5

200 25 7.5

260 32.5 6.5

Subtraction method Sales inclusive of tax (c) Purchases inclusive of tax (d) Difference [i.e. (c) – (d)] (e) VAT [i.e. (e) * 12.5/112.5]

112.5 0 112.5 12.5

225 112.5 112.5 12.5

292.5 225 67.5 7.5

351 292.5 58.5 6.5

Note – it should be noted that under the invoice credit method credit for tax paid at earlier stages is available only when the good is purchased by a dealer registered as liable to pay VAT and the seller from whom it is purchased is also a registered dealer. In other words, the sale is from business to business or what is called ‗B2B‘. No such credit is allowed in the case of the sale to an unregistered dealer or a final consumer, called ‗B2C‘ sale, going by the current jargon. COMPARATIVE ANALYSIS OF THREE METHODS OF COMPUTING VAT 537.4.2 A comparative chart of the three methods of calculating VAT is given below when rate of tax is uniform (rate of VAT of 12.5 per cent is adopted in the illustration given below) –Methods Manufacturer

Rs. Wholesaler Rs.

Retailer Rs.

Total Economy Rs.

Addition Method Wages Rent Interest Profit

150 50 25 25

300 100 75 25

200 20 20 10

650 170 120 60

Value added [(a)+(b)+(c)+(d)] VAT

250 31.25

500 62.5

250 31.25

1000 125

Subtraction method Sales Purchases Value added [(a)-(b)] VAT

350 100 250 31.25

850 350 500 62.50

1100 850 250 31.25

2300 1300 1000 125

Invoice method Sales Tax on sales Purchases Tax on purchases VAT [(b)-(d)]

350 43.75 100 12.5 31.25

850 106.25 350 43.75 62.50

1100 137.5 850 106.25 31.25

2300 287.5 1300 262.5 125

COMPARATIVE ANALYSIS WHEN RATE OF VAT IS NOT UNIFORM

537.4.3 Although all the methods are identical, these are not likely to yield the same revenue when tax rates vary according to commodities (i.e. the rates are different for inputs and that for outputs). As shown in the table given below, the yield would be Rs. 30 under the subtraction method while it is Rs. 25 only under the invoice method when the tax rate is 15 percent at wholesale stage and 10 percent at other stages.Calculation of VAT

Manufacturer Rs.

Wholesaler Rs.

Retailer Rs.

Total Economy Rs.

Sales (a) Purchases (b) Value added [(a) – (b)] (c)

100 0 100

200 100 100

250 200 50

550 300 250

Rate of VAT is 10% on all stages VAT under subtraction method [i.e., 10% of (c)]

10 10 5 25

Tax credit or invoice method [i.e., 10% of (a) minus10% of (b)]

10 – 0 = 10 20 – 1 = 10 25 – 20 = 5 55 – 30 = 25

Rate of VAT is 15% at wholeselling level and 10% at all other stages Subtraction method [15% of (c) in the hands of wholeseller and 10% of (c) at other stages] Tax credit or invoice method

10 10 – 0 = 10

15 30 – 10 = 20

5 25 – 30 = (5)

30 65 – 40 = 25

The invoice method is widely used in most VAT countries because of its inherent advantages in calculating tax liability. First, it makes cross-checking of tax paid at earlier stages moreamenable, as dealers are required to mention the amount of tax on invoices. Second, tax burden being dependent upon the tax rate at the final stage, dealers at intermediate stages do not have any incentives to seek special treatment in the tax rate. Finally, it facilitates border tax adjustments. If exports are zero – rated, it can be done easily under this method. ADMINISTRATIVE PROCEDURES GENERALLY ADOPTED BY DIFFERENT STATES 538. Generally the following procedures are adopted- COMPULSORY ISSUE OF TAX INVOICE, CASH MEMO OR BILL 538.1 The entire design of VAT with input tax credit is crucially based on documentation of cash invoice, cash memo or bill. Every registered dealer, having turnover of sales above an amount specified, shall issue to the purchases serially numbered tax invoice with prescribed particulars. This tax invoice will be signed and dated by the dealer or his regular employee, showing the required particulars. The dealer shall keep the counterfoil or duplicate of such tax invoice duly signed and dated. Failure to comply with the above will attract penalty REGISTRATION, SMALL DEALERS AND COMPOSITION SCHEME

538.2 Registration of dealers with gross annual turnover above a specified amount (say, Rs.5 lakh) is compulsory. Generally, there is a provision for voluntary registration. Moreover, all dealers under the old system of local sales tax have been automatically registered under the VAT Act. A new dealer is generally allowed 30 days time from the date of liability to get registered. Small dealers with gross annual turnover not exceeding a specified amount (say, Rs.5 lakh) are not generally liable to pay VAT. Small dealers with annual gross turnover not exceeding a specified amount (say,Rs.50 lakh) who are otherwise liable to pay VAT, shall however have the option for the composition scheme with payment of tax at a small percentage of gross turnover. The dealers opting for this composition scheme will not be entitled to input tax credit. TAXPAYER’S IDENTIFICATION NUMBER (TIN) 538.3 The taxpayer‘s identification number consists of 11 digit numerals throughout the country. First two characters will represent the State Code as used by the Union Ministry of Home Affairs, Government of India (census code). The set-up of the next nine characters may. However, be different in different States. This will include 2 check digits. RETURN 538.4 Under VAT, simplified form of returns has been notified. Returns are to be filed monthly/quarterly as simplified in the State Acts/Rules, and will be accompanied with payment challans. Every return furnished by dealer will be scrutinized expeditiously within prescribed time-limit from date of filling the return. If any technical mistake is detected on scrutiny, the dealer will be required to pay the deficit appropriately. PROCEDURE OF SELF-ASSESSMENT OF VAT LIABILITY The major contribution of VAT is simplification. VAT liability will be self-assessed by the dealers themselves. Voluntary return will be submitted after setting of the tax credit. There is no longer a compulsory assessment at the end of each year as was application under the old system. If no specific notice is issued proposing departmental audit of the books of the account of the dealer within a stipulated time, the dealer will be deemed to have self-assessed on the basis of returns submitted by him. AUDIT 538.6 Correctness of self – assessment will be checked through a system of departmental audit. A certain percentage of the dealers will be taken up for audit every year on a scientific basis. If, however, evasion is detected on audit, the concerned dealer may be taken up for audit for previous periods. This Audit Wing will remain de – linked from tax collection wing to remove any bias. The audit report will be transparently sent to the dealer also. Simultaneously, a cross – checking, computerized system is being worked out on the basis of coordination between the tax authorities of the State and those of central excise and income – tax. This comprehensive cross-checking system will help reduce tax evasion and also lead to significant growth of tax revenue. At the same time, by protecting transparently the interests of tax-complying dealers against the unfair practices of tax-evaders, the system will also bring in more equal competition in the sphere of trade and industry. DECLARATION FORM 538.7 there will be no need for any provision for concessional sale under the VAT Act since the provision for set-offs makes the input zero-rated. Hence, there will be no need for declaration form, which will be a further relief for dealers. OTHER TAXES 538.8 A s mentioned earlier, all other taxes such as turnover tax, surcharge, additional surcharge and special additional tax (SAT) have been generally abolished. PENAL PROVISIONS 538.9 Penal provisions under VAT are not more stringent than in the sales tax system.COVERAGE OF GOODS UNDER VAT 538.10 In general, all the goods, including declared goods will be covered under VAT and will get the benefit of input tax credit. However, there are a few goods which are outside VAT. Generally, exempted category includes liquor, lottery tickets, petrol, diesel, aviation turbine fuel and other motor spirit since their prices are not fully market determined. These will continue to be taxed under Sales Tax Act or any other State Act or even by making special provisions in the VAT Act itself, and with uniform floor rates. VAT RATES AND CLASSIFICATION OF COMMODITIES

538.11 Under the VAT system covering about 550 goods, there will be only two basic VAT rates of 4 percent and 12.5 percent. Moreover, there is a specific category of tax-empted goods. Besides, a special VAT rate of 1 percent is applicable only for gold and silver ornaments, etc. Thus the multiplicity of rates under the old structure has been omitted. Exempted category generally includes natural and unprocessed products in unorganized sector, items which are legally barred from taxation and items which have social implication. Included in this exempted category is a set of commodities flexibility chosen by individual States from a list of goods (finalized by the Empowered Committee formed for the purpose of introduction of VAT) which are of local social importance for the individual States without having any inter-state implication.

Q.4 What is the concept of avoidance of double taxation? (2 Marks)

Module II: Assessment of Companies Computation of taxable income, MAT , Set off & carry forward of losses in companies, Deductions from Gross total income applicable to companies, Tax planning with reference to new projects/expansions/rehabilitation plans including mergers, amalgamation or de-mergers of companies, Concept of avoidance of double taxation.10. Income-tax is not deductible ; however , the assessee can claim double taxation relief in respect of doubly taxed incomeMODULE IV: INDERECT TAXATION BACKGROUND AND JUSTIFICATION 530. In the old sales tax structure, there were problems of double taxation of commodities and multiplicity of taxes, resulting in a cascading tax burden. For instance, in the old structure, before a commodity is produced, inputs are first taxed, and then the commodity is produced with input tax load, output is taxed again. This results an unfair double taxation with cascading effects.Suggested solution: The patent should be transferred to a company in a low tax country from which the patents are licensed to one or more licensing companies in countries with a dense tax treaty network and which does not levy a withholding tax on royalties paid abroad. The set-up of a licensing company in Mauritius could meet these objectives. Mauritius has an expanding network of double taxation treaties, thus substantially reducing the withholding taxes on royalties paid to the Mauritius company. Although the Mauritius company is subject to tax in Mauritius at a rate of 15%, the spread between royalties received and royalties paid to the offshore patent-holder can be minimised (Mauritius has not adopted any transfer pricing regulations which could have an impact on the amount of the spread). Royalties paid by the Mauritius company are not subject to a withholding tax in Mauritius. Note: If there is no double tax treaty between Mauritius and the country from which the royalties are paid, the set-up of a sub-licensing company in a third country might be considered, e.g. Luxembourg. Luxembourg has a good tax treaty with Mauritius.

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Module II: Assessment of Companies Computation of taxable income, MAT , Set off & carry forward of losses in companies, Deductions from Gross total income applicable to companies, Tax planning with reference to new projects/expansions/rehabilitation plans including mergers, amalgamation or de-mergers of companies, Concept of avoidance of double taxation.

Provision relating to taxation of a Company Indian companies are taxable in India on their worldwide income, irrespective of its source and origin. Foreign companies are taxed only on income which arises from operations carried out in India or, in certain cases, on income which is deemed to have arisen in India. The later includes royalty, fees for technical services, interest, gains from sale of capital assets situated in India (including gains from sale of shares in an Indian company) and dividends from Indian companies. Thus, the tax-liability on income of a company depends upon the residential status of the company. A Company is said to be resident in India during any relevant previous year if:-i. It is an Indian Company;orii. The control and management of its affairs is situated wholly in India. In case of Resident Companies, the total income liable to tax includes [section 5(1)]:-Any income which is received or is deemed to be received in India in the relevant previous year by or on behalf of such companyAny income which accrues or arises or is deemed to accrue or arise in India during the relevant previous yearAny income which accrues or arises outside India during the relevant previous year. Similarly, a Company is said to be non-resident during any relevant previous year if:-i. It is not an Indian company,andii. The control and management of its affairs is situated wholly/partiallyoutside India. In case of Non-Resident Companies, the total income liable to tax includes[section 5(2)]:-Any income which is received or is deemed to be received in India during the relevant previous year by or on behalf of such companyAny income which accrues or arises or is deemed to accrue or arise to it in India during the relevant previous year.

As a result a situation may arise where the same income becomes taxable in the hands of the same company in one or more countries,leading to 'Double Taxation'. The problem of double taxation may arise on account of any of the following reasons:- A company(or a person) may be resident of one country but may derive income from other country as well,thus he becomes taxable in both the countries. A company/person may be subjected to tax on his world income in two or more countries,which is known as concurrent full liability to tax.One country may tax on the basis of nationality of tax-payer and another on the basis of his residence within its border.Thus,a person domiciled in one country and residing in another may become liable to tax in both the countries in respect of his world income. A company/person who is non-resident in both the countries may be subjected to tax in each one of them on income derived from one of them.for example,a non-resident person has a Permanent establishment in one country and through it he derives income from the other country.In India the relief against double taxation has been provide under Section 90 and Section 91 of the Income Tax Act. Section 90 of the Income Tax Act relates to bilateral relief. Under it, the Central Government has entered into an agreement with the Government of any country outside India. These agreements called as "double taxation avoidance agreements (DTAA's)" , provide for the following:- Granting of relief in respect of:-o Income on which income tax has been paid both in India and in that country oro Income tax chargeable in India and under the corresponding law in force in that country to promote mutual economic relations, trade and investment, or The type of income which shall be chargeable to tax in either country so that there is avoidance of double taxation of income under this Act and under the corresponding law in force in that countryIn addition the Central Government may enter into an agreement to provide:- For exchange of information for the prevention of evasion or avoidance of income tax chargeable under the Act or under the corresponding law in force in that country, or investigation of cases of such evasion or avoidance, orFor recovery of income tax under the Act and under the corresponding law in force in that country.India has entered into DTAA with 65 countries including countries like U.S.A., U.K., Japan, France, Germany, etc. In case of countries with which India has

double taxation avoidance agreements, the tax rates are determined by such agreements.Under the section, the assessee is given relief by credit/refund in a particular manner even though he is taxed in both the countries. Relief may be in the form of credit for tax payable in another country or by charging tax at lower rate.The steps involved in granting such a bilateral relief are:- (a) Compute the total income of person liable to pay tax in India in accordance with the provisions of the Income Tax Act (b) Allow relief as per the terms of the tax treaty entered into with the other contracting company,where the taxation has suffered double taxation.The liability to tax arising under the Income Tax Act are subject to provisions of the double taxation avoidance agreements between India and foreign country. Thus the treaty provisions shall prevail over the income tax provisions.The types of agreements under DTAA's can be majorly categorised as:- Comprehensive Agreements:-These are elaborated documents which puts forward in detail that how incomes under various heads may be dealt with.Limited Agreements :-These are entered into to avoid double taxation related to the income derived from operation of aircrafts,ships,carriage of cargo and freight.Other Agreements :-including double taxation relief rules. Section 91 of the Income Tax Act relates to unilateral relief. Under it, if any person/company is resident in India in any previous year and paid the income,which accrued to him in India, to any country with which there is no agreement (under Section 90) for relief from double taxation,he shall be entitled to deduction from the Indian Income-tax payable by him of a sum calculated on such doubly taxed income at the average Indian rate of tax or the average rate of tax of said country, whichever is lower,or at the Indian rate of tax if both the rates are equal.The steps involved in calculating relief under this section are:- (a)Calculate tax on total income(including foreign income) and claim relief applicable on it (b)Add surcharge and education cess after claiming rebate under the Section 88E (c)Compute average rate of tax by dividing the tax computed in previous step with the total income (d)calculate average rate of tax of foreign country by dividing income-tax actually paid in the said country after deduction of all relief due (e)Claim the relief from the tax payable in India at the rate computed in previous two steps on the basis of whichever is less.Double taxation:

Double taxation is the imposition of two or more taxes on the same income (in the case of income taxes), asset (in the case of capital taxes), or financial transaction (in the case of sales taxes). It refers to two distinct situations:

taxation of dividend income without relief or credit for taxes paid by the company paying the dividend on the income from which the dividend is paid. This arises in the so-called "classical" system of corporate taxation, used in the United States. taxation by two or more countries of the same income, asset or transaction, for example income paid by an entity of one country to a resident of a different country. The double liability is often mitigated by tax treaties between countries. International Double Taxation Agreements Main article: Tax treaty It is not unusual for a business or individual who is resident in one country to make a taxable gain (earnings, profits) in another. This person may find that he is obliged by domestic laws to pay tax on that gain locally and pay again in the country in which the gain was made. Since this is inequitable, many nations make bilateral Double taxation agreements with each other. In some cases, this requires that tax be paid in the country of residence and be exempt in the country in which it arises. In the remaining cases, the country where the gain arises deducts taxation at source ("withholding tax") and the taxpayer receives a compensating foreign tax credit in the country of residence to reflect the fact that tax has already been paid. To do this, the taxpayer must declare himself (in the foreign country) to be non-resident there. So the second aspect of the agreement is that the two taxation authorities exchange information about such declarations, and so may investigate any anomalies that might indicate tax evasion.[citation needed]

European Union savings taxation Main article: European Union withholding tax In the European Union, member states have concluded a multilateral agreement on information exchange.[1] This means that they will each report (to their counterparts in each other jurisdiction) a list of those savers who have claimed exemption from local taxation on grounds of not being a resident of the state where the income arises. These savers should have declared that foreign income in their own country of residence, so any difference suggests tax evasion. (For a transition period, some states have a separate arrangement.[2] They may offer each non-resident account holder the choice of taxation arrangements: either (a) disclosure of information as above, or (b) deduction of local tax on savings interest at source as is the case for residents). Cyprus Double Tax Treaties Cyprus has concluded 34 double tax treaties which apply to 40 countries. The main purpose of these treaties is the avoidance of double taxation on income earned in any of these countries. Under these agreements, a credit is usually allowed against the tax levied by the country in which the taxpayer resides for taxes levied in the other treaty country and as a result the tax payer pays no more than the higher of the two rates. Further, some treaties provide for tax sparing credits whereby the tax credit allowed is not only with respect to tax actually paid in the other treaty country but also from tax which would have been otherwise payable had it not been for incentive measures in that other country which result in exemption or reduction of tax. [3]

German Taxation Avoidance If a foreign citizen is in Germany for less than a relevant 183 day period (approximately six months) and are tax resident (ie., and paying taxes on your salary/benefits) elsewhere, then it may be possible to claim tax relief under a particular Double Tax Treaty. The relevant 183 day period is either 183 days in a calendar year or in any period of 12 months, depending upon the particular treaty involved. The Double Tax Treaty with the UK, for example, looks at a period of 183 days in the German tax year (which is the same as the calendar year). So, for example, you could work in Germany from 1 September through to the following 30 May, a total of 10 months, whilst being tax resident in Germany and could claim to be exempt from German tax under a Double Tax Treaty. This is assuming that during this period you were tax resident in another country and paying taxes on your salary and benefits there. In some cases, it would be beneficial, from a tax standpoint, to claim exemption under a Double Tax Treaty, i.e., if your other country of tax residence levies much lower taxes. In other cases, whilst the tax liability may be broadly similar (e.g., as with the UK and Germany), claiming exemption under a Double Tax Treaty offers administrative convenience and savings in professional fees (payroll bureau, tax return filing etc). In Germany, if the criteria of a relevant Double Tax Treaty are satisfied then there is no requirement to submit a formal claim for relief; rather,

exemption may simply be assumed. The other criteria are that you are paid by a non-German company and that the costs of your employment are borne by a non-German company. You should not, generally, have a problem satisfying these criteria. If you are receiving a salary for working in Germany and that salary is subject to German tax, i.e., relief under a Double Tax Treaty is not available or desirable, you (as a company) or your employer is obliged to deduct a German withholding tax and pay this over to the German Revenue authorities on a regular basis. You will need to seek professional advice in Germany as to the calculation, regularity and transmission of these payments and contact details can be provided if required. Double Taxation Avoidance Agreement Signed By India India has comprehensive Double Taxation Avoidance Agreement(DTAA ) with 79 countries. What it means is that there are agreed rate of tax and jurisdiction on specified types of income arising in a country to a tax resident of another country.Under Income Tax Act 1961 of India ,there are two provisions -section 90 and section 91 - which provides specific relief to tax payers to save them from DTAA. Section 90 is for tax payer who have paid the tax to a country with which India has signed DTAA. While Section 91 provides relief to tax payers who have paid tax to a country with which India has not signed DTAA. Thus, India gives relief to both kind of taxpayers. A large number of Foreign Institutional Investors who trade on the Indian stock markets operate from Mauritius. According to the tax treaty between India and Mauritius, Capital Gains arising from the sale of shares is taxable in the country of residence of the shareholder and not in the country of residence of the Company whose shares have been sold. Therefore, a company resident in Mauritius selling shares of an Indian company will not pay tax in India. Since there is no Capital gains tax in Mauritius, the gain will escape tax altogether. U.S. Citizens and Resident Aliens Abroad The US requires its citizens to file tax returns reporting their earnings wherever they reside. However, there are some measures designed to reduce the international double taxation that results from this requirement. [4]

First, an individual who is a bona fide resident of a foreign country or is physically outside the US for an extended time is entitled to an exclusion (exemption) of part or all of their earned income (i.e. personal service income, as distinguished from income from capital or investments.) That exemption is currently set at $85,700 (2007).[4]

Second, the US allows a foreign tax credit by which income taxes paid to foreign countries can be offset against US income tax liability attributable to foreign income. This can be a complex issue that often requires the services of a tax advisor. The foreign tax credit is not allowed for taxes paid on earned income that is excluded under the rules described in the preceding paragraph (i.e. no double dipping).[4]

Double taxation within the United States Double taxation can also happen within a single country. This typically happens when subnational jurisdictions have taxation powers, and jurisdictions have competing claims. In the United States a person may legally have only a single domicile. However, when a person dies different states may each claim that the person was domiciled in that state. Intangible personal property may then be taxed by each state making a claim. In the absence of specific laws prohibiting multiple taxation, and as long as the total of taxes do not exceed the 100% of the value of the intangible personal property, the courts will allow such multiple taxation.

Q.5 What is “Gross Total Income”? (2 Marks)

Module II: Assessment of Companies Computation of taxable income, MAT , Set off & carry forward of losses in companies, Deductions from Gross total income applicable to companies, Tax planning with reference to new projects/expansions/rehabilitation plans including mergers, amalgamation or de-mergers of companies, Concept of avoidance of double taxation.GROSS TOTAL INCOME (GTI) As per section 14, income of a person is computed under the following five heads: 1. Salaries

2. Income from house property.

3. Profits and gains of business or profession.

4. Capital gains.

5. Income from other sources.

The aggregate income under these heads is termed as "gross total income".PERMISSIBLE DEDUCTIONS FROM GROSS TOTAL INCOME AND TAX LIABILITY

These deductions are available from gross total income. Aggregate amount of deductions under section 80C to 80U cannot exceed (gross total income minus short-term capital gain under section 111A minus any long-term capital gain). Deduction under section 80-IA to 80U is admissible in respect of ―net income‖ computer under the provisions of the Act (i.e. income arrived at at after deducting permissible deductions and adjusting current or brought forward losses.) Deduction under section 80-IA, 80-IAB, 80-IB, 80-IC and 80-ID is not available if return of income is not submitted on or before the due date of submission of return of income. Deduction in respect of profits and gains shall not be allowed under any provisions of section 10A or Section 10AA or section 10B or section 10BA or under section 80H to 80RRB, if a deduction in respect of same amount under any of the aforesaid section has been allowed in the same assessment year. The aggregate deductions under these provisions shall not exceed the profits and gains of the undertaking or units or enterprise or eligible business, as the case may be. No deductions under the above provisions shall be allowed if the deduction has not been claimed in the return of income. For the purpose of claiming deduction under section 35AD or under Chapter VI-A (i.e., Sections 80C to 80U), the transfer price of goods and services between the undertaking (i.e., unit or enterprise eligible for these deductions)has not been claimed in the return of income. Deduction under section 80C is available only to an individual or a Hindu undivided family. Deduction is available on the basis of specified qualifying investments/contributions/deposits/ payments (hereinafter referred to as ―gross qualifying amount‖) made by the taxpayer during the previous year. Such investment deposit etc. can be made out of taxable income or otherwise. Amount deductible under section 80C cannot be more than Rs. 1lakh. The maximum amount deductible under sections 80C, 80CCC and 80CCD cannot exceed Rs. 1 Lakh

1. Life insurance premium [subject to a maximum of 20% of sum assured]

2. Payment in respect of non-commutable deferred annuity

3. Any sum deducted from salary payable to a government employee for the purpose of securing him a deferred annuity (subject to a maximum of 20% of salary)

4. Contribution (not being repayment of loan) towards statutory provident fund and recognized provident fund.

5. Contribution (not being repayment of loan) towards 15-year public provident fund

6. Contribution towards an approved superannuation fund .

7. Subscription to National saving certificates, VIII Issue.

8. Contribution for participating in the Unit-Linked Insurance plane (ULIP) of unit trust of India

9. Contribution for participating in Unit-Linked Insurance plane (ULIP) of LIC Mutual Fund.

10. Payment for notified annuity plane if LIC or any other insurer.

11. Subscription towards notified units of Mutual Fund or UTI

12. Contribution to notified pension fund set up by mutual fund or UTI

13. Any Sum paid (including accrued interest) as subscription to home loan Account Scheme on the National Housing Bank or contribution to any notified pension fund set up by the national Housing Bank.

14. Any sum paid as subscription to any scheme of –

a. Public sector company engaged in providing long-term finance for purchase/construction on residential house in India (i.e., public deposit scheme of HUDCO )

b. Housing board constituted in India for the purpose of planning development or improvemer of cities/towns

15. Any sum paid as tuition fees (not including any payment towards development fees/ donation payment of similar nature ) whether at the time of admission or otherwise to any university college/educational institution in Indi for full time education of any two children of the assesse.

16. Any payment paid the cost of purchase/construction of a residential property (including repayment of loan taken from government bank co-operative bank, LIC, National Housing Bank, Assessee‘s employer where such employer is public compay/public sector company university/co-operative society )

17. Amount invested in approved debentures of, and equity shares in a public company engage in infrastructure including power sector or units of a mutual fund proceeds which are utilized for the developing maintaining etc., of a new infrastructure facility.

18. Amount deposited as term deposite for a period of 5 years or more in accordance with a schem framed by the Government.

19. Subscription to any notified bonds of National Bank for Agriculture and Rural Development. (NABARD).

20. Amount deposited under senior citizens saving scheme.

21. Amount deposited in five-year time deposit scheme in post office. Notes – I. Interest on NSC will be chargeable to the basis of annual accrual Moreover, the accrue interest for the first 5 years is deemed as re-investment and the same is entitled for deduction under section 80C.

II. Investment/deposits are qualified on payment basis.

Amount paid or deposited under an annuity plan of the LIC of India or any other insurer from receiving pensions, is deductible in the hands of an individual. Amount should be paid or deposited out of income chargeable to tax. Deduction cannot exceed Rs. 1 lakh. Moreover, the aggregate deduction under section 80C, 80CCC and 80CCD cannot exceed Rs.1,00,000. 1. Employee‘s contribution to the notified pension scheme is deductible in the year in which contribution is made. However, no deduction is available in respect of employee‘s contribution which is in excess of 10 percent of the salary of the employee. If contribution is

made by a person (other than an employee) no deduction is available in respect of his contribution, which is I exees of 10 percent of his gross total income.

2. Contribution by the employer to the notified pension scheme is deductible in the hands of the concerned employee in the year in which contribution is made. However no deduction is available in respect of employer‘s contribution, which is in excess of 10 percent of the salary of the employee.

3. The aggregate amount of defuction under section 80C, 80CC and 80CCD cannot exceed Rs. 1,00,000.

4. The amounts standing to the credit of the assessee in the pension account for which a deduction has already been claimed by him, and accretions to such account, shall be taxed as income in the year in which such amounts are received by the assessee (or his nominee) on closure of the account or his opting out of the said scheme or on receipt of pension from the annuity plan. If, however, the amount of pension received from the pension account is used for purchasing an annuity plan in the same previous year, then it will be exempt from tax.

5. ―Salary‖ includes dearness allowance, it the terms of employment so provide, but excludes all other allowances and perquisites.

1. Deduction is available in respect of medi-claim insurance premium (health insurance premium) paid by an individual/Hindu undivided family out of income chargeable to tax. The premium should not be paid in cash.

Any taxpayer can claim this deduction. Donation to the following is deductible from gross total income (the amount is given in the last column) –Done Maximum Deduction(as a% of net

qualifying amount) (1) (2) (3)

a. National Defence Fund NA 100

b. Jawaharlal Nehru Memorial Fund

NA 50

c. Prime minister’s Drought Relief Fund

NA 50

d. Prime Minister’s National Relief Fund

NA 100

e. Prime Minister’s Armenia Earthquake Relief Fund

NA 100

f. Africa (Public Contributions-India) Fund

NA 100

g. National Children’s Fund NA 50

h. Indira Gandhi Memorial Trust

NA 50

i. Rajiv Gandhi Foundation NA 50

j. National Foundation for Communal Harmony

NA 100

k. An Approved university/educational institution

NA 100

l. Maharashtra chief Minister’s Relief Fund

NA 100

m. Any fund set up set up by the Government of Gujarat for providing relief to victims of earthquake in Gujarat

NA 100

n. Zila Saksharta Samiti NA 100

o. National Blood Transfusion Council and state Council for Blood Transfusion

NA 100

p. Fund set up by a state Government for the medical relief to the poor

NA 100

q. Central Welfare Fund of the Army and Air Force and the Indian naval Benevolent Fund

NA 100

r. Andhra Pradesh chief’s minister’s cyclone Relief fund

NA 100

s. National illness fund NA 100

t. Chief Minister’s Relief Fund or Lieutenant

NA 100

Governor’s Relief Fund

u. National Sports fund or national cultural Fund or Fund for Technology Development and Application

NA 100

v. Any other fund any institution which satisfies conditions mentioned in section 80G(5)

As given below 50

w. Government or any local authority to be utilized for any charitable purpose other than the purpose

As given below 50

of promoting family planning

x. Any authority constituted in India by (or under)any law enacted either for the purpose of dealing with and satisfying the need for housing accommodation or for the purpose of planning, development or improvement of cities, town and villages, or for both

As given below 50

y. Any corporation specified in section 10(26BB) for promoting interest of minority community

As given below 50

z. Government or any approved local authority, institution or association to be utilized for the purpose of promoting family planning

As given below 100

aa. Indian Olympic association or to an institute notified by the central government for the development of infrastructure for sports and games in India (only donation by a company)

As given below 100

bb. Any trust institution or fund to which section 80G (5C)applies for providing relief victims of earthquake in Gujarat

NA 100

cc. National trust for welfare of persons with Autism cerebral palsy, mental Retardation and multiple Disabilities

NA 100

dd. Any notified temple, mosque, gurdwara, church or other place (for renovation or repair)

As given below 50

Maximum Amount – where the aggregate of the sums mentioned in (v),(w)(x)(y)(z)(aa)(dd) supra exceeds 10 per cent of the adjusted gross total income, then the amount in excess of excess of 10 per cent of the adjusted gross total income will be ignored while computing the aggregate of the sums in respect of which deduction is to be allowed.Gross total incomes minus the following is adjusted gross total income – a. Amount deductible under section 80C to 80U (but not section 80G);

b. Such incomes on which income-tax is not payable;

c. Long-term capital gains;

d. Short-term capital gain which is taxable under section 111A at the rate of 15 per cent and

e. Incomes referred to in section 115A, 115AB, 115AC or 115AD.

1. The taxpayer is an individual.

2. The taxpayer is a self-employed person. Alternatively, the taxpayer is an employee but he does not get house rent allowance from the employer at any time during the previous year.

3. The following persons should not own any residential accommodation at the place where the taxpayer resides, performs the duties of his office, or employment or carries on his business or profession –

a. The taxpayer;

b. His/her spouse;

c. His/her minor child (including minor step child and minor adopted child); and

d. The Hindu undivided family of which the taxpayer is a member .

4. If the taxpayer owns a residential accommodation at a place other the place noted above, then in respect of that house the concession in respect of self-occupied property is not claimed by him.

5. The taxpayer files a declaration in form no. 10BA regarding the expenditure incurred by him towards payment of rent.

The amount deductible under section 80GG is the least of the following – a. Rs. 2,000 per month;

b. 25 per cent of ―total income‖; or

c. The excess of actual rent paid over 10 per cent of ―total income‖.

―total income ‖ for this purpose gross total income minus long-term capital gains, short term capital gains under section 11A, deductions under section 80C to 80U (not being section 80GG) and income under section 115A. An assessee (other than an assessee whose gross total income includes income chargeable under the head ―profits and gains of business or profession‖) is entitled to deduction in the computation of his total income in respect of payment /donations for scientific research or rural development .

Amount of deduction – 100 per deduction will be available for 10 consecutive assessment years out of 15 years beginning from the year in which an undertaking lays and begins to operate the cross-country natural gas distribution network. the following conditions should be satisfied – 1. the taxpayer is a developer of a special economic zone.

2. the gross total income of the taxpayer includes profits and gains derived by an undertaking from any business of developing a special economic zone.

3. Such special economic zone is notified on or after April 1, 2005.

4. Deduction should be claimed in the return of income. return of income should be submitted on or before the due date of submission of return of income. Books of account should be audited. Amount of deduction – 100 percent deduction is available in respect of the aforesaid profit . Deduction is available for 10 consecutive assessment years. The deduction may be claimed, at the option of the taxpayer for any 10 consecutive assessment years out of 15 years beginning from the year in which the special economic zone has been notified by the Central government. Amount of deduction - the amount of deduction is equal to 30 percent of additional wages (i.e. wages paid to new regular workmen in excess of 100 workmen wmployed during the year) paid the new regular workmen‘ employeement is provided. No deduction is however, available if the increasing number of reqular woekmen employed during the year is less than 10 per cent of th sexisting number of workmen employed in the undertakin as on the last day of a preceding year. ta scheduled bank/foreign bank having an offshore banking uit in aspecia; economic zone ; or a unit of International financial services center can claim deduction under section 80 LA if a few conditions are satisfied Amount of deductions 100 per cent of the aforesaid income for 5 year. the whole of the amount of the profits attributable to specified activities in the case of a co-operation society is allowable as deducting the following conditions should be satisfied – 1- the taxpayer is an individual resident in India.

2- he is an author or joint author

3- the book authored by him is work of literary, artistic or scientific nature however the books shall not include brochures, commentaries, diaries, guides journals magazines, newspaper amphles text –books for schools tracts and other publications of similar nature by what ever name called.

4- the gross total income of the taxpayer includes the following –

a. royalty or copyright fees (payable in jump sum or otherwise ) in respect of aforesaid book (it also includes advance payment which is not returnable ); and

5- the taxpayer shall have to obtain a certificate in form no. 10CCD from the person responsible or paying the income.

6- deduction should be claimed in the return Amount of deduction – the amount of royalty is deductible up to Rs. 3 Lakh Moreover for calculating deduction under section 80QDB if rate of royalty is more than 15 percent , the excess amount shall be ignored. The following conditions should be satisfied – 1. The taxpayer is an individual and resident in India.

2. He is a patentee (he may be a co-owner of patent).

3. He is in receipt of any income by way of royalty in respect of patent, which is registered.

4. The taxpayer shall have to obtain a certificate in Form No. 10CCE from the person responsible for paying the income.

5. Where the eligible income is earned outside India deduction is not available unless such income is brought into India in convertible foreign exchange on or before September 30 of the assessment year. A certificate of foreign inward remittance should be taken in form No. 10H from a prescribed authority (i.e., RBI or an authorized bank).

6. Deduction should be claimed in the return of income .

Amount of deduction – the amount of royalty is deductible up to Rs. 3 lakh.

The following conditions should be satisfied – 1. The taxpayer is an individual.

2. He is resident in India.

3. The taxpayer suffers 40 percent or more than 40 per cent if any disability (i.e., blindness, low vision, leprosy-cured, hearing impairment, loco motor disability, mental retardation, mental illness).

4. The taxpayer shall have to furnish a copy of the certificate issued by the medical authority. Amount of deduction – fixed deduction of Rs. 50,000 is available. A higher deduction of Rs. 1 lakh is allowed in respect of a person with severe disability (i.e., having disability of 80 percent or above.)TAXABLE INCOME- HOW COMPUTED 41. It is determined as follows- a) First ascertain income under the different heads of income.

b) Income of other persons may be included in the income of the company under sections 60 and 61.

c) Current and brought forward losses should be adjusted according to the provisions of sections 70 to 80. Provisions of sections 79 regarding set off and carry forward of losses of closing held companies are given in para 40.

d) The total of income computed under different heads is the gross total income.

e) From the gross total income so computed, the following deductions are permissible under sections 80C to 80U-

Assignment B(10 Marks)

Q.1 How the incidence of tax depends upon Residential Status of an Assesse? Module I : Basic Concepts BASIC CONCEPTS ASSESSMENT YEAR "Assessment year" means the period starting from April 1 and ending on March 31 of the next year. Income of previous year of an assessee is taxed during the next following assessment year at the rates prescribed by the relevant Finance Act.PREVIOUS YEAR Income earned in a year is taxable in the next year. The year in which income is earned is known as previous year and the next year in which income is taxable is known as assessment year. Previous year is the financial year immediately preceding the assessment year. All assessees are required to follow financial year (ie, April 1 to March

31) as the previous year. This uniform previous year has to be followed for all sources of income. (3 Marks)

ACCRUAL OF INCOME Income accrued in India is chargeable to tax in all cases irrespective of residential status of an assessee. The words "accrue" and "arise" are used in contradistinction to the word "receive". Income is said to be received when it reaches the assessee when the right to receive the income becomes vested in the assessee, it is said to accrue or arise. INCOME DEEMED TO ACCRUE OR ARISE IN INDIA In some cases, income is deemed to accrue or arise in India under section 9 even though it may actually accrue or arise outside India. The cases enumerated by section 9 are given below — Income from business connection in India.

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

Capital gain on transfer of a capital asset situated in India.

Income from salary if service is rendered in India

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)

Dividend paid by the Indian company (this point does not have much practical utility. Normally in the hands of the shareholders, dividend from an Indian company is exempt from tax, as an Indian company has to pay dividend tax).

Interest, royalty or technical fees received from the Government of India.

Interest, royalty or technical fees received from a resident (except when the payment pertains to business carried on by the payer outside India).

RESIDENTIAL STATUS AND TAX INCIDENCE RESIDENTIAL STATUS OF A COMPANY [SEC.6 (3)] An Indian company is always resident in India. A foreign company is resident in India only if, during the previous year, control and management of its affairs is situated wholly in India. In other words, a foreign company is treated as non resident if during the previous year , control and management of its affairs is either wholly or partly situated out of India. The table given below highlights the same proposition-RESIDENTIAL STATUS OF AN INDIVIUAL The tables given below summarize the rule of residence for the assessment year 2009-10 :Resident and ordinarily Resident (1)

Resident but not ordinarily Resident (2)

Non- resident (3)

Must satisfy at least one of the basic conditions and both of the additional conditions

Must satisfy at least one of the basic conditions and one or none of the additional conditions

Must satisfy none of the basic conditions

BASIC CONDITIONS AT A GLANCEIn the case of an Indian citizen who leaves India during the previous year for the purpose of employment (or as a member of the crew of an Indian ship ) (1)

In the case of an Indian citizen or a person of Indian origin ( who is abroad ) who comes on a visit to India during the previous year (2)

In the case of an individual [ other than that mentioned in columns (1) and (2)] (3)

a. Presence of at least 182 days in India during the

a. Presence of at least 182 days in India during the

a. Presence of at least 182 days in India during the

previous year 2008-09 previous year 2008-09 previous year 2008-09 b. Non- functional b. Non - functional b. Presence of at least 60

days in India during the previous year 2008-09 and 365 days during 4 years immediately preceding the relevant previous year (i.e., during April 1,2004 and March 31,2008).

ADDITIONAL CONDITIONS AT AGLANCETaxpayers other than an individual Control and management of the affairs of

the taxpayers are

Wholly in Wholly outside Partly in India and India India partly outside India

Hindu undivided family

Resident Non-resident Resident

Firm Resident Non-resident Resident Association of persons

Resident Non-resident Resident

Indian company Resident Resident Resident Non-Indian company

Resident Non-resident Non-resident

Any other person except an individual

Resident Non-resident Resident

i. Resident in India in at least 2 out of 10 years immediately preceding the relevant previous year

[ or must satisfy at least one of the basic conditions, in 2 out of 10 immediately preceding previous years (i.e., 1998-99 to 2007-08)].

ii. Presence of at least 730 days in India during 7 years immediately preceding the relevant previous year (i.e., during April 1, 2001 and March 31, 2008). Notes: 1. A resident Hindu undivided family is either ordinarily resident or not ordinarily resident .A resident Hindu undivided family is ordinarily resident in India if karta or manager of the family (including successive kartas ) satisfies the following two conditions as laid down by section 6(6)(b) : (a) he has been resident in India in at least 2 out of 1 0 previous years immediately preceding the relevant previous year; and (b) he has been present in India for a period of 730 days or more during 7 years immediately preceding the previous year. If karta or manager of resident Hindu undivided family does not satisfy the two additional conditions, the family is treated as resident but not ordinarily resident in India. 2. In order to determine the residential status of the aforesaid taxpayers, the residential status of the karta of the family (except as stated in 1 supra), partners of the firm, members of the association, directors of the company, etc., is not relevant. For instance, it is possible that partners of a firm are resident in India but the firm is controlled from a place outside India and, consequently, the firm is a non-resident in India.

Q.2 How the tax planning with reference to new business is to be done? (3 Marks)

Course Contents: Module I: Basic Concepts Introduction to Income Tax Act, 1961, Residential Status, Exempted Incomes of Companies. An overview of various provisions of

Business & profession & Capital gains – applicable to companies

Module II: Assessment of Companies Computation of taxable income, MAT , Set off & carry forward of losses in companies, Deductions from Gross total income applicable to companies, Tax planning with reference to new projects/expansions/rehabilitation plans including mergers, amalgamation or de-mergers of companies, Concept of avoidance of double taxation.(a) any gains or profits immediately derived by the individual from any trade, business, profession or vocation carried on or exercised by the individual either as an individual or in the case of a partnership as a partner personally acting therein;

"trade" includes a business, and every trade, manufacture, adventure or concern in the nature of a trade or business;(c) gains or profits from any other trade or business;

The industrial undertaking should not have been formed by the transfer of a new business of machinery or plant previously used for any purpose [there are two exceptions like 20 per cent old machinery and imported old machinery].

3. The aforesaid business should be a new business (i.e., not set up by splitting up, o reconstruction of. of an existing business ).

6. the undertaking should not be formed by way of reconstruction or splitting up or by transfer to a new business of old plant and machinery (subject to certain exceptions).

1. The business of the hotel is not formed by the splitting up, or the reconstructing of a business already in existence or by the transfer to a new business of a building previously used as a hotel or of any machinery or plant previously used for any purpose.

2. The business of the multiplex theatre is not formed by the splitting up or the reconstruction, of a business already in existence or by the transfer to a new business of any building or of my machinery or of plant previously used for any purposes.

2. The convention centre is not formed by the splitting up, or the reconstruction, of a business already in existence or by the transfer to a new business of any building or of any machinery or plant previously used for any purpose.

4. The aforesaid business is not formed by the splitting up or the reconstruction of a business already in existence. it is nor formed by the transfer to a new business of machinery or plant previously used for any purpose. TAX PLANNING WITH REFERENCE TO A NEW BUSINESS- LOCATION OF A BUSINESSLOCATION OF NEW BUSINESS57. Many factors affect location of a business. The following tax incentives are available under the act:- 1. Under section 10A in the case of a newly established industrial undertakings in free trade zones . 2. Under section 10AA in the case of newly established unites in special economic zone 3. Under section 10B in the case of a newly established hundred percent export oriented undertakings 4. Under section 10BA in respect of artistic hand made wooden articles 5. under section 80-IA in respect of profits and gains from industrial undertaking or enterprises engaged in infrastructure development, etc. 6. Under section 80-IAB in respect of profits and gains by an undertaking or enterprise engaged in development of special economic zone . 7. Under section 80-IB in respect of profits and gains from certain industrial undertakings other than infrastructure development undertakings . 8. Under section 80-IC in respect of profits and gains of certain undertakings in certain special category of states . 9. Under section 80-ID in respect of profits and gains of hotels and convention centre in NCR. 10. Under section 80-IE in respect of profits and gains of certain undertakings in North eastern states . TAX PLANNING WITH REFERENCE TO NEW BUSINESS –NATURE OF NEW BUSINESSNATURE OF NEW BUSINESS69. Many incentives are available under the act which are directly co-related in the nature of business. Some of these incentives are as follows :- i. Newly established industrial undertaking in free trade zones ( Sec. 10A ) ii. Exemption in the case of units in special economic zones ( Sec. 10AA ) iii. Newly established hundred percent export-oriented undertakings ( Sec. 10B) iv. Export of artistic handmade wooden articles ( Sec. 10BA) v. Tea development account ( Sec. 33AB) vi. Telecommunication services ( Sec. 35ABB)

vii. Special provision for deduction in the case of business for prospecting for mineral oil ( Sec. 42 and 44BB) viii. Special provisions for computing profits and gains for business of civil construction ( Sec. 44AD) ix. Special provisions in the case of business of plying , hiring , or leasing goods carriages ( Sec. 44AE) x. Special provisions for computing profits and gains of retail business ( Sec. 44AF) xi. Profits and gains from industrial undertakings engaged in infrastructure, etc

( Sec. 80-IA) xii. Profits and gains by an undertaking or enterprise engaged in development of

Special economic zone ( Sec. 80-IAB) xiii. Profits and gains from certain industrial undertakings other than infrastructure

Development undertakings ( Sec. 80-IB) xiv. Profits and gains of certain undertakings in certain special category of states

( Sec. 80-IC) xv. Deduction in respect of employment of new workmen ( Sec. 80JJAA) xvi. Tonnage Tax Scheme ( Secs, 115V to 115VZC) 70. An Assessee can claim deduction under section 33AB as follows :-SPECIFIED BUSINESS SHOULD BE NEW BUSINESS71.1-2 The specified business should not be set up by splitting up, or the reconstruction, of a business already in existence. Moreover, it should not be set up by the transfer of old plant and machinery. 20 percent old machinery is permitted- If the value of the transferred assets does not exceed 20 percent of the total value of machinery or plant used in the business, this condition is deemed to have been satisfied. Second-hand imported machinery is treated as new- Any new machinery or plant which was used outside India by any person (other than the assessee) shall not be regarded as machinery or plant previously used for the purpose, if the following conditions are fulfilled-1. Such machinery or plant was not, at any time previous to the date of the installation by the assessee, used in India. 2. Such machinery or plant is imported into India from any country outside India. 3. No deduction on account of depreciation in respect of such machinery or plant has been allowed or is allowable under the act in computing the total income of any person for any period prior to the date of the installation of the machinery or plant by the assessee.TAX PLANNING WITH REFERENCE TO NEW BUSINESS - FORM OF ORGANISATION86. among other considerations(like requirement of finance ,personal liability of owner ,level of operation, quantum of profit, specified requirement of technical expertise),tax incentives play important role while comparing tax liability under different organisation forms. WHETHER SOLE PROPRIETORSHIP IS A BETTER ALTERNATIVE 87. Aggregate amount of tax liability on firm and partners is generally higher that of the case when the same amount of income is generated through sole proprietorship. One should therefore consider the possibility of converting firms into sole proprietorships. The same is evident from the case studies given below:

Q.3 Telco Ltd., a company incorporated and managed in South Africa and engaged in telecommunication services, is going to invest in China. Its Chinese operations will be both manufacturing and providing services. Telco intends to penetrate the Chinese market for telecommunication and according to some market research

carried out before, the operations will be highly profitable within a couple of years.

How to structure Telco's investment in a tax effective manner? (4 Marks)

Assignment C(10 Marks)

Each question given below carry equal marks of 0.25 (i.e 0.25*40 = 10 Marks)

Q.1 A domestic company is always a company in which the public are substantially interested -

(a) True (b) False(c) None of the above(d) True in some cases.

Q.2 A private limited company can never be a company in which the public are substantially interested –

(a) True(b) False(c) True in some cases(d) None of the above

Q.3 A company registered in the UK and makes arrangement for payment of dividend in India is not a domestic company –

(a) True (b) False(c) True in some cases(d) None of the above

Q.4 A company is said to be resident of a particular company if –

(a)Control and management of the affairs of a company is situated wholly in that particular country. (b)Control and management of the affairs of a company is situated outside that particular country.

(c) Control and management of the affairs of a company is situated partly in that particular country and partly outside that particular country. (d) All of the above

Q.5 X Ltd. a foreign company manages its affairs partly from

India and partly outside India. X Ltd. is said to be –

(a) Resident in India(b) Non-Resident in India.(c) Resident and Ordinary Resident in India,(d) Resident but not ordinary Resident in India.

Q.6 A company owning the following hotels can claim deduction under section 80-ID –

(a)A 5 star hotel in X ( a place ). (b)A 4 star hotel in Y ( a place ). (c)A 3 star hotel in Z ( a place ). (d)All of the above.

Q.7 A company is qualified to claim deduction under section 80-IB. By mistake the deduction was not claimed in the return in the return of income. However, the company claims the before the Assessing Officer at the time of assessment under section 143(3)

(a)Deduction will be allowed by the assessing officer. (b)Deduction will not be allowed by the assessing officer. (c)Deduction will be allowed by the assessing officer, if the Commissioner of Income-tax permits. (d)Deduction will be allowed by the assessing officer, if the it is permitted by the Chief Commissioner. Q.8 A Government company cannot claim any deduction under section 10A, 10AA and 10B –

(a)True(b)False(c)None of the above(d)True in some cases.

Q.9 A limited liability partnership owns an infrastructure facility. It can claim deduction under section 80-IA –

(a)True(b)False(c)True in some cases(d)None of the above

Q.10 Only a company(not a limited liability partnership) can claim deduction under section 10A, 10AA, and 10B –

(a)True(b)False(c)True in some cases

(d)None of the above

Q.11 Deduction under section 80JJJA is available in the following cases –

(a)Indian Company(b)Foreign Company(c)Limited Liability Partnership.

(d)All of the above

Q.12 Tonnage tax scheme is applicable in the following cases –

(a)Foreign Shipping Company,(b)Indian Shipping Company,(c)Limited liability partnership in shipping industry.(d)All of the above

Q.13 A company will pay dividend tax if –

(a)Bonus shares are allotted to equity shareholder.(b)Bonus shares are allotted to preference shareholders,(c)Shares are allotted to debenture holders free of cost.(d)Shares are allotted to employees as ESOP shares free of

cost.

Q.14 Corporate taxation does not play any significance role in determining the choice between different sources of finance –

(a)True(b)False

Q.15 A Company want to purchase a plant (cost: Rs. 80 crore).It can out rightly purchase it. Alternatively, it can take the plant on lease. The following factors are taken into consideration to find out which one is better –

(a) Corporate tax rate;

(b) Corporate rate and depreciation rate; (c) Corporate tax rate, depreciation rate, lease rent, cost of capital and useful life of plant; (d) None of the above.

Q.16 If corporate tax rate is reduced the tax saving on account of depreciation will increase - (a) True (b) False (c) True in some cases (d) None of the above

Q.17 If rate of depreciation is reduced the tax saving on account of depreciation will increase - (a) True

(b) False (c)True in some cases (d)None of the above

Q.18 If borrowed funds are used for purchase of a plant and tax rates are reduced, the tax saving will increase -

(a) True (b) False (c) True in some cases (d) None of the above

Q.19 Depreciation is not available in the case of machine acquired under higher purchase – (a) True (b) False (c) True in some cases (d) None of the above

Q.20 X Limited is considering a proposal to manufacture a component itself or purchase from market. No fresh investment in plant and machinery will be required if it decides to manufacture the component within its factory. Total Variable Cost of manufacturing is $ 74 per unit of component. Net fixed cost of use of plant and machinery comes to $ 20 per unit of component. The component is available in market at $ 79 per unit of component. It is better to purchase the component from market-

(a) True (b) False (c) True in some cases (d) None of the above

Q.21 Y Limited has an option to purchase a machine out of own funds or alternatively a bank can finance it. At the current rate of corporate tax, the tax saving in the later option is higher. If the corporate tax rate is reduced, the second option will become less attractive-

(a) True (b) False (c) True in some cases (d) None of the above

Q.22 In case of demerger, accumulated loss and unabsorbed depreciation of the demerged company will be-

(a)Carried forward in the hands of demerged companies.

(b)Carried forward and set off in hands of resulting companies.

(c) Set off in the hands of demerged companies.

(d) None of these.

Q.23 Amalgamation and demerger are considered as-

(a) Same terms always. (b) Distinct terms always

(c) Same terms in certain cases.(d) Distinct terms in certain cases.

Q.24 Net wealth is calculated as-

(a) Assets chargeable to wealth tax less the exempted assets(b) Assets chargeable to wealth tax less debt owned(c) Assets less debt owned(d) Assets less exempted assets

Q.25 Wealth tax is chargeable

(a) @ 2% of the net wealth exceeding Rs. 30 Lakhs(b) @ 1% of the net wealth exceeding Rs. 30 lakhs (c) @ 1% of the entire net wealth provided it exceeds Rs. 30,00,000.(b) @ 2% of the entire net wealth provided it exceeds Rs. 30,00,000.

Q.26 Wealth tax is payable if the net wealth of the assesee

(a) Exceeds Rs. 250,000(b) Is Rs. 30,00,000 or more

(c) Exceeds Rs. 30,00,000 (d) None of the above

Q.27 A firm is (a) Not liable to wealth tax (b) Liable to wealth tax(c) Not liable to wealth tax but partners share in the value of the assests of the firm shall be included

in the net wealth of the partner(d) All of the above

Q.28 Asset held by a minor child is included in the net wealth of the

(a)Father (b)Mother (c)Father or mother whose net wealth before clubbing is greater.

(d)Father or mother whose net wealth before clubbing is lesser.

Q.29 An assessee is one who pays the wealth tax, an assesse belongs

to which of the following category?

(a) A company (b) HUF

(c) A dead person’s legal representative, the executor or administrator (d)All of the above

Q.30 A house is not treated as an asset if

(a) it is meant exclusively for residential purposes(b) house held as stock-in-trade(c) house used for own business or profession(d) all of the above

Q.31 VAT WAS FIRST INTRODUCED AS A TAX IN THE YEAR:-  (A) 1919(B) 1921 (C ) 1948(D) 1954  Q.32 VAT WAS FIRST INTRODUCED BY THE:-  (A) FRANCE(B) GERMANY (C ) USA(D) UK

Q.33 WHICH IS MOST COMMON VARIANT OF VAT USED WORLD WIDE:-  (A) GROSS PROFIT VARIANT(B) CONSUMPTION VARIANT(C ) GROSS PRODUCT VARIANT(D) GROSS INCOME VARIANT

Q.34 TIN MEANS:-  (A) TAX INFORMATION NUMBER(B) TAX INDIA NUMBER(C ) TAX IDENTIFICATION NUMBER(D) TAX INTRODUCTION NUMBER

Q. 35 VAT INTRODUCTION WILL CERTAINLY:-  (A) MAKE THE REVENUE COLLECTION WORST.(B) MAKE THE REVENUE COLLECTION BETTER.(C ) THE REVENUE COLLECTION ARE THE SAME.(D) REVENUE VOLUME HAS NOTHING TO DO WITH INTRODUCTION OF VAT Q.36 THE ACCOUNTING UNDER THE VAT WILL BE:-  (A) REGULAR AND CHEAP.

(B) REGULAR AND EXPENSIVE(C) IRREGULAR AND CHEAP.(D) IRREGULAR AND EXPENSIVE

Q.37 TO CLAIM THE INPUT CREDIT OF TAX PAID WHAT IS MOST IMPORTANT DOCUMENT:- (A) PERMISSION OF THE SALES TAX AUTHORITY.(B) PROPER VAT INVOICE (C ) CASH BOOK(D) LEDGER 

 Q.38 WHICH IS MOST COMMON VARIANT OF VAT USED WORLD WIDE:-  (A) GROSS PROFIT VARIANT(B) CONSUMPTION VARIANT(C ) GROSS PRODUCT VARIANT(D) GROSS INCOME VARIANT

Q.39 DUE TO INTRODUCTION OF VAT:-  (A) TAX EVASION IS RESTRICTED.(B) TAX EVASION IS INCREASED.(C ) VAT HAS NOTHING TO DO WITH EVASION OF TAX.(D) TAX EVASION HAS BECOME EASY.

Q.40 THE ACCOUNTING UNDER THE VAT WILL BE:-  (A) REGULAR AND CHEAP.(B) REGULAR AND EXPENSIVE(C) IRREGULAR AND CHEAP.(D) IRREGULAR AND EXPENSIVE