OVERVIEW OF INCOME-TAX ACT, 1961

For Sinhagad Institute MBA Students

TAXATION IN INDIA

TAXATION IN INDIA

Determinants of taxation of an individual in

India

Source of income

Residential status

Place of receipt of income

Not ordinarily resident (‘NOR’)

Non-resident (‘NR’)

Resident

DETERMINING RESIDENCY IN INDIAIndividual

Stay in India >=

60* days in the FY and >= 365 days

in the aggregate in the last

4 FYs

Non-resident

Not ordinarily resident

Yes

Yes

Yes

Yes

No

Resident

Basic conditions

Stay in India >=

182 days in the FY

Additional conditions

Aggregate stay in India during the previous 7

FYs < 730 days

Non-resident in 9 out of 10

previous FY

No

No

No

* Stands changed to 182 days in case of a citizen of India who leaves India for employment abroad and in case of a citizen of India or a person of Indian origin who comes on a visit to India from abroad in the year of leaving / coming into India

SCOPE OF TAXABLE INCOME

Not ordinarily resident (‘NOR’)

Scope of taxable income

ResidentNon-resident

(‘NR’)

•Worldwide income

•Income received in India

•Income sourced

from India•Income from business controlled from India

•Income received in India

•Income sourced

from India

SALARY INCOME

SALARY INCOME

Employer-employee relationshipDirect control and supervisionSalary chargeable to tax on due or receipt basis; whichever is earlier

SALARY INCOME

Following income is chargeable to income-tax under the head ‘Salaries’: Any salary due from an employer or former employer,

whether actually paid or not; Any salary paid or allowed by or on behalf of the

employer, though not due or before it became due; and Any arrears of salary paid or allowed by or on behalf

of the employer, if not charged to tax for any earlier previous year

Perquisites as provided under section 17 of the Income-tax Act, 1961 (‘the Act’)

SALARY INCOME

Salary to include: Wages Any annuity or pension Any gratuity Any fees, commissions, perquisites or profit in lieu

of salary Any advance salary Leave encashment Annual accretion to recognized provident fund Employer’s contribution to a recognized provident

fund in excess of prescribed limits

SALARY INCOME

Profit in lieu of salary: Compensation due or received from the employer or

former employer in connection with termination of employment or modification of terms and conditions of employment

Any amount received or due from employer or former employer or from provident fund or any other fund under a keyman insurance policy

Any amount received or due from employer or former employer on or before joining or after cessation form his employment

PLACE OF ACCRUAL

Salary is deemed to accrue or accrue or arise at the place where the services (in respect of which it accrues) are renderedSalary in respect of services rendered in India is deemed to accrue or arise in India even if it is paid outside IndiaLeave salary earned in India is deemed to accrue or arise in India

HOUSE RENT ALLOWANCE

Exemption not allowable where employee lives in own house or in a house for which no rent has been paid

Least of the following is exempt from tax: : 40 percent (50 percent for Delhi, Mumbai, Kolkata and

Chennai) of salary; Rent paid in excess of 10 percent of salary for the

relevant period; Actual HRA received

Salary, for this purpose, includes base salary, dearness allowance (if terms of employment so provide) and commission (based on fixed percentage of turnover achieved by an employee)

PROFESSION TAX

Deduction in the year of paymentIf an employer bears this tax, include as a perquisite and then permitted as a deduction

REVISION OF PERQUISITE RULES

Accommodation

Earlier provisions New provisions

Owned by the employer 10% of salary (in cities with

population over 4 lakhs) 7.5% of salary (in other

cities)

20% of salary

15% of salary

Leased by the employer 10% of salary; or actual rent paid; whichever is

lower

20% of salary; or actual rent paid;

whichever is lower

Hotel accommodation 24% of salary; or actual charges; whichever is

lower

No change

REVISION OF PERQUISITE RULES

Furniture provided by the employer is taxed at: 10% of the cost of furniture (if furniture is owned

by the employer) actual hire charges (if furniture is hired by the

employer)Any recovery from the employee is reduced from the perquisite valuation

NEW PERQUISITE RULES

Perquisites retained (taxed as earlier)Domestic helpUtilitiesEducationConcessional/interest free loanUse and transfer of movable assets

Perquisites omittedProvision of car and chauffeurConcessional travelProvision of holiday home facilityProvision of free/concessional mealsGiftsCredit card facilityClub facilityAny other benefit provided by the employer

FRINGE BENEFIT TAX

Applicable from April 1, 2005Tax on fringe benefits provided directly or indirectly to employees or their family members, in the course of employmentEmployees deemed to include former employeesRate of tax - 33.66% (30% plus surcharge and education cess) on fringe benefits as valued Valuation at specified percentages (20% or 50%) of defined expenses (actuals in some cases)Employees not liable to pay tax on fringe benefitsFBT is not tax deductible Industry specific relief on certain categories of expenses

FRINGE BENEFIT TAX - OVERVIEW

FRINGE BENEFIT TAX - OVERVIEW

What are Fringe Benefitsany privilege, service, facility or amenity provided directly or indirectly, whether by way of reimbursement or otherwiseany free or concessional ticket for private journeys of employees and their family membersany contribution to approved superannuation fundother 16 specified categories

Fringe Benefits not to coverPerquisites taxed in the hands of employees (as per Rule 3)Specified exemptions under various categories

APPLICABILITY OF FBT

Payable by all employers (other than individuals) irrespective of tax statusPayable irrespective of size or number of employeesPayable even if the employer is not liable to pay Indian Income tax

tax holiday units non-profit entities loss making entities companies taxed on presumptive basis companies entitled to treaty exemptions

Exemption to Charitable Trusts and specified institutions

FBT COMPLIANCE

FBT to be paid by way of advance tax Annual return of fringe benefit tax to be deposited Separate provisions for assessment and appellate proceduresInterest and penal consequences for non-complianceSpecified due dates

Installment All tax payer

First July15

Second October 15

Third January 15

Fourth March 15

RETURN OF INCOME

REQUIREMENTS TO FILE RETURN OF INCOME

Who is required to file return of income Company or a firm – mandatory requirement Others – total income exceeds exempted limit

‘One by six criteria’ – Resident of India, residing in specified area and satisfies one of the following: occupies immovable property exceeding certain area; owns / leases motor vehicle; subscribes to a cellular telephone but not WLL; foreign travel; holds a credit card; or member of a club

However, these criteria have been removed in the Finance Act 2006

REVISED RETURN

Filed if the assessee discovers an omission or wrong statementReplaces the original returnFiled before the end of one year from the relevant assessment year or the completion of the assessment, whichever is earlierCan be revised furtherBelated return cannot be revised

LOSS RETURN

Return must be filed within the prescribed time limitsIf not filed, no carry forward of loss, however carry forward of unabsorbed depreciation permissible

DEFECTIVE RETURN

Incomplete returnAssessee may be given an opportunity to rectify the defectIf the defect not rectified, the return treated as invalidReturn defective if: columns of return not filled or annexures not

attached; computation of income tax not attached; proof of tax deposited is not produced within the

period of two years, Non furnishing of tax audit report; etc

INCOME TAX COMPLIANCE

INCOME TAX COMPLIANCE

Obtaining Permanent Account NumberPayment of advance-taxFiling of income-tax returnObtaining a No objection certificate (‘NOC’)

ASSESSMENT PROCEDURES

INTIMATION UNDER SECTION 143(1)

Where a return of income has been filed under section 139 or in response to notice under section 142(1) and if any tax or interest is found due on the basis of such

return, an intimation shall be issued to the assessee specifying the sum so payable, and such intimation shall be deemed to a notice of demand under section 156 of the Act and

any refund is due on basis of such return, it shall be granted to the assessee and intimation to this effect would be sent to the assessee

In case no refund is due and no tax is payable by the assessee on the basis of the return, then the acknowledgement of the return shall be deemed to be an intimation Time frame – Intimation can be issued within one year from the end of financial year in which return is filed

INQUIRY BEFORE ASSESSMENT - SECTION 142

Scope of Section

No return filed Return filed

Notice to file returnNotice asking for

information/documents

SCRUTINY ASSESSMENT - SECTION 143(3)

Notice for scrutiny under section 143(2)Time frame for service of notice – 12 months from end of month in which return is filedLimited scrutiny (143(2)(i)) – Assessing officer has reason to believe that any claim of loss, exemption, deduction, allowance or relief made in the return is inadmissibleNo notice under section 143(2)(i) after June 1, 2003Detailed scrutiny (143(2)(ii)) – Assessing officer considers it necessary or expedient to ensure that income has not been understated; or excessive loss has been computed; or tax has not been underpaid in any other manner

SCRUTINY ASSESSMENT - SECTION 143(3)

Verify the documents / information / evidence which the assessee may produce in support of position adopted in the return of income filedThe assessing officer shall pass an order in writing under section 143(3) and make an assessment of the total income or loss of the assessee, and determine the sum payable or refund of any amount due to assessee on the basis of such assessment Time frame for completion - 21 months from the end of assessment year in which the income was first assessable

BEST JUDGEMENT ASSESSMENT - SECTION 144

Ex-parte assessment under section 144 would be made in any of the following circumstances: Failure to file return under sections 139(1),(4) or

(5) Failure to comply with notice under sections 142(1),

audit direction under section 142(2A) Failure to comply with notice under section 143(2)Opportunity to be heard to be given, except when notice under section 142(1) has been issued prior to ex-parte assessmentTime frame for completion – 21 months from end of assessment year in which the income was first assessable

INCOME ESCAPING ASSESSMENT - SECTION 147

If the assessing officer has reason to believe that income chargeable to tax has escaped assessment, he may assess or reassess such income and also any other income chargeable to tax which has escaped assessment and which comes to his notice subsequentlyReason to believe would include Valid material Relevant and bonafide belief Not mere change of opinion Not to be based on rumour or conjecture

Proceedings void ab initio in case notice not issued or notice invalidAll original proceedings must have been terminated before re-assessment proceedings can be validly initiateBefore issuing notice under section 147, the assessing officer shall record his reasons in writing

INCOME ESCAPING ASSESSMENT - SECTION 147Where assessment is completed under section 143(3) or 147, assessments may be re-opened after 4 years from end of relevant assessment year, only where income chargeable to tax has escaped assessment for such year by reason of: failure on the part of the assessee to make a return under

section 139 or in response to a notice under section 142(1) or section 148

failure on the part of the taxpayer to disclose truly and fully all material facts necessary for assessment

Before making an assessment under section 147, the assessing officer shall issue a notice to the assessee requiring him to furnish the return of income within the specified periodTime limit for issue of notice - 4 years, 6 years in case the income escaped assessment exceeds or likely to exceed Rs one lakhReturn to be filed by the assessee in response to the notice

Time limit for completion of reassessment proceedings – Within nine months from the end of the financial year in which the notice under section 148 was served

RECTIFICATION

RECTIFICATION - SECTION 154

An income-tax authority may with a view to rectifying any mistake apparent from the record: amend any order passed by it amend any intimation or deemed intimation under section 143(1)

Rectification may also be made on application by the assessee

Orders cannot be rectified after expiry of 4 years from the end of the financial year in which order sought to be amended was passed

On rectification plea by assessee – Amendment / refusal order to be passed within 6 months from the end of the month in which the application is received by the income-tax authority

RECTIFICATION - SECTION 154 Mistake Obvious and patent Self evident and reached without debate Fresh determination of facts should not be required Misreading of a clear provision of law/ applying an

inapplicable provision/ overlooking mandatory provision

Statutory interpretation should not be involvedRecord Includes all materials/ documents available at the

time of passing the order of assessment Fresh documents/ materials not recorded at the time

of passing the order cannot be considered Record of any period can be considered

RECTIFICATION - SECTION 154

Examples of mistakes apparent from record which can be rectified Error of law or fact

Clerical or arithmetical error

Error in determination of written down value

Overlooking the obligatory provisions of the legislature

Mistakes arising out of retrospective amendment of law

REVISION OF ORDER – SECTION 263

Pre-requisites Prejudicial to interests of Revenue

Erroneous order

Record shall include and shall be deemed always to have included all records available at the time of examination by the Commissioner Revised order should be passed before the expiry of 2 years from the end of the financial year in which order sought to be revised was passedOpportunity of being heard should be given to the assessee before passing an order under section 263Powers of Commissioner – Enhance, modify or cancel the assessment and direct a fresh assessment Appeal can be filed to the Appellate Tribunal against the order under section 263

REVISION OF ORDER – SECTION 264

Revision of orders, on own motion of Commissioner or on application by the assesseeRevision of order on own motion by the Commissioner, to be passed within one year from date of order sought to be revisedApplication by assessee should be made within 1 year from date on which the order in question was communicated or date on which assessee came to know of order, whichever is earlierOrder to be passed within 1 year from end of financial year in which application is made by assessee for revisionPre-requisite – Assessee to waive right of appeal Where appeal against the order has been filed – no revision possible

APPEALS

APPEAL TO CIT(A)

Appealable orders (Illustrative) Scrutiny assessment order Best Judgment assessment order Reassessment order Rectification order enhancing assessee’s liability FBT order Tonnage tax order Appeal to CIT(A) within 30 days of Date of payment of tax, where appeal is in respect of TDS under section 195

Date of service of notice of demand relating to assessment or penalty

Date on which intimation of order sought to be appealed against is served

APPEAL TO CIT(A)

Time extended if sufficient cause provenAppeal to be filed in prescribed form and manner

CIT(A) fixes a day and place for hearing the appeal, and notice of the same is given to the appellant and the assessing officer whose order is being appealed against

During the course of the hearing, CIT(A) may entertain additional ground/evidence raised by the appellant in seeking modification of the assessment order passed by the assessing officer

CIT(A)’s order disposing of the appeal is in writing and states decision and reasons supporting the same

CIT(A) has powers to confirm, reduce, enhance or annul the assessmentWhere possible, CIT(A) to dispose within 1 year from the end of the financial year in which appeal was filed

APPEAL TO THE ITAT

Appeal to ITAT should be filed within 60 days of the date on which the order sought to be appealed against is communicatedMemorandum of cross-objections – within 30 days of receipt of notice that an appeal has been preferred to the ITATTime extended if sufficient cause provenAppeal to be filed in prescribed form and mannerAdditional ground/ evidence can be raised for the first time before the ITAT. In such a case opportunity of being heard should be given to the assessing officer After hearing both parties, the ITAT passes an order as it thinks fit and communicates the same to the assessee and the CommissionerWhere possible, ITAT to dispose within 4 years from the end of the financial year in which appeal was filedIn case order of stay is made, appeal to be disposed within 180 days of stay order; else, stay stands vacate

APPEAL TO THE ITAT

Mistakes apparent from record – Order of ITAT can be amended within 4 years from date of ITAT order [Section 254(2)] if it is brought to the notice by the assessee or the assessing officerFinal fact finding authorityBinding nature

TAX WITHHOLDING

TAX WITHHOLDING

As per the provisions of the Act, any person responsible for paying certain specified category of sums, has to deduct tax at the time of:

Credit of such amount to the account of the payee; or

Payment to the payee

whichever is earlier

In case of payments to non-residents, tax is required to be deducted on all credits / payments where the payments are taxable in the hands of the non-residentHowever in case of payment to residents, the requirement of tax deduction is restricted only to certain specified streams of payments

TAX WITHHOLDING

Section 195 requires to withhold tax on any interest or any other sum chargeable under the provisions of the Act Payer can make an application to the Indian Revenue to determine the appropriate portion of income chargeable to tax and upon such determination deduct tax only on such portion of incomeEven the payee can make an application to the Indian Revenue for granting of certificate to receive income without/lower deduction of tax at source

TAX WITHHOLDING

In case tax on the credit/payment being made to a non-resident is to be borne by the payer, the same is required to be grossed up as it is taxable as income in the hands of the payee

Provisions of the Act provide for disallowance of expenditure in the hands of the payer in case tax on certain specified payments to residents and non-residents has not been deducted or after deduction has not been paid in time to the Government treasury

Accordingly, appropriate withholding is imperative to ensure tax deductibility of the expensesBroadly, once the tax has been deducted: The tax deducted is to be deposited with the Government

treasury; Certificates for deduction of tax are to be issued to the

payee; and Returns giving the details of deduction and deposit are to be

filed with the tax authorities

TAX WITHHOLDING

The rate of deduction varies depending upon the nature of payment, status of the payee and residence of the payee

Each of the above aspects have been discussed in the following slides

RATE OF DEDUCTION FOR RESIDENTS

Nature of payment

Condition for deduction of tax

Rate

Salary - Average of income tax computed on the basis of rates in force for the financial year

Interest other than Interest on securities

Aggregate of such sums credited or paid or likely to be credited or paid to a person during a financial year exceeds Rs 5,000

20 percent in case payee is a company10 percent in any other case

Rent Aggregate of such sums credited or paid or likely to be credited or paid to a person during a financial year exceeds Rs 120,000

15 percent if the payee is an individual or HUF20 percent in all other cases

RATE OF DEDUCTION FOR RESIDENTS

Nature of payment

Condition for deduction of tax

Rate

Payments to contractors and sub-contractors

Payment for a works contract exceeds Rs 20,000 or the aggregate of such sums credited or paid or likely to be credited or paid to a person during a financial year exceeds Rs 50,000

Payment to contractor:

1 percent in case of advertising contract2 percent in any other case

Payment to sub-contractor:

1 percent in all cases

Commission or brokerage

Aggregate of such sums credited or paid or likely to be credited or paid to a person during a financial year exceeds Rs 2,500

5 percent

RATE OF DEDUCTION FOR RESIDENTS

Nature of payment

Condition for deduction of tax

Rate

Fee for professional or technical services

Aggregate of such sums credited or paid or likely to be credited or paid to a person during a financial year exceeds Rs 20,000

5 percent

The above rates are exclusive of:

Surcharge being 10 percent in case payee is an individual if income or aggregate of such incomes paid or likely to be paid and subject to tax deduction exceeds Rs 1,000,000, 10 percent in case of a firm and a company; and

Education cess at the rate of 2 percent on tax plus surcharge