Description
The presentation explaining various aspects of income tax concepts like general principles, definitions, tax planning, avoidance, evasion and management of taxes.
Taxation-Income Tax
If you drive a car I’ ll tax the street. If you try to sit I’ ll tax your seat. If you get too cold I’ ll tax the heat. If you take a walk I’ ll tax your feet. • Beatles- Taxman.
(If you pollute, I’ll tax the smoke But if you clean up, I’ll give till I’m broke ‘Cause I need you to understand That messing with Nature ain’t no joke!!)
Person includes :
• • • • • an individual ; a Hindu undivided family ; a company ; a firm ; an association of persons or a body of individuals, whether incorporated or not ; • a local authority • every artificial juridical person, not falling within any of the preceding categories.
Some more basic concepts
• • • • • • • • Previous Year Assessment Year Rates of Income Tax Revenue and Capital Heads of Income Gross Total Income General Deductions (Sec. 80) Method of Accounting
Residential Status (Individual)
• An individual is said to be resident in India in any previous year, if he satisfies at least one of the following basic conditions: (a) He is in India in the previous year for a period of 182 days or more. (b) He is in India for a period of 60* days or more during the previous year and 365 days or more during 4 years immediately preceding the previous year.
Residential Status (Individual)
• a resident individual is treated as “resident and ordinarily resident” in India if he satisfies the following two additional conditions— a) He has been resident in India in at least 2 out of 10 previous years [according to aforementioned basic condition] immediately preceding the relevant previous year. b) He has been in India for a period of 730 days or more during 7 years immediately preceding the relevant previous year.
Residential Status of a Company
Control and management Indian Company Other than Indian Company resident Non resident Non resident
Wholly in India resident Wholly outside resident India Partly in India resident
Incidence of tax for Individuals:
Resident and ordinarily resident Indian Income Foreign Income Taxable Resident but not ordinarily resident Taxable Non-resident
Taxable
- Business income : wholly/partly controlled from India - Business income : controlled from outside India Any other foreign income (like salary, rent, interest, etc.)
Taxable
Taxable
Not taxable
Taxable
Not taxable
Not taxable
Taxable
Not taxable
Not taxable
Companies: Resident Non resident
Indian Income
Taxable
Taxable
Foreign Income
Taxable
Non taxable
Capital or revenue expenseGeneral Principles
?? Acquisition of fixed assets v. Routine expenditure - Capital expenditure is incurred in
acquiring, extending or improving a fixed asset, whereas revenue expenditure is incurred in the normal course of business as a routine business expenditure. ?? Several previous years v. One previous year - Capital expenditure produces benefits for several previous years, whereas revenue expenditure is consumed within a previous year. ?? Improvements v. Maintenance - Capital expenditure makes improvements in earning capacity of a business. Revenue expenditure, on the other hand, maintains the profitmaking capacity of a business. ?? Non-recurring v. Recurring - Usually capital expenditure is a non-recurring outlay, whereas revenue expenditure is normally a recurring outlay. ?? Lump sum payment v. Periodic payment - In order to determine whether an expenditure is capital or revenue in nature, the fact that it is a lump sum payment or periodic payment is not important. ?? Expenditure out of capital v. Expenditure out of revenue - For determining whether expenditure is of capital or revenue nature, it is immaterial whether expenditure is made out of money withdrawn from capital or out of profits.
Positive tests for deductibility
• If the expenditure is incurred : (i) with a view to bring profits or monetary advantage either today or tomorrow ; (ii) to render the assessee immune from impending or reasonably apprehended litigation ; (iii) in order to save losses in foreseeable future ; (iv) for effecting economy in working which may pay dividends today or tomorrow; (v) for increasing efficiency in working ; (vi) for removing inefficiency in the working ; (vii) where the expenditure incurred is such as a wise, prudent, pragmatic and ethical man of the world of business would conscientiously incur with an eye on promoting his business prospects, subject to the expenditure being genuine and within reasonable limits ; (viii) where it is incurred solely by way of a civil duty owed by the assessee to the society having regard to the nature of his business which brings him profits but results in some detriment to the public at large either by way of health hazard or ecological pollution or serious inconvenience to the citizens with a view to mitigate the aforesaid evil consequences and consequences of a like nature, subject to its being genuine and within reasonable limits.
Negative tests
• (i) (ii) (iii) (iv) If the expenditure is incurred : for a mere altruistic consideration; mainly in order to satisfy his philanthropic urges ; mainly in order to win applause or public appreciation ; for illegal, immoral or corrupt purposes or by any such means or for any such reasons ; (v) mainly in order to oblige a relative or an official ; (vi) mainly to earn the goodwill of a political party or a politician ; (vii) mainly to show off or impress others with his affluence or for ostentatious purposes ; (viii) apparently for a factor listed as a positive factor, but in reality for one of the obnoxious purposes listed as a negative factor ; (ix) on a nebulous plea or pretext by way of an alibi in the name of winning profits in remote future but really for one or the other of the purpose listed as negative tests ; (x) it is a bogus, fictitious or sham transaction ; (xi) it is unreasonable and out of proportion ; (xii) it is an expenditure merely with a view to avoid tax liability without any genuine purpose or reason in good faith ; and (xiii) the advantage to be secured by incurring the expenditure is of the nature of a remote possible advantage depending on “ifs” and “buts” and, if at all, to be secured at an uncertain future date which may be considered too remote.
Tax Planning
• Arrangement of financial and economic affairs by complete legitimate benefits of available deductions, exemptions, etc. so that tax libility is minimized. • Full compliance of tax laws • All legal obligations and transactions met • No colourable devices (letter of law: yes, spirit of law: no) • No intention to deceive
Tax Avoidance
• Reducing or negating tax liability in legally permissible ways • Letter of law is followed • No mala fide intention • Advantage of lacuna/loophole in law
Tax Evasion
• • • • Tax liability is illegally avoided Letter and spirit of law not followed Mala fide intention/intention to deceive Untrue statements, misleading documents, suppression of facts, not maintaining proper accounts, etc.
Heads of Income
• Income from Salary • Income from house property • Profits and Gains from business or profession • Capital gains • Income from other sources
Flow of Income
GTI
• Gross Income from each head • Less: Specific deductions under each head • Less: General deductions ( section 80) • Total income / taxable income / • net total income
TI
Tax Planning and Managerial decisions
• • • • • • • • Make or Buy Own or Lease Instalments or hire Repair or replace Shut down or continue Capital structure Dividends Bonus shares
Setting up a New Business
• Where (location) • What ( what should be manufactured) • How (legal form)
doc_886452306.ppt
The presentation explaining various aspects of income tax concepts like general principles, definitions, tax planning, avoidance, evasion and management of taxes.
Taxation-Income Tax
If you drive a car I’ ll tax the street. If you try to sit I’ ll tax your seat. If you get too cold I’ ll tax the heat. If you take a walk I’ ll tax your feet. • Beatles- Taxman.
(If you pollute, I’ll tax the smoke But if you clean up, I’ll give till I’m broke ‘Cause I need you to understand That messing with Nature ain’t no joke!!)
Person includes :
• • • • • an individual ; a Hindu undivided family ; a company ; a firm ; an association of persons or a body of individuals, whether incorporated or not ; • a local authority • every artificial juridical person, not falling within any of the preceding categories.
Some more basic concepts
• • • • • • • • Previous Year Assessment Year Rates of Income Tax Revenue and Capital Heads of Income Gross Total Income General Deductions (Sec. 80) Method of Accounting
Residential Status (Individual)
• An individual is said to be resident in India in any previous year, if he satisfies at least one of the following basic conditions: (a) He is in India in the previous year for a period of 182 days or more. (b) He is in India for a period of 60* days or more during the previous year and 365 days or more during 4 years immediately preceding the previous year.
Residential Status (Individual)
• a resident individual is treated as “resident and ordinarily resident” in India if he satisfies the following two additional conditions— a) He has been resident in India in at least 2 out of 10 previous years [according to aforementioned basic condition] immediately preceding the relevant previous year. b) He has been in India for a period of 730 days or more during 7 years immediately preceding the relevant previous year.
Residential Status of a Company
Control and management Indian Company Other than Indian Company resident Non resident Non resident
Wholly in India resident Wholly outside resident India Partly in India resident
Incidence of tax for Individuals:
Resident and ordinarily resident Indian Income Foreign Income Taxable Resident but not ordinarily resident Taxable Non-resident
Taxable
- Business income : wholly/partly controlled from India - Business income : controlled from outside India Any other foreign income (like salary, rent, interest, etc.)
Taxable
Taxable
Not taxable
Taxable
Not taxable
Not taxable
Taxable
Not taxable
Not taxable
Companies: Resident Non resident
Indian Income
Taxable
Taxable
Foreign Income
Taxable
Non taxable
Capital or revenue expenseGeneral Principles
?? Acquisition of fixed assets v. Routine expenditure - Capital expenditure is incurred in
acquiring, extending or improving a fixed asset, whereas revenue expenditure is incurred in the normal course of business as a routine business expenditure. ?? Several previous years v. One previous year - Capital expenditure produces benefits for several previous years, whereas revenue expenditure is consumed within a previous year. ?? Improvements v. Maintenance - Capital expenditure makes improvements in earning capacity of a business. Revenue expenditure, on the other hand, maintains the profitmaking capacity of a business. ?? Non-recurring v. Recurring - Usually capital expenditure is a non-recurring outlay, whereas revenue expenditure is normally a recurring outlay. ?? Lump sum payment v. Periodic payment - In order to determine whether an expenditure is capital or revenue in nature, the fact that it is a lump sum payment or periodic payment is not important. ?? Expenditure out of capital v. Expenditure out of revenue - For determining whether expenditure is of capital or revenue nature, it is immaterial whether expenditure is made out of money withdrawn from capital or out of profits.
Positive tests for deductibility
• If the expenditure is incurred : (i) with a view to bring profits or monetary advantage either today or tomorrow ; (ii) to render the assessee immune from impending or reasonably apprehended litigation ; (iii) in order to save losses in foreseeable future ; (iv) for effecting economy in working which may pay dividends today or tomorrow; (v) for increasing efficiency in working ; (vi) for removing inefficiency in the working ; (vii) where the expenditure incurred is such as a wise, prudent, pragmatic and ethical man of the world of business would conscientiously incur with an eye on promoting his business prospects, subject to the expenditure being genuine and within reasonable limits ; (viii) where it is incurred solely by way of a civil duty owed by the assessee to the society having regard to the nature of his business which brings him profits but results in some detriment to the public at large either by way of health hazard or ecological pollution or serious inconvenience to the citizens with a view to mitigate the aforesaid evil consequences and consequences of a like nature, subject to its being genuine and within reasonable limits.
Negative tests
• (i) (ii) (iii) (iv) If the expenditure is incurred : for a mere altruistic consideration; mainly in order to satisfy his philanthropic urges ; mainly in order to win applause or public appreciation ; for illegal, immoral or corrupt purposes or by any such means or for any such reasons ; (v) mainly in order to oblige a relative or an official ; (vi) mainly to earn the goodwill of a political party or a politician ; (vii) mainly to show off or impress others with his affluence or for ostentatious purposes ; (viii) apparently for a factor listed as a positive factor, but in reality for one of the obnoxious purposes listed as a negative factor ; (ix) on a nebulous plea or pretext by way of an alibi in the name of winning profits in remote future but really for one or the other of the purpose listed as negative tests ; (x) it is a bogus, fictitious or sham transaction ; (xi) it is unreasonable and out of proportion ; (xii) it is an expenditure merely with a view to avoid tax liability without any genuine purpose or reason in good faith ; and (xiii) the advantage to be secured by incurring the expenditure is of the nature of a remote possible advantage depending on “ifs” and “buts” and, if at all, to be secured at an uncertain future date which may be considered too remote.
Tax Planning
• Arrangement of financial and economic affairs by complete legitimate benefits of available deductions, exemptions, etc. so that tax libility is minimized. • Full compliance of tax laws • All legal obligations and transactions met • No colourable devices (letter of law: yes, spirit of law: no) • No intention to deceive
Tax Avoidance
• Reducing or negating tax liability in legally permissible ways • Letter of law is followed • No mala fide intention • Advantage of lacuna/loophole in law
Tax Evasion
• • • • Tax liability is illegally avoided Letter and spirit of law not followed Mala fide intention/intention to deceive Untrue statements, misleading documents, suppression of facts, not maintaining proper accounts, etc.
Heads of Income
• Income from Salary • Income from house property • Profits and Gains from business or profession • Capital gains • Income from other sources
Flow of Income
GTI
• Gross Income from each head • Less: Specific deductions under each head • Less: General deductions ( section 80) • Total income / taxable income / • net total income
TI
Tax Planning and Managerial decisions
• • • • • • • • Make or Buy Own or Lease Instalments or hire Repair or replace Shut down or continue Capital structure Dividends Bonus shares
Setting up a New Business
• Where (location) • What ( what should be manufactured) • How (legal form)
doc_886452306.ppt