TAXATION

Presented By Harish Tangirala Subhas kar Sriman Reddy Varun Kumar Vanama Subrata Bhowmick SVBK Varma Silla Sundar Krishna

Heres what were going to present

Overview of taxation in India Different types of taxes General Principles of taxation Status of resident and non resident Taxation for resident and non resident Calculation of tax for corporate and citizen Double taxation agreement of India with different countries ( Calculations and examples) Tax avoidance

On a rainy day in kolkata..

Introduction
Taxation is the inherent power of the sovereign, exercised through the legislature, to impose burdens upon subjects and objects within its jurisdiction for the purpose of raising revenues to carry out the legitimate objects of government.

It is also defined as the act of levying a tax, i.e. the process or means by which the sovereign, through its law-making body, raises income to defray the necessary expenses of government. It is a method of apportioning the cost of government among those who, in some measure, are privileged to enjoy its benefits and must therefore bear its burdens.

Essential elements of a tax

It is an enforced contribution. It is generally payable in money. It is proportionate in character. It is levied on persons, property, or the exercise of a right or privilege. It is levied by the State which has jurisdiction over the subject or object of taxation. It is levied by the law-making body of the State. It is levied for public purpose or purposes.

Introduction
Three tier federal tax structure Central Govt, State Govt, Local Bodies Revenue Dept oversees the taxation in India Inception of CBEC and CBDT Major taxation laws
Central Excise Act (1944) Central Sales Tax Act (1956) Wealth Tax Act (1957) Income Tax Act (1961) Customs Act (1962) Service Tax Act(1994) VAT Act (2005)

Plan to introduce Goods and Service Tax by the year 2011* Plan to introduce Direct Taxes Code Act 2010 by the year 2012*

Introduction
Direct Taxes
Tax on Corporate Income Capital Gains Tax Personal Income Tax Tax Incentives Double Taxation Avoidance Treaty

Central Govt

Indirect Taxes

Excise Duty Customs Duty Sales Tax Service Tax/VAT Property Tax

State Govt

Moving ahead
Overview of taxation in India Different types of taxes General Principles of taxation Status of resident and non resident Taxation for resident and non resident Calculation of tax for corporate and citizen Double taxation agreement of India with different countries ( Calculations and examples) Tax avoidance ( Sections) Also Article

How are taxes levied

Tax on Corporate Income
(Domestic) 35% + 2.5% Surcharge + 2% Edu Cess (Foreign) 40% + 2.5% Surcharge + 2% Edu Cess Wealth Tax 1% (Income > 1500000 INR Dividend Distribution Tax 12.5% MAT 7.5% Capital Gains Tax 10% ( For assets held below 3 yrs) 20% ( For assets held beyond 3 yrs) Personal Income Tax Categorized into 4 Slabs based on Income. 0,10,20,30 % tax levied + 10% surcharge if income > 850000 Tax Incentives Upto 100% incentive available subject to terms Double Taxation Treaty Agreement with 79 countries

Excise Duty/Customs Duty Ranging between 0-30% Central Sales Tax 4% + LST upto 15% VAT Upto 12.5%

Property Tax, Octroi and Stamp Duty cary from state to state

Lets move ahead.

Overview of taxation in India Different types of taxes General Principles of taxation Status of resident and non resident Taxation for resident and non resident Calculation of tax for corporate and citizen Double taxation agreement of India with different countries ( Calculations and examples) Tax avoidance ( Sections) Also Article

Theory and Basis of taxation

Existence of government is necessary Benefit received principle Life blood and necessary theory Benefit received principle

Basic principles of sound tax system

Fiscal adequacy
The sources of revenue should be sufficient to meet the demands of public expenditure

Equality or theoretical justice

The tax burden should be proportionate to the taxpayers ability to pay

Administrative feasibility
Tax laws should be capable of convenient , just, and effective administration

Whats Next
Overview of taxation in India Different types of taxes General Principles of taxation Status of resident and non resident Taxation for resident and non resident Calculation of tax for corporate and citizen Double taxation agreement of India with different countries ( Calculations and examples) Tax avoidance

Main categories of NRIs

The following are the main three categories of NRIs: Indian citizens who stay abroad for employment or for carrying on a business or Vocation or any other purpose in circumstances indicating an indefinite period of stay abroad. Indian citizens working abroad on assignment with foreign government agencies like United Nations Organisation (UNO), including its affiliates, International Monetary Fund (IMF), World Bank etc. Officials of Central and State Government and Public Sector undertaking deputed abroad on temporary assignments or posted to their offices, including Indian diplomat missions, abroad.

Residence Rules
An individual is treated as resident in a year if present in India for 182 days during the year or

For 60 days during the year and 365 days during the preceding four years. Individuals fulfilling neither of these conditions are nonresidents. (The rules are slightly more liberal for Indian citizens residing abroad or leaving India for employment abroad.)

Not Ordinarily Resident

You should have been resident in India in nine out of the ten previous years preceding the previous year in which you are resident within the meaning of section 6(1) You should have been in India for a period or periods amounting in all to 730 days or more during the seven years preceding that previous year. If you does not fulfill any of the above conditions, you will be treated as "not ordinarily resident".

Non-Residents
Non-Residents and Non-Resident Indians Nonresidents are taxed only on income that is received in India or arises or is deemed to arise in India. A person not ordinarily resident is taxed like a nonresident but is also liable to tax on income accruing abroad if it is from a business controlled in or a profession set up in India. Non-resident Indians are not required to file a tax return if their income consists of only interest and dividends, provided taxes due on such income are deducted at source.

Taxability of individuals is summarized in the table below

Status Indian Income Foreign Income Resident and ordinarily resident Resident but not ordinarily resident Non-Resident Taxable Taxable

Taxable

Not Taxable

Taxable

Not Taxable

Next
Overview of taxation in India Different types of taxes General Principles of taxation Status of resident and non resident Taxation for resident and non resident Calculation of tax for corporate and citizen Double taxation agreement of India with different countries ( Calculations and examples) Tax avoidance

Tax calculation
Gross income= Monthly income*12 Taxable income= Gross income- (savings + donations/charity) Include Surcharge (If yearly income > 10L) You need to add 3% of your taxable earnings (as education cess)

Taxable NRI incomes

INCOME from: property if such property is situated in India salaries if the services are rendered in India salaries payable by the Government to a citizen of India even though the services are rendered outside India dividend paid by an Indian company even if the same is paid outside India

Exemptions
Non-resident running a news newspapers, magazines etc agency or publishing

Income arising from operations which are confined to the shooting of any cinematography film

NRI Tax
Indian NRI Tax Percentage Entering into a Bond with Indian company (Foreign Currency Convertible Bonds ) 10%

Borrowing Foreign currency

20%

Income from securities that are enlisted in any well-reputed stock exchange in India.

20%

Next
Overview of taxation in India Different types of taxes General Principles of taxation Status of resident and non resident Taxation for resident and non resident Calculation of tax for corporate and citizen Double taxation agreement of India with different countries ( Calculations and examples) Tax avoidance

Tax Slabs
Income tax slab for FY 11-12 New Income Tax Slabs for FY 11-12 for Resident Senior Citizens(FY 2011-12) S. No. Income Range Tax percentage 1 Up to Rs 2,40,000 No tax / exempt 2 2,40,001 to 5,00,000 10% 3 5,00,001 to 8,00,000 20% 4 Above 8,00,000 30% Income Tax Slabs for ay 11-12 for Resident Women (below 65 years) (FY 2011-12) 1 Up to Rs 1,90,000 2 1,90,001 to 5,00,000 3 5,00,001 to 8,00,00 4 Above 8,00,000 New Income Tax Slabs for FY 11-12 Others & Men (FY 2011-12) 1 Up to Rs 1,80,000 2 1,80,001 to 5,00,000 3 5,00,001 to 8,00,000 4 Above 8,00,000 New Income Tax Slabs for FY 11-12 Very Senior Citizen (FY 2011-12) 1 Up to Rs 5,00,000 2 5,00,001 to 8,00,000 3 Above 8,00,000 No tax / exempt 10% 20% 30% No tax / exempt 10% 20% 30% No tax / exempt 20% 30%

Definition of Person under Income Tax Act,1961

Individual HUF Partnership firm Company AOP/BOI Local authority Other Artificial judicial persons (idol or deity)

Heads of income
Income from Salaries (Sec 15-17) Income from House Property (Sec 22-27) Profits and Gains from Business or Profession (Sec 2844DB)

Capital Gains (Sec 45-55A) Income from other sources (Sec 56-59)

Tax Calculation(example)
Mr. X submits the following details of his income for the assessment year 2011-12
Particulars Income from salary Loss from let out house property Income from sugar business Loss from iron ore business Short term capital loss Long term capital gain Income received from lottery winning Winnings in card games Bank interest Rs. 3,00,000 40,000 50,000 40,000 40,000 30,000 50,000 6,000 5,000

Computation of gross total income of Mr. X for the A.Y. 2011-12

Particulars Salaries Income from salary (-) Loss from let out house property Profits and gains of business or profession Income from sugar business (-) Loss from iron ore business Capital Gains Long term capital gains Short term capital gains Income from other sources Winnings from lottery Winnings from card games Bank interest Gross Total Income 50,000 6,000 5,000 61,000 3,41,000 40,000 (30,000) 10,000 50,000 (40,000) 10,000 3,00,000 (40,000) 2,60,000 Rs. Rs.

Income tax applicable for a company

Company
Domestic Company Foreign Company Other Incomes

Rate of income tax

30% 50% 40%

Coming Up
Overview of taxation in India Different types of taxes General Principles of taxation Status of resident and non resident Taxation for resident and non resident Calculation of tax for corporate and citizen Double taxation agreement of India with different countries ( Calculations and examples) Tax avoidance

Double taxation defined

Double

taxation means taxing the same

income twice, once in the home country and again in host country. It is of relevance to mention here No rules of international law prohibit international double taxation. So it is for the countries in the international arena to solve double taxation problems.

Double Taxation
Double Taxation Convention on Income and Capital, 1977, defines the phenomenon of international juridical double taxation. Double tax treaties comprise of agreements between two countries, which, by eliminating international double taxation, promote exchange of goods, persons, services and investment of capital. Double taxation avoidance agreements, depending on their scope, can be classified as Comprehensive(81) and Limited(8).

Objectives
To help in avoiding and alleviating the adverse burden of international double taxation To help a taxpayer of one country to know with greater certainty the potential limits of his tax liabilities in the other country.

 The Income Tax Act, 1961 (ITA) governs taxation of income in India. section 5. Section 6. Section 90: provides for tax relief in accordance with treaties executed by India Section 91: provides relief where no treaty exists

A double tax avoidance agreement deals by and large with business income, income from moveable property and from immovable property.
Income from the business is taxed-

only in the resident country, if the business entity has no activity in the source state;
only on the source state, if there is a fixed place of business,

Income form immovable property arising to a non-resident is taxed primarily in the state of its location.

Overall Structure of DTAA

Article 1& 2 Scope of the convention

Article 3, 4,5

General Definitions, Resident, Permanent establishment

Taxation of various incomes- Business profits, Royalties, Fees for Technical services, Interest, Dividends, Others Taxation of capital Methods of elimination of double taxation Special provisions-Non discrimination, MAP, etc.

Article 6 to 21

Article 22 Article 23A and 23B Article 24 and 29

Article 30,31

Entry into force, Termination

Methods of granting tax credit

Exemption Method Credit Method

Full Exemption

Exemption with Progression

Income earned in the state of source is considered in the state of residence only for rate purpose

Full Credit

Ordinary Credit
State of residence allows credit of tax paid in the state of source Restricted to that part of the income-tax which is attributable to the income, taxable in the state of residence

The Income earned in the state of source is fully exempt in the State of residence

Total tax paid in the state of source is allowed as a credit against any tax payable in the state of residence

Finally the Final Topic

Overview of taxation in India Different types of taxes General Principles of taxation Status of resident and non resident Taxation for resident and non resident Calculation of tax for corporate and citizen Double taxation agreement of India with different countries ( Calculations and examples) Tax avoidance

Confusing Terms
Tax avoidance: legal utilization of the tax regime to

one's own advantage, to reduce the amount of tax

that is payable by legal means. Tax evasion: general term for efforts not to pay taxes by illegal means.

Tax Resistance: declared refusal to pay a tax for

conscientious reasons.

Reliance Industries Limited Depreciation - Tax Avoidance Reliance Logistics Ltd Sales as internal consumption Tax Evasion

Tax Avoidance
Taxpayer reduces tax liability by taking advantage of the loop-holes and

ambiguities in the legal provisions

Perfectly legal and is, at times, referred to as tax planning 1998 - 2005, 55% of US companies paid no federal income taxes during at least one year.

Ways to Avoid Tax

Country of residence
Changing one's tax residence to a tax haven Becoming a perpetual traveller (like in case of Merchant Navy, etc.)

Double taxation
Bilateral double taxation treaties with other countries to avoid taxing twice However, few double-taxation treaties with tax havens countries. Not enough to simply move one's assets to a tax haven, one must also personally move to a tax haven

Legal entities
Creation of a separate legal entity to which one's property is donated

Legal vagueness
Tax results depend on definitions of legal terms which are usually vague. Eg. "business expenses" and "personal expenses

Cherry-Picking Tax Avoidance

Superannuation Fund in Australia

Issues in Anti-Avoidance
Revenue view
Tax avoidance is a problem for any tax system Erodes revenues that the system is designed to generate Undermines the fairness of the system, lesser burden on taxpayers with greater resources Frequently involves contrived, artificial transactions that serve little or no purpose other than to reduce tax liability. Enables some taxpayers to gain an unfair advantage, undermining confidence in the tax system.

Existing anti-avoidance rules in Indian tax law

Transfer of income without corresponding transfer, or with revocable transfer, of beneficial ownership of assets sections 60, 61 Clubbing of income of spouse, minor children, other persons, in certain situations section 64 Bond-washing transactions section 94

Restrictions on expense deductions

sections 14A expenses for earning exempt income section 40A(3) expenses in cash

Existing anti-avoidance rules in Indian tax law

Dividends - section 2(22) Salary/perquisites - section 17 Business - section 28 Capital gains - section 45 Gifts - section 56 Tax benefit to eligible business units - transactions with other units of

same person, or of associated person, to be at arms length

Sections 80 IA/IB/IC Other specific provisions Section 10(10D) single premium insurance policies Section 93 income payable to non-residents by virtue of certain transfers of assets

Tax Avoidance in UK
...being open for business does not mean being open to tax avoidance...we expect everyone to pay their fair share. And where we see tax avoidance, we will crack down on it. - David Gauke (Exchequer Secretary to the Treasury) Government launched its new strategic approach to tackling avoidance in June 2010. The key elements are:
make the most of opportunities to make the tax system more watertight; review areas of the tax system that have been under repeated avoidance attack for sustainable solutions; and create new defences against avoidance,

HMRCs new anti-avoidance strategy 3 core elements:

preventing avoidance at the outset where possible; detecting it early where it persists; and countering it effectively through challenge by HMRC

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