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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