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Corporate Taxation. Prof. S B Gabhawalla. Course Outline. Taxation. Income Tax: Scheme of the Act. Income. Exemption. Receipt vs. Income Capital vs. Revenue Scope of Income. Exemptions. Heads of Income. H1. H2. H3. H4. H5. Aggregation Rules. Aggregation. Deductions. Deductions.

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Corporate taxation

Corporate Taxation

Prof. S B Gabhawalla

Income tax scheme of the act
Income Tax: Scheme of the Act



  • Receipt vs. Income

    • Capital vs. Revenue

    • Scope of Income

  • Exemptions

  • Heads of Income






  • Aggregation Rules



  • Deductions


  • Tax Liability



Scope of income
Scope of Income

--Residential Nexus--




Non Resident

--Territorial Nexus--

In India



Outside India


Non Taxable

(To be refined later)

Tax rates individual normal
Tax Rates: Individual : Normal

1 Applicable from the first rupee of tax (Marginal Relief Available)

Tax rates individual ladies
Tax Rates: Individual : Ladies

1 Applicable from the first rupee of tax (Marginal Relief Available)

Tax rates individual senior citizens
Tax Rates: Individual : Senior Citizens

1 Applicable from the first rupee of tax (Marginal Relief Available)

Tax rates others
Tax Rates: Others

1 Applicable from the first rupee of tax (Marginal Relief Available)

Salaries the starters
Salaries: The Starters..

  • Test: Employer – Employee Relation

  • Basis of Charge: Accrual or Receipt whichever is earlier

  • Scheme (Taxation): Primarily Gross Basis

Scheme of taxation
Scheme of Taxation

  • Basic Salary

  • Add Allowances (to the extent not exempt)

  • Add Perquisites (as valued)

  • Add Retirement Benefits (to the extent not exempt)

  • Less Profession Tax

  • Entertainment Allowance

Benefits in kind broad landscape
Benefits in Kind: Broad Landscape

  • Purely Official – Not Perquisite

  • Purely Personal & Identifiable - Perquisite

  • Purely Personal but not Identifiable – Fringe Benefit

  • Both Personal as well as official – Fringe Benefit


  • Exemption based on expenditure and multiple limits

    • House Rent Allowance

    • Entertainment Allowance

    • Leave Travel Concession/Allowance

  • Exemption based on expenditure

  • Exemption based on monetary limits

Expenditure allowances
Expenditure Allowances

  • Allowance is based on expenditure

    • Tour Allowance

    • Transfer Allowance

    • Daily Allowance while on tour

    • Helper Allowance

    • Research Allowance

    • Uniform Allowance

    • Conveyance Allowance (does not include from residence to office and back)

Monetary allowances

Hill Area Allowance

Border Area Allowance

Tribal Area Allowance

Allowance for Transport Employees

Compensatory Field Area Allowance

Compensatory Modified Area Allowance

Counter Insurgency Allowance

Underground Allowance

High Altitude Allowance

Active Field Allowance

Island Duty Allowance

Children Education Allowance Rs. 100

Hostel Allowance Rs.300

Conveyance Allowance (from residence to office & back) Rs. 800

Monetary Allowances

House rent allowance
House Rent Allowance

  • Exemption is least of

    • Excess of Rent Paid over 10% of Salary

    • 50% of salary for metro cities, 40% for others

    • Actual Receipt

  • Salary means Basic, DA(if it forms a part of retirement benefits) & Commission (if it is paid as a specific percentage of sales achieved by the employee)

Leave travel concession
Leave Travel Concession

  • Fare

    • Based on the mode of travel

  • for self or family

    • Spouse, children*, dependents

  • For travel to any place in India

  • For 2 journeys in a block of 4 calender years

    • From 1986

    • Carry Forward to 5th year if unused

Perquisites taxable in all cases
Perquisites Taxable in all cases

  • Rent Free/ Concessional Accommodation

    • 7.5%-10%-15% of salary or actual hire charges if lower

    • Additional 10% of the cost of furniture or actual higher charges

    • If accommodation in hotel, 24% of the salary or charges paid to hotel whichever is lower

    • If employee is paying some rent, deduct from the value

Perquisites taxable in all cases1
Perquisites Taxable in all cases

  • Obligation of an employee paid by the employer

  • Premiums Paid for Life Assurance/Annuity

  • Interest Free/ Concessional Loans

    • Simple Interest on maximum outstanding monthly balance except in following cases:

      • Medical Loan for specified diseases Nil

      • Petty Loans upto Rs. 20000/- Nil

Perquisites taxable in all cases2
Perquisites Taxable in all cases

  • Use of an Asset

    • 10% of the actual cost or hire charges paid

    • Exempt in case of laptops and computers, telephones and mobiles

  • Transfer of an Asset

    • Sale price less the depreciated value

    • Depreciation Rates for this purpose

      • Computers & Electronic Items 50% WDV

      • Motor Cars 20% WDV

      • Others 10% SLM

    • Depreciation for completed year

Perquisites taxable for specified employees
Perquisites taxable for specified employees

  • Medical Facilities Exempt if

    • In a hospital maintained by the employer

    • In a Government hospital

    • In an approved hospital for prescribed diseases

    • Mediclaim Premium, Group Mediclaim

    • Other Medical Treatment upto Rs. 15000/-

    • Overseas Medical Treatment

      • Treatment Cost

      • Cost of Travel & Stay for self & family

      • Cost of Travel & Stay for one attendant

      • Cost of Travel excluded only if gross income < 2 lakhs

Retirement benefits
Retirement Benefits

  • Provident Fund

  • Superannuation Fund

  • Pensions

  • Gratuity

  • Encashment of unutilised leave

  • Retrenchment Compensation

  • Voluntary Retirement Compensation

Approved superannuation fund
Approved Superannuation Fund

  • Employers’ Contribution exempt upto 27% of salary

    • Liable for FBT if exceeds Rs. 100000/- per employee

  • Employees’ Contribution eligible for deduction

  • Interest is exempt

  • Pension on retirement is taxable

  • Commutation on retirement partly exempt

  • Payment on death totally exempt

  • In all other cases, taxable


  • Uncommuted Pensions

    • Received by the retired employee Salaries

    • Received by the legal heir I.O.S

  • Commuted Pensions on retirement

    • If receiving gratuity also, 1/3rd of non commuted value is exempt

    • If not receiving gratuity, ½ is exempt

    • For Government employees, totally exempt


  • Government Employees – Exempt

  • Covered by the Payment of Gratuity Act

    • 15 days salary for each year of service

    • Rs. 350000/-

    • Actual Receipt

  • Not Covered by the Payment of Gratuity Act

    • ½ months’ average salary for each completed year of service

    • Rs. 350000/-

    • Actual Receipt

Encashment of leave salary
Encashment of Leave Salary

  • Government Employees – Exempt

  • Others

  • Cash Equivalent of earned unused leave

    • Earned 30 days for each completed year of service

    • Salary is average of last 10 months

  • 10 months average salary

  • Rs. 300000/-

  • Actual Receipt

Income from house property
Income from House Property

  • Tax on “Notional Income”

  • Property can be:

    • Used for own Business To exclude

    • Used for own Residence (only 1) NIL

    • Let Out Rent/Mkt Rent

    • Vacant Mkt Rent

  • Interest on Borrowed Capital available as a deduction

    • In case of 1 SO Prop. upto Rs. 150,000/-

    • In all other cases, without limit

Capital gains the starters
Capital GainsThe Starters..

  • Capital Receipts not taxable unless specifically included

  • Essentials

    • Profits/Losses on

    • Transfer of a

    • Capital Asset

Profit loss

  • Sale Price

  • Deductions

    • Cost of Acquisition

    • Cost of Improvement

    • Expenses on Transfer

Capital asset
Capital Asset

  • Wide definition

  • Cannot however cover

    • Stock in trade

    • Personal assets & privileges

    • Agricultural Rural Land (Population < 10000)

  • Classification as short term & long term

    • Equity/Preference Shares, Other listed securities & units – 12 months

    • Other Assets – 36 months

Privileges of long term
Privileges of Long Term

  • Indexation Benefits

  • Substitution of Fair Market Value

  • Lower Rate of Tax @ 20%

  • Special Scheme for listed securities

  • Eligible for Re-investment Benefits

Listed securities
Listed Securities…

  • Position from 01.10.2004 (if STT is paid)

    • Long Term - exempt

    • Short Term – concessional tax rate of 15%

  • The concessional regime does not apply to

    • Off Market Transactions

    • Shares held as “stock in trade”

Privileges of long term reinvestment benefits

Residential House – Residential House

Reinvest Capital Gains

Purchase 1 year before/2 years after OR

construct 3 years after

Any – Residential House

Reinvest Sale Consideration

Purchase 1 year before/2 years after OR

construct 3 years after

Privileges of Long TermReinvestment Benefits

  • Any – Specified Capital Gains Bonds

    • Reinvest Capital Gains

    • Within six months

Lock in period of 3 years for the re-invested asset

Some important exemptions
Some Important Exemptions

  • Agricultural Incomes

  • Specified Interest Incomes

  • Income of Charitable Institutions

  • Dividend Income

  • Gifts Received upto Rs. 50,000/-


  • Generally available only to residents

  • Subject to the existence of income

  • Broad Categories

    • For certain payments

    • For certain incomes

    • In certain situations

Specified investments
Specified Investments

  • A maximum amount of Rs. 1,00,000/- is deductible

  • No inter-sectoral caps

  • Eligible Investments

    • Provident Fund / Public Provident Fund

    • Contribution to Pension Fund

    • LIC Premiums

    • National Savings Certificate

    • Purchase of Residential House

    • Repayment of Housing Loan – Principal Component

    • Education Expenses of Children

    • Contribution to ELSS / ULIP

Mediclaim premium
Mediclaim Premium

  • Payments covered

    • Self & Spouse

    • Dependent Parents

    • Dependent Children

  • Deduction available upto

    • Rs. 15000 generally

    • Rs. 20000 for senior citizens


  • Calculate Qualifying Amount

    • Eligible without limit

    • Eligible with limit of 10%

    • Not Eligible

  • Calculate Deductible Amount

    • 100% Deduction

    • 50% Deduction

Taxability of business income
Taxability of Business Income

  • Tax on Net Income from Business

  • Net Income = (+) Gross Receipts (-) Expenses

  • Role of Accounting for both (+) & (-)

  • Net Income is therefore as determined by the books of accounts & method of accounting followed

Differing objectives lead to disturbance of the base
Differing Objectives lead to disturbance of the base

  • Net Profit as per Profit & Loss Account

  • Add:

    • Items debited but not allowed

    • Items not credited but taxable

  • Less:

    • Items credited but exempt/ taxable elsewhere

    • Items not debited but allowed

  • Taxable Income

What are these adjustments
What are these adjustments?

  • Expenses specifically allowed

  • Expenses disallowed

  • Residuary Category

    • Not Capital

    • Not Violation of Law

    • For the Purposes of Business

  • Depreciation

  • Expenses specifically allowed expenditure on scientific research
    Expenses specifically allowed:Expenditure on Scientific Research

    • Revenue Expenditure related to business

    • Capital Expenditure related to business (excluding cost of land)

    • Donation to Scientific Research Associations/National Laboratory/ University/IIT/Company (1.25 times weighted deduction)

    • Revenue & Capital Expenditure (not being land & building) on approved in-house projects (1.5 times weighted deduction)

    Residuary category
    Residuary Category

    • Not Capital in Nature

    • For the purposes of business

      • Personal Expenditure not allowed

    • Incurred during the previous year

    • Not for any Violation of Law (eg. Penalties)

    Amounts not deductible
    Amounts not deductible

    • Income Tax/ Wealth Tax/Tax on Perquisites / Fringe Benefit Tax

    • Provisions made for non statutory employee welfare funds

    • Payments to partners by a partnership firm

      • Remuneration in excess of limits

      • Interest on capital in excess of 12% p.a.

    Amounts not deductible payments to relatives
    Amounts not deductible:Payments to relatives

    • Payments to relatives in excess of fair value

    • Relatives defined to include: spouse, brother, sister, lineal ascendant and descendant

    • Receipts not covered

    • No corresponding adjustment in the assessment of the relative

    Amounts not deductible payments without tds
    Amounts not deductible:Payments without TDS

    • Overseas / Domestic Payments are deductible only if the applicable taxes are deducted at source and paid

    • If the payments are disallowed in the current year because the taxes are not deducted or paid, they shall be allowed in the year of payment

    Amounts not deductible cash expenditure
    Amounts not deductible :Cash Expenditure

    • Expenditure above Rs. 20000/- to be made by account payee cheque otherwise the expense will be disallowed

    • Exceptions carved out in genuine cases like

      • Payments to Government Agencies, payments on a bank holiday, payments in a village not serviced by a bank, etc.

    • How to move out??

    Amounts not deductible unpaid statutory dues
    Amounts not deductible:Unpaid Statutory Dues

    • Covers the following dues

      • Tax, duty or cess

      • Bonus/Commission to employees

      • Interest on Loan of financial institutions

      • Int. on term loan of scheduled bank

      • Leave Salary to employee

      • Contribution to PF/SAF/SWS

    • Deduction available only if paid before the due date of filing return of income

    • If not paid, can claim deduction in the year of payment

    Depreciation concept
    Depreciation: Concept

    • Not on individual assets but on block of assets

    • Written Down Value Method at rates specified

    • In the year of purchase

      • Full year’s depreciation unless the asset put to use for less than 180 days (half depreciation)

    • In the year of sale

      • No Depreciation

    • Block of Assets – Same group & same rate

    Depreciation block of assets rate
    Depreciation: Block of Assets & Rate

    • Buildings used for residential purposes (5%)

    • Other Buildings (10%)

    • Furniture & Fixtures (10%)

    • Plant & Machinery (15%)

    • Motor Cars (15%)

    • Computers & Software (60%)

    • Intangible Assets (25%)

    • Pollution Control Equipments (100%)

    • Energy Saving Devices (80%)

    Depreciation written down value
    Depreciation: Written Down Value

    • Opening WDV (a) xx

    • Add Actual Cost of Assets Purchased

      • Used > 180 days (b) xx

      • Used < 180 days (c) xx

    • Less Sale Price of Assets Sold (d) xx

    • Closing WDV (e) = ( a + b + c - d) xx

    Depreciation wdv contd
    Depreciation : WDV (Contd.)

    • If Closing WDV is negative

      • Treat the amount as Short Term Capital Gains

        • Adjustable against business losses to the extent of depreciation written off

      • No Depreciation will be available even if there are other assets in the block

    • If Closing WDV is positive but there are no assets in the block

      • Treat the amount as Short Term Capital Loss

      • No Depreciation will be available even though the WDV is positive

    Depreciation wdv contd1
    Depreciation : WDV (Contd.)

    • If Closing WDV is positive and there are assets in the block

      • Do not calculate profit or loss but provide depreciation on (e)

      • If e > c

        • Depreciation = full * (a+b-d) + half * c

      • If e < c

        • Depreciation = half * e

    Tax deducted at source
    Tax Deducted at Source

    • Deduction at the stage of payment

    • Attempts to plug

      • Non reporting of income

      • Lower reporting of income

    • Improves cash flow for the Government

    • Additional Burden for the Assessee

    Tds on salaries
    TDS on Salaries

    • At the “average rate of tax”

    • Both Residents and Non Resident covered

    • Allowances to be considered with proof

      • No proof be insisted for HRA upto Rs. 3000

    • Deductions & Rebates to be allowed

    • Multiple Employers?

    • Multiple Sources of Income

      • Only Loss from HP can be considered

    Tds on non residents
    TDS on non residents

    • All incomes covered

    • All Payers covered

    • At Applicable Rates

    • Application by payer for determination of income

    • Application by receiver for non deduction of tax

    • Application by receiver for lower deduction

    Procedures traditional
    Procedures: Traditional

    • Obtain Tax Deduction Number

    • Deduct Tax

    • Pay to the Government

    • Issue TDS Certificate

    • File TDS Returns

    Procedures demat
    Procedures: DEMAT

    • Quarterly e-TDS Return to be filed in soft format

    • The NSDL to consolidate all TDS based on PAN

    • Issue a consolidated TDS Certificate to each assessee

    • Many procedural issues likely to arise

    Non compliance consequences
    Non Compliance - Consequences

    • Recovery of the TDS Amount

    • Interest on delayed payment / non payment

    • Penalty for non compliance

    • Disallowance of Expenditure

    Minimum alternate tax
    Minimum Alternate Tax

    • To compensate for discrepancies between accounting and taxation principles

    • Accept the net profit as per Companies Act and make specific adjustments to convert it into book profits

    • Pay minimum tax @ 10 % of the book profits if the actual tax liability is lower

    • Does it really serve the purpose ?

    Dividend distribution tax
    Dividend Distribution Tax

    • Dividends – Tax Free in hands of shareholders, liable for DDT @ 15% for the company

    • Brings to light the problems relating to

      • Earnings Stripping

      • Capital Gearing

      • Cascading Effect on Capital Structuring

    Scope of income1
    Scope of Income

    --Residential Nexus--




    Non Resident

    --Territorial Nexus--

    In India



    Outside India


    Non Taxable

    (Simplified Version)

    The genesis of the problem
    The Genesis of the Problem..

    • Source Based Taxation

      • Not Acceptable to Developed Nations

    • Residence Based Taxation

      • Not Acceptable to Developing Nations

      • Prone to Misuse

    • Combination of Source & Residence Based Taxation is a universal phenomenon

    • This leads to problems of double taxation

    Understanding dt conflicts
    Understanding DT Conflicts

    • Source Resident Conflicts

      • German company offers technical support to Indian company and charges FTS

    • Resident Resident Conflicts

      • A US Citizen stays in India for more than 182 days

    Resolving r r conflicts
    Resolving R-R Conflicts

    • Successive Tests (for individuals)

      • Permanent Home

      • Centre of Vital Interests

      • Nationality

      • Mutual Agreement Procedure

    • Successive Tests (for others)

      • Place of Effective Management

    • The US Citizen will pay tax in US & not in India

    Resolving s r conflicts
    Resolving S-R Conflicts

    • Sharing of the Tax Revenue

    • Concept of Active & Passive Incomes

    • Allocate these incomes to respective states

    • Remember, Resident State is always supreme!

    Resolving s r conflicts1
    Resolving S-R Conflicts

    • OECD Model Convention

      • Source State to tax only active incomes

      • Resident State to tax the passive incomes

      • Resident State may still tax active incomes but should eliminate double taxation

    • Suitable for developed nations but not acceptable to developing countries

    Resolving s r conflicts2
    Resolving S-R Conflicts

    • UN Model Convention

      • Source State to tax active incomes

      • Source State may tax passive incomes but at concessional rate

      • Resident State may tax all incomes but should eliminate double taxation

    • Most Indian treaties based on the UN Model

    Income distributive rules rights of the source state

    Nature of Income

    OECD Model

    UN Model

    From Immoveable Properties

    Full Tax

    Full Tax

    Business Profits

    In case of PE

    In case of PE


    No Tax

    Lower Tax


    No Tax

    Lower Tax


    No Tax

    Lower Tax

    Fees for Technical Services

    No Tax

    Lower Tax

    Capital Gains from properties

    Full Tax

    Full Tax

    Capital Gains from Shares

    No Tax

    Full Tax

    Independent Personal Services

    In case of FB

    In case of FB

    Dependent Personal Services

    Full Tax

    Full Tax

    Income Distributive Rules – Rights of the Source State

    Resident state taxation
    Resident State Taxation

    • Right of the resident state to tax incomes is unfettered

    • Tax to be paid in Resident State = Tax Payable – Tax Paid Overseas

    • Therefore tax saved in source state may get nullified in the resident state

    • Proper choice of a resident state is therefore the pivot to international tax planning

    Tax havens
    Tax Havens…

    • No Tax Jurisdictions

      • Bermuda, Cayman Islands

    • No Tax on foreign source Incomes

      • Hongkong, Panama

    • No Tax on foreign source Incomes of Companies owned by non residents

      • Barbados, Isle of Man

    • Special Laws make them ideal

      • British Virgin Islands, Switzerland

    • Treaty Networks can be used

      • Netherlands, Mauritius

    International transfer pricing
    International Transfer Pricing

    • Multitude of business entities and jurisdictions over the value chain










    A Ltd


    B Ltd


    B Ltd


    C Ltd


    D Ltd


    E Ltd


    B Ltd


    Transfer pricing framework
    Transfer Pricing - Framework

    • Any income, expense or cost sharing

    • In an “International Transaction”

    • Shall be determined at “arms’ length price”

    Arms length price
    Arms’ Length Price

    • Comparable Uncontrolled Price (CUP)

    • Resale Price Method (RPM)

    • Cost Plus Method (CPM)

    • Transactional Net Margin Method (TNMM)

    • Profit Split Method (PSM)

    Far analysis
    FAR Analysis

    Check for a simpler party if it could be categorised as manufacturer or distributor

    Thank you

    Thank You swimming…