Amity Campus

Uttar Pradesh
India 201303

ASSIGNMENTS
PROGRAM: MFC
SEMESTER-II
Subject Name
: Corporate Tax Planning
Study COUNTRY
: Sudan LC
Permanent Enrollment Number (PEN) : MFC001652014-2016014
Roll Number
: AMF206 (T)
Student Name
: SOMAIA TAMBAL YOUSIF ELMALIK
INSTRUCTIONS
a) Students are required to submit all three assignment sets.
ASSIGNMENT
Assignment A
Assignment B
Assignment C

DETAILS
Five Subjective Questions
Three Subjective Questions + Case Study
Objective or one line Questions

MARKS
10
10
10

b)
c)
d)
e)

Total weightage given to these assignments is 30%. OR 30 Marks

All assignments are to be completed as typed in word/pdf.
All questions are required to be attempted.
All the three assignments are to be completed by due dates and need to be submitted for
evaluation by Amity University.
f) The students have to attached a scan signature in the form.
Signature :
Date

_________________________________

( ) Tick mark in front of the assignments submitted

Assignment A
Assignment B
Assignment C

Corporate Tax Planning

Assignment A
(10 Marks)

Q.1

Distinguish between tax avoidance and tax evasion?

(2 Marks)

TAX PLANNING, TAX MANAGEMENT, TAX AVOIDANCE AND TAX EVASION

1. Over the last eight decades, since the introduction of income-tax, it has been observed that there is a constant
struggle between taxpayer and tax collectors, the former trying to reduce (if not negate) their tax liability, and the
latter seriously struggling to plug in the loopholes in the statute.
2. To understand the meaning of tax planning, tax avoidance and tax evasion, one can go through the following
casesCase1 - X is an individual for the assessment year 2010-11 his gross total income is Rs. 12,40000 tax on Rs.
12,40,000 is Rs 2,84,280. to reduce his tax liability there of will be reduced to Rs. 11,70,000 and Rs. 2,62,650
respectively. As the tax liability has been reduced within the legal framework it is tax planning
Case2 - X Ltd. is a chemical manufacturing company. it has a factory in Haryana near Delhi border. withing th
factory campus a piece of land of 2000 square metere is lying unutilized. the company wants to start a new unit ot
manufacture computer components. if this manufacturing unit is started in the existing factory campus, deduction
under section 80IB, the company starts the new unit a village near jammu. the company has two option. under one of
the options deduction under section 80-IB is not available. However, this deduction is available under the other
option. TO get the benefit of deduction under section 80-IB the new unit has been started in jammu & Kashmir. As
the tax liability has been reduced to get benefit of deduction available under the income-tax, it is tax planning.
Case3 - Suppose in Case2, the process of manufacturing actually takes place in Haryana. to get the benefit of
deduction under section 80-IB, the company takes a factory building on rent in a villagein jammu and only on paper
it is shown that the new manufacturing unit is situated in a village near jammu.
as the company wants to reduce the tax liability by making incorrect statement about the location of manufacturing
process it is tax evasion.
Case4 - If Rs. 50,000 is gifted by a husband to his wife, income generated therefrom is taxable in the hands of
husband under the clubbing provisions of section 64(i) section 64(1) is not applicable if gift is made by same person
out of the funds ofhis hindu undivided family in capacity as karta of the family.
If gifts is made by karta of the family to his wife, clubbing provisions can e avoided and ultimate tax liability will be
reduced, however the tax liability will be reduced by taking the help of a loophole in the law bur within the legal
framework. it is tax avoidance.
3. Tax planning can be defined as an arrangement of ones financial and economic affairs by taking complete
legitimate benefit of all deductions exemptions, allowances and rebates so that tax liability reduces to minimum
essential features of tax planning
it comprises arrangements by which tax laws are fully complied.
all legal obligations and transactions (both individually and as a whole) are met.
Transactions donot take the form of colourable devices
there is not intention to deceit the legal spirit behind the tax law.
4. the line of demarcation between tax planning and tax avoidance is very thin and blurred. the English courts about
eight decades ago recognized the right of a taxpayer to resort to the legal method of tax avoidance. it is well settled
that it is unconstitutional for the government to attempt payment outside the legal framework as he renders himself
liable for prosecutions as a tax evader.

tax avoidance is reducing or negating tax liability in legally permissible ways and has legal sanction Essential
features of tax avoidance are as under
Legitimate arrangement affairs in such a way so as to minimize tax liability.
Avoidance of tax is not tax evasion and carries not public disgrace with it.
an act valid in law cannot treated as fictitious merly on the basis of some underlying motive supposedly resulting
in lower payment of tax to authorities.
there is not element of mala fide motive involved in tax avoidance.
Over an over again the courts have said that there is nothing sinister in so arranfing ones affairs as to keep taxes as
low as possible. tax avoidance is ound law and certainly not bad morality for any body to so arrange his affairs in
such a way that the brunt of taxation is the minimum. this can be done within the legal framework even by taking
help of loopholes in the law. if on account of lacuna in the law or orherwise the assessee is able to avoid a payment
of tax within the letter of law, it cannot be said that the action is void because it is intended to save payment of tax so
long as the law exists in its present form the taxpayer is entitled to take its advantage.
The above meaning of tax avoidance has also now acquired the judicial blessings of the supreme court of India in
Union of India v. Azadi Bachoo Andolan[2003]263 ITR 706/132 Taxman 373,whichreversed the findings in its
earlier judgment in McDowell & co. Ltd. v.
CTO[1985]154 ITR 148/122 Taxman 11 as legally incorrect.
If a court finds that not withstanding a series of legal steps taken by as an assessee in case the intended legal result
has not been achieved, the court might be justified in overlooking the intermediate steps but it would not be
permissible for the court to treat the intervening legal steps as fictitious based upon some hypothetical assessment of
the real motive of the assessee the court must deal with what is tangible in an objective manner. In other words, an
act which is otherwise valid in law cannot be treated as fictitious merely on the basis of some underlying motive
supposedly resulting in some economic detriment or prejudice to the national interests. A transaction or arrangement
which is perfectly permissible under law and has the effect of reducing the tax burden of the assesse. should not be
looked upon with disfavor.
5. All methods by which tax liability is illegally avoided are termed as tax evasion. An assessee guilty of tax evasion
may be punished under the relevant laws. Tax evasion may involve stating an untrue statement knowingly submitting
misleading document, suppression of facts not maintaining proper accounts of income earned (if required under law)
omission of material facts on assessment. All such procedures and methods are required by the statute before
complying with the said abidance by making false statement would be within the ambit of tax evasion.
6. A Person may plan his finances in such a manner strictly within the four corners of the taxing statute that his tax
liability is minimized or made nil. if this is done and as observed strictly in accordance with an taking advantage of
the provisions contained in the Act, by no stretch of imagination can it be said that payment of tax has been evaded
for. in the contest of payment of tax evasion necessarily means to try illegally to avoid paying tax CIT v Sri
Abhaynanda Rath Family Benefit Trust [2002 ]123 Taxman 81 (Ori)
7. Tax management involves the procedures of compliance with the statutory provision of law the following are the
board area of distinction between tax planning and tax management.

Tax planning
1. the objective of tax planning is to
reduce the tax liability to the
minimum.
2. tax planning is futuristic in its
approach,
3. tax planning is very wide in its
coverage and includes tax
management .

Tax management
1. the objective of tax management
is to comply with the provision of
law.
2. tax management relates to past ,
present and future
3. tax management has a limited
scope .
4. As a result of effective tax

4. the benefits arising from tax

planning are substantial particularly
in the long term,

management penalty penal interest

prosecution etc, can be avoided

8. The following are the broad areas of distinction the two:

Tax avoidance

Tax evasion

1. Any planning of tax

which aims at reducing
or negating tax liability
in legally recognized
permissible ways, can
be termed as an instance
of tax avoidance.
2. tax avoidance takes
into account the loop
holes of law.
3. tax avoidance is tax
hedging with in the
framework of law .
4. Tax avoidance has
legal sanction
5. Tax avoidance is
intentional tax planning
before the actual tax
liability arises.

1. All methods by which

tax liability is illegally
avoided is termed as tax
evasion.
2. tax evasion is an
attempt to evade tax
liability with the help of
unfair means/method.
3. Tax evasion is tax
omission
4. tax evasion is
unlawful and an
assessee guilty of tax
evasion may be punisher
under the relevant laws.
5. tax evasion is
international attempt to
avoid payment of tax
after the liability to tax
has arisen.

Q.2 What do you understand by control and Management of a

Company?
(2 Marks)
RESIDENTIAL STATUS OF A COMPANY [SEC.6 (3)]
An Indian company is always resident in India. A foreign company is resident in India only if, during the previous
year, control and management of its affairs is situated wholly in India. In other words, a foreign company is treated
as non resident if during the previous year , control and management of its affairs is either wholly or partly situated
out of India. The table given below highlights the same proposition-

Place of control

Resident or non-resident

Control and management of the affairs of a company [for

meaning see para 28.1] is Wholly in India
Wholly outside India
Partly in India or partly outside India

An Indian
company

A company other than an Indian

company
Resident
Non-resident
Non-resident

Resident
Resident
Resident

Note- A Company can never be ordinarily or not-ordinarily resident in India.

Control and management

28.1 In determining residential status of a company, the following broad propositions should be kept in view :
Meaning of control and management The term control and management refers to head and brain which
directs affairs of policy, finance, disposal of profits and vital things concerning the management of a company.
The place of incorporation of the company may not be the place where control liesControl is not necessarily situated in the country in which the company is registered.
A company may be resident in more than one country- Under the tax laws a company may have more than one
residence. The mere fact that a company is also resident in a foreign country , would not necessarily displace its
residence in India.
Central control and management lies where meetings of board of directors are held- Usually control and
management of a companys affairs is situated at the place where meetings of board of directors are held. Moreover,
control and management referred to in section 6 is central control and management and not the carrying on of day to
day business of servants, employees or agents.
Place of doing business may be different from place of control of business- The whole of business may be done
outside India and yet the control and management of that business may be wholly within India. In order to determine
the residence of a company, the real test to be applied is, where does the controlling and directing power function, or
where is its head and brain.
Control is different from share holding control- Control does not mean share holding control. In the case of
a subsidiary company managed by its local board of directors, it is difficult to establish that control and management
of its affairs vests at the place where the parent company resides.
A non-Indian companys de facto control must be in India for residential India-In order to hold that a non-Indian
company is resident in India during any previous year, it must be established that such companys de facto is in
India. Although central management and control has sometimes been stated in the form head, seat and directing
power the question depends on the facts of the management and not on the physical situation of the thing that is
managed. A company is managed by the board of directors and if the meetings of the board of directors are held
within India, it may be said that the control and management is situated here.
Partial control from outside India -control and management does not mean carrying o a day to day business.
Even a partial control outside India is sufficient to hold a foreign company as a non-resident.

CASE STUDY
XYZ ltd. is registered in Srilanka and is a subsidiary of an Indian company. The business of the company is
stevedoring in Srilanka. The meetings of the board of directors and general meeting of share holders are held in
Bombay. The affairs of the assessee-company are looked after by two mangers under two power of attorney which
confer upon them the widest power and authority. The directors retain complete control over the matter delegated to
the managers and from time to time give direction to the mangers as to how things should be done and managed.

Discuss whether under these circumstances the control and management of XYZ ltd is situated wholly in India and
the company is resident in India within the meaning of section 6.

A company registered outside India is treated as resident in India only if during the previous year. Control and
management of its affairs is situated wholly in India. In construing the expression control and management it is
necessary to bear in mind the distinction between doing business and control and management of business. Business
and whole of it may be done outside India and yet the control and management of that business may be wholly
situated within India. In the given problem the business of the assessee company is done in Srilanka.
However, it is entirely irrelevant where the business is done and where the income has been earned. What is relevant
and material is from which place has that business control and management? Control and management referred to
in section 6 is capital control and management. The control and the management contemplated by this section is not
the carrying on of day-to-day business by servants, employs or agents. The real test to be applied is where is the
controlling and directing power, or rather, where does the controlling and directing power function, or, to put in a
different language there is always a seat of powers or the head and brain and what has got to be ascertained is: where
is this seat of power or the head and brain? A business organization has got to work through servants and agents, but
it is not the servants and agents that constitute the seat of power or the controlling and directing power. It is that
authority to which the servant employs and agents are subject, it is that authority, which controls and manages them
which is the central authority, and it is at the place where the central authority concerns, the control and management
is situated.
In the given problem, it is entirely unacceptable that the control and management is situated at Srilanka where its
affairs are carried on and they are carried on by people living there appointed by the company with large power of
management. To mangers under two powers of attorney look after all the affairs of the assessee- company in
Srilanka. However, it is equally clear from the given facts that the central controls and management has been kept in
Bombay and has been exercised by the directors in Bombay. Therefore control and management of the assessee
company is situated wholly in India- Narottam and Pereira ltd v. CIT [1953] 23 ITR 454(bom.)

Q.3 What is VAT?

(2 Marks)

PREFACE
This Corporate tax planning module seeks to enabling the students to make use of legitimate tax shelters,
deductions, exceptions, rebates and allowances; with the ultimate aim of minimizing the corporate tax liability. To
give an overview of wealth tax provisions pertaining to companies (from a users perspective).To create an awareness
of VAT and how the scheme is going to have an impact on the existing sales tax system

CORPORATE TAX PLANNING

Course Objective:
At the end of this course, the students should be able to demonstrate an understanding of the
tax provisions enabling them to make use of legitimate tax shelters, deductions, exceptions,
rebates and allowances; with the ultimate aim of minimizing the corporate tax liability.
To give an overview of wealth tax provisions pertaining to companies (from a users perspective).
To create an awareness of VAT and how the scheme is going to have an impact on the existing sales tax system

Module IV: Indirect Taxation

An overview of Sales Tax, (VAT)

MODULE IV: INDERECT TAXATION

BACKGROUND AND JUSTIFICATION
530. In the old sales tax structure, there were problems of double taxation of commodities and multiplicity of taxes,
resulting in a cascading tax burden. For instance, in the old structure, before a commodity is produced, inputs are
first taxed, and then the commodity is produced with input tax load, output is taxed again. This results an unfair
double taxation with cascading effects.

JUSTIFICATION OF VAT
530.1 The VAT not only provides full set-off for input tax as well as tax on previous purchases, but it also abolishes
the burden of several other taxes, such as turnover tax, surcharge on sales tax, additional surcharge, special
additional tax, etc. In addition, Central Sales Tax is also going to be phased out. As a result, the overall tax burden

will be rationalized, and prices, in general, will fall. Moreover, VAT has replaced the existing system of inspection by
a system of built-in self-assessment by traders and manufacturers. The tax structure has become simple and more
transparent. This will significantly improves tax compliance and will also help increase revenue growth.
VAT is base on the value addition to the goods, and the related VAT liability of the dealer is calculated by deducting
input tax credit from tax collected on sales during the payment period. The essence of VAT is to providing set-off for
the tax paid earlier, and this is given effect through the concept of input tax credit/rebate. This input tax credit in
relation to any period means setting off the amount of input tax by a registered dealer against the amount of his
output tax. In the old sales tax structure in several states, multiplicities of taxes (such as turnover tax, surcharge on
sales tax, additional surcharge etc.) were imposed. With the introduction of VAT, these other taxes will be abolished.

CASE STUDY
530.2 The following examples are given to give a birds eye view of VATIllustration 1 Assume the goods are taxable at the rate of 12.5 per cent and all the goods have been purchased and
sold within the States by a VAT dealer. He will put two nails in the wall and will place all the purchase vouchers in
one nail and the sail vouchers in other nail. SupposeTotal of tax element in respect of sales
voucher
Total of tax element in respect of purchase
voucher
VAT payable by dealer

A
B
A minus B

Illustration 2 VAT is calculated by deducting tax credit from tax collected during the payment period.
Rs.
Purchase price
100
Tax paid on purchase (i.e. input tax ) at the rate
10
(assumed) of 10 per cent
Sale price
180
Tax on sale price (i.e. output tax) at the rate
22.5
(assumed) of 12.5 per cent
VAT payable (Rs. 22.5 Rs. 10)
12.5
Illustration 3 X Ltd. is a manufacture company. It purchases raw material from P and Q. Manufactured goods are
sold by X Ltd. to a wholesaler Y Ltd. sells goods to retailer Z. Retailer Z sells goods to consumers.
Price without VAT
Raw material supplied
by
P to X Ltd. (VAT
charged by P @
12.5%)
Q to X Ltd. (VAT
charged by Q @ 4%)
Manufactured goods
sold by
X Ltd. to Y Ltd. (VAT
charged by X Ltd.
from Y Ltd. @ 12.5%)
Less : VAT credit
available to X Ltd.
(Rs. 125 + Rs. 240)

Rs.
1,000
6,000

10,000

Gross
VAT
Rs.
125
240

1,250
365

Net VAT payable by dealer to

the government
Rs.
125
240

875

Goods sold by
wholesaler
Y Ltd. to Z (retailer)
(VAT charged by Y
Ltd. from Z @ 12.5%)
Less : VAT credit
available to Y Ltd.
Goods sold by retailer

Z to consumers (VAT
charged by Z from
consumers @ 12.5%)
Less : VAT credit
available to Z

17,000

2,125
1,250

875

22,000

2,750
2,125

625

In the above case, VAT collected by the Government is as follows

Who will pay VAT to the Government
P
Q
X Ltd.
Y Ltd.
Z
Total VAT collected by the Government

Rs.
125
240
885
875
625
2,750

TAX ON VALUE ADDED

530.3 As commonly levied, the value added tax constitutes a method of taxing final consumer spending in the
economy by installments or in stages. The method consists of levying a tax on value added to a product ( or service)
at each stage of its production and distribution, for this purpose value added is taken as the difference between the
sales and purchases of intermediate products or goods for resale of a business. Like the turnover tax VAT is a multistage tax but with the difference that it is levied on the value added at each stage and not on the gross turnover of the
dealer. This ensure that each input that goes into a final product is taxed once and only once, and not cumulatively as
under a turnover tax and thus avoid causing cascading associated with turnover taxes. On the face of it the simplest
way to levy a VAT is to tax the value added in a business process embodied in the difference between businesss
sales and purchases.

WHAT ARE THE BENEFITS OF VAT IN BRIEF

531. The benefits of VAT are as follows
a. Set-off will be given for input tax as well as tax paid on previus purchases;
b. Other taxes, such as turnover tax, surcharge, additional surcharge, etc. will be abolished;
c. Overall tax burden will be rationalized
d. Prices will be general fall;
e. There will be self assessment by dealers;
f. Transparency will be increase, and
g. There will be higher revenue growth.

NEED FOR INTRODUCING VAT

532. The following points highlight the critical emergent need for introducing VAT
VAT is more equitable way of taxing as all dealers share the tax burden.
VAT is more transparent as easy procedures exist under it and only two rates are there.
Simpler easy computation and easy compliance.

Credit for input taxation leading to cost efficiency.

Better compliance through self-policing
Prevent cascading effects by providing input rebate.
Avoids distortions in trade and economy due to uniform tax rates.

WHAT ARE THE MERITS OF VAT

533. VAT structure is superior to the sales tax system because of the following advantages/ benefits
1. Eliminates multiple tax It eliminates cascading effect of sales tax system by setting off the tax paid earlier at
every stage of sale (i.e. a set off will be given for input tax as well as tax paid on previous purchases).
2. Simple VAT helps in simplifying the indirect tax system. Because it is based simply on transactions and not on a
base that requires complicated definition like income or wealth. VAT has the merit of certainty and is relatively easy
to understand. When levied on a broad base and applied to all sales in business there is little room for differing
interpretations. In most countries, the pre- VAT commodity tax systems are found to be very complicated. In fact, all
the countries that have gone in for VAT had a genuine need for simplifying their tax system.
3. Lowering of tax burden VAT reduces tax burden and helps reduce prices.
4. Fairness VAT is a move towards more efficiency, equal competition and fairness in the taxation system. VAT
helps common people, trade, industry and also the Government. Other taxes, such as turnover tax, surcharge,
additional surcharge etc. will be abolished as a result of introduction of VAT. Overall tax burden is rationalized.
5. Tax evasion will be reduced The adoption of VAT helps in reducing evasion of tax. There is self- assessment and
therefore, better tax compliance being less chances of tax evasion. It has the merit of self-policing in that it induce
businesses to demand invoice from their supplier to enable them to obtain credit for the tax paid on their purchases
against their total tax liability. Under a system where the tax is levied only at one stage, primarily at the first point of
sales has been predominant practice under the state sale tax, shifting the value added to subsequent stage can reduce
tax liability. VAT serves to counter this by bringing the value added at all stages under the tax. While the evasion can
still occur, compared to single-stage sales tax VAT provides a built-in mechanism, to counter evasion because of
audit trail it creates. The application of tax at each point of sales if the tax is evaded at one stage then the tax is
realized at the other stage. Evasion can occur only when all companies in the production and distribution chain act
collusion to conceal their sales.
The sales tax system has the considerable amount of evasion. Studies related to evasion of sales tax in India, for
instance, indicate that evasion range between 5 and 85 percent of the tax base depending upon the type of
commodity. As again the system of administration of sales tax, VAT requires that all the dealers must issue the tax
invoices. The subsequent dealer must maintain these invoices in other to benefit from tax deduction. This would
enable the tax authority to cross check the decorated transaction between the taxpayers, consequently reducing the
propensity to evade tax. In fact, the requirement to maintain the vouchers (invoices) works as self- policing the
evasion of tax.
6. Tax transparency VAT has a novel feature of tax transparency. That is, the total burden of tax on particular
commodity is clearly seen from the transactions. Hence, the economic analysis of the tax structure is convenient.
Also, in international trade, this enhances tax neutrality. Under the sales tax system it is difficult to estimate the exact
amount of refund for export/. In most cases, the statistical evidence suggests that the tax on inputs and raw material
or on capital goods is under-compensated.
7. Higher tax revenue There is higher revenue growth.
8. Uniformity There is a greater uniformity in this system.
9. Simpler VAT system is comparatively simpler that the sales tax system of taxation as there would be no dispute
regarding taxable stage of sale and classification of goods taxable at a particular rate of tax and there would be
minimum requirement of declaration forms.
10. Neutral The greatest virtue of VAT lies in its neutrality that is, non interference with the choices or decisions
of economic agents in matter of location of business, as well as business organization. Under VAT, the tax liability
does not depend on the number of times a product is traded before reaching the final consumer or how much of the
value is added at what stage in vertically or for shunning specialization unlike under a regimes of turnover tax or a

sales tax that makes no allowance for taxes paid at earlier stages. Under VAT, the allocation of resources is left to be
decided by the free play of market forces and competition and not driven by tax considerations.
11. Stable source of revenue Because consumption is less volatile than income, it provides a stable and flexible
source of Government revenue. In OECD countries it was found that every 1 percentage point of VAT yields 0.4
percent of GDP in revenue.

IS THERE ANY DEMERIT OF VAT

534. To get maximum benefits (as given by Cnossen, S.) VAT should
a. Extends through the production and distribution chain right up to the retail stage;
b. Has its base as board as possible;
c. Permits registered firms to obtain full and immediate credit for vat paid on inputs;
d. Limits the extent of rate differential; and
e. Follows the destination principle.

DEMERITS IN INDIAN CONTEXT

534.1 The design of VAT that has been adopted by the states in India meets of the criteria of the good VAT as defined
above but is deficient in some crucial respects. Some of these are given below
1. It does not cover goods as well as services While VAT extends to the retail stage, its base is not comprehensive
enough to compromise all goods and services that go into final
consumption. A grievous shortcoming of base is non inclusion of services. The Union government taxes services,
while VAT is governed by State Governments. The Central Government may delegate the powers to tax some
services to the states. But that is yet to come. Besides whether the base of states VATs, which now extends only to
goods, can be integrated fully with the tax on services eventually in not clear. Hence, as of now, the states VAT base
suffers from major drawback.
2. Exceptions As power the scheme of the state VATs was expected to be fairly comprehensive as exemptions were
supposed to be few. Besides, various concessions extended under the erstwhile sales tax regime for new industries
and so on were also to be eased out. However, under continuous pressure from various quarters the number of
commodities, which are now being exempted from VAT in various states, is not that small.
3. Floor rate the other deficiency of the design of VAT being implemented by the states is the one embedded in the
structure of the rates. The states have two basic rates; general rate of 12.5 per cent and reduced rate of 4 percent (and
1 percent for gold, etc.). These are supposed to be applied uniformly in all states and so although they are described
as floor rates, the States will have no discretion to go below or above the prescribed rates, contrary to what a floor
rate ordinary implies. There is also an exempted category, which will bear no tax, but no rebate will be given for
taxes paid on their purchases at the time of sale to a final consumer.
4. General rate of 12.5 percent is too high - the general VAT rate of 12.5 percent is unduly high. This is supposed to
be a revenue neutral rate, through it is difficult to see how a uniform rate could be reserve neutral for all states.
Presumably it was chosen to accommodate the concerns of states with high levels of sales taxation about potential
revenue loss from VAT. A high rate became all the more necessary on revenue considerations because a large number
of commodities and industrial inputs have been included in the 4 percent categories. Many (not all of them basic
necessities) are in the exempt category.
5. Classification of capital goods classification of goods under different lists is, in many instances, arbitrary- and
leaves wide room for doubts and disputes as to whether a particular item comes within the lower rate category or not.
This is bound to give rise to distortions and inequalities in the application of the tax (e.g., a crutch or wheelchair is
exempt as an aid for handicapped, but not a hearing aid or a heart valve). Even a simple product like paper, which
occurs in the 4 % list, requires definition. Otherwise, one may wonder, does it include tissue paper, gift-wrap, writing
paper or pad, and drawing paper?
6. Another major flaw of the rate structure is the inclusion of Capital Goods and Industrial inputs in the 4 percent list.
No country in the world where VAT is in operation permits concessional rate for inputs, expect in special
circumstances. This goes against the basic tenet of VAT that the end use of a product by the customer should not
affect the VAT to be charged and paid by a seller; if it is used as business input, for the set-off takes care of

that. Reduced rate of tax on inputs also increases revenue loss from undeclared sales of finished products. Capital
Goods are also not defined and dealers may not know whether a particular product sold will be used by the ultimate
user as a capital good.
7. The application of VAT on MRP at the first point, e.g., on drugs in West Bengal and Maharashtra, on the plea
that there can be no taxable value addition at the subsequent stages, once the MRP is taken as a base in problematic.
This is completely misconceived idea and defeats the purpose of VAT, which is to tax sales at all stages with credits
for inputs/purchase taxing commodities at the first stage on the MRP also results in from the consuming states to the
producing states where the first point sellers are located.

WHAT IS INPUT TAX CREDIT

535. The essence of VAT is in providing set-off for the tax paid earlier, and this is given effect through the concept of
input tax credit/rebate. This input tax credit in relation to any period means setting off the amount of input tax by a
registered dealer against the amount of his output tax. The Value Added Tax (VAT) is based on the value addition to
goods, and the related VAT liability of dealer is calculated by deducting input tax credit from tax collected on sales
during the payment period (say, a month).

CASE STUDY
Examine the following illustrations
1. X purchases input worth Rs. 15,00,0000 and records sales of 22, 00,000 in the month of January 2008. Input tax
rate and output tax rate is 12.5 percent. Input tax credit/set-off shall be computed as follows
Rs.
Input procured within the State in a month
(a) 15, 00,000
Output sold in the month
(b) 22, 00,000
Input tax paid @ 12.5% on (a)
(c) 1, 87,500
Tax collected 12.5% on (b)
(d) 2, 75,000
VAT payable during the month [(d)-(c)]
(e) 87,500
2. X purchased input worth Rs. 16, 00,000 and records sales of Rs. 21, 00,000 in the month of January 2008. Input
tax rate and output rate are 12.5 percent respectively. Input tax credit/set-off shall be calculated as follows
Input purchased during January 2008
Output sold in the month of January 2008
Input tax paid @ 4% of (a)
Output tax collected during January 2008 @ 12.5% of (b)
VAT payable for January 2008 after set-off/input tax credit [(d)-(c)]

Rs.
(a) 16, 00,000
(b) 21, 00,000
(c) 64,000
(d) 2, 62,000
(e) 1, 98,500

COVERAGE OF SET-OFF INPUT TAX CREDIT

535.1 Input tax credit is generally given for entire VAT paid within the State on purchases of taxable goods meant for
resale/manufacture of taxable goods. However, generally no credit is available in respect of purchases given below
1. Goods purchased from unregistered dealers.
2. Goods purchased from other States/countries.
3. Purchase of goods used in manufacture of exempted goods.
4. Purchase of capital goods (in some cases credit is available in installments).
5. Purchase of goods used as fuel in power generation.
6. Purchases of goods to be dispatched as branch transfers outside States.
7. Purchases of goods used in manufacture of goods to be dispatched outside any State as branch
transfer/consignments.
8. Purchases of goods in cases where the dealer does not have invoices showing amounts of tax charged separately
by the selling dealer.
9. Purchases of non-creditable goods (these goods may be defined in the law regulating VAT in a particular set).

10. Purchases from dealer who has opted for composition scheme (these schemes may be specified in the law
regulating VAT in a particular set).

CARRYING OVER OF TAX CREDIT

535.2 If the tax credit exceeds the tax payable on sales in a tax period, it shall be carried over the next tax period. If
there is any excess unadjusted input tax credit at the credit at the end of the financial year, it shall be eligible for
refund. In some cases, if VAT collected in a tax period is lower than input tax credit in respect of local purchases and
inter State purchases, only the balancing amount is carried forward to the next tax period and it will be adjusted in
the next tax period on the same basis. However, unadjusted tax credit at the end of financial year is generally
refunded.
Input tax credit on capital goods is also be available for traders and manufactures. Tax credit on capital goods may be
adjusted over a maximum of 36 equal monthly installments. The States may at their option reduce this number of
installments. Generally, there is a negative list for capital goods not eligible for input tax credit.
Provision illustrated the following data pertains to X Ltd., a manufacturing company situated in State A where tax
period is monthly. Input VAT credit on capital goods is State A is available in 36 months. However, in state A input
tax credit in respect of capital goods is not available in some cases. X Ltd. purchases input from State A as well as
States B. Manufactured goods are sold by X Ltd. in State A as well as State C.
Rs.
VAT paid on procurement of
(a)
4,00,000
input/supplies within State A in
January 2008
CST paid on procurement of
(b)
3,00,000
input/supplies within State B in
January 2008
VAT paid on procurement of
(c)
21,60,000
capital goods within State A in
January 2008
VAT paid on procurement of
(d)
9,10,000
capital goods in January 2008
from State A as well as other
State (bit not eligible for tax
credit)
VAT collected in respect of sale (e)
3,12,000
within State A during January
2008
CST collected in respect of
(f)
72,000
inter-State sales to dealers in
State C during January 2008
Input tax credit for January
(g)
4,60,000
2008 [i.e., (a) + 1/36 of (c)
CST and VAT payable by X
(h)
3,84,000
Ltd. in State A for January
2008 if no tax credit is
available [(e) + (f)]
CST and VAT payable by X
(i)
Nil
Ltd. in State A for January
2008 after adjusting tax credit
[(h) (g), since it is negative
no CST and VAT is payable in
State A
for January 2008]
Surplus which is carried over
(j)
76,000
as tax credit for set-off during
February 2008 [(g) (h)]

Notes
1. CST paid by X Ltd. on procurement of input supplies from State B (i.e., Rs. 3, 00, 000) is not eligible for tax
credit.
2. The surplus of Rs. 76,000 as calculated above will be available for tax credit in February 2008.
3. Any surplus at the end of March 2008 will be refunded to X Ltd.

TREATMENT OF EXPORT
535.3 For all exports made out of the country, VAT paid within the State will be generally refunded in full within a
stipulated period (generally it is 3 months). Moreover, units located in SEZ and EOU will be generally granted either
exemption from payment of input tax or refund of the input tax paid within the aforesaid period.

INPUTS PROCURED FROM OTHER STATES

535.4 Taxes paid on inputs procured from other States through inter State sale and stock transfer will not be
eligible for credit.
However, it appears that a decision has been taken for duly phasing out central sales tax.

WHAT ARE VARIANTS OF VAT

536. Theoretically, VAT could be levied with three specific variants, viz, (a) Gross product variant, (b) Income type
variant, and (c) Consumption type variant. These variants could be further distinguished through their methods of
calculation, viz, addition method and subtraction method. The subtraction method could be further analyzed into (a)
direct, (b) intermediate, and (c) indirect subtraction method.

GROSS PRODUCT VARIANT

536.1 This variant allows deductions for all purchases of raw materials and components but no deduction is allowed
for capital inputs. In this way capital goods such as plant and machinery are not deductible from the tax base in the
year of purchase and depreciation on the plant and machinery is not deductible in the subsequent years. One may say
that the economics base of gross product variant is equivalent to GNP (gross national product). Under this system,
capital goods carry a heavier tax burden as they are taxed twice. Modernization and upgrading of plant and
machinery is delayed due to this dual tax treatment.

INCOME VARIANT
536.2 in this variant of VAT, deduction are allowed for purchases of raw materials and components as well as
depreciatio0n on capital goods. The economics base of the income variant is equivalent to net national product.
However, in practice, there are many difficulties connected with the specification of any method of measuring
depreciation, which basically depend on the life of an asset as well as on the r\ate of inflation.

CONSUMPTION VARIANT
536.3 Under this variant, deduction is allowed for all business purchases including capital assets. In other words, the
economics base of the tax is equivalent to total private consumption. It does not distinguish between capital and
capital expenditures. Moreover, under this system, there is no need to specify the life of asset or depreciation
allowance for different assets. This form is neutral between different modes of production. In other words, there will
not be any effect on tax liability due to method of production.
Among the three variants of VAT stated above, the consumption variant is widely used in Europe and other
continents (in our country generally income variant is adopted). The reason for preference of consumption variant is
that it does not affect decision regarding investment because the tax on capital goods is also set-off against VAT
liability. The tax is neutral n respect of techniques of production. The consumption variant is more in harmony with
the destination principle. In the foreign trade sector, this variant relieves all the exports from taxation while imports
are taxed. Finally, this variant is convenient from the point of the administrative expediency as it simplifies tax
administration by obviating the need to distinguish between purchases of immediate or capital goods on the one hand
and consumption goods on the other.

WHAT ARE DIFFERENT MODES OF COMPUATION OF VAT

537. As stated earlier VAT is nothing but a form of sales tax only and is charged at each stage of sale on the value
added to the goods. Value Added is the difference between sale and purchase of a business. A straight forward
way to compute the base of a VAT for given period, says a quarter, is, in the case of a manufacturer, to deduct the
total cost of the inputs used in the production from the amount for which the manufactured goods are sold.

Theoretically, VAT is computed by adopting three alternative methods. These are (i) addition method (ii) subtraction
method (iii) tax credit or invoice method. These methods can be used to arrive at the VAT liability.

ADDITION METHOD.
537.1 This method is based on the identification of value-added, which can be estimated by summation of all the
elements of value- added (i.e., wages, profits, rent and interest). This method is known as addition method or income
approach. This is in line with the income method of calculating national income. The chief drawback of this method
is that it does not require matching of invoices in order to check tax evasion.

SUBTRACTION METHOD
537.2 The subtraction method estimates value-added by means of difference between outputs and inputs [i.e. T= t
(output input)]. This is also known as product approach and has further variants in the way subtraction is attempted
from among (a) direct subtraction method, (b) intermediate subtraction method, and (c) indirect subtraction method .
Direct subtraction method is equivalent to a business transfer tax whereby tax is levied on the difference between the
aggregate tax- exclusive value of sales and aggregate tax exclusive value of purchases. Intermediate subtraction
method is based on deduction of aggregate tax-inclusive value of purchases from the aggregate tax inclusive value of
sales and taxing the difference between them.

TAX CREDIT METHOD

537.3 Under the tax credit method, the tax on inputs is deducted from the tax on the sales to arrive at the VAT
payable by the dealer. The indirect subtraction method entails deduction of tax on inputs from tax on sales for each
tax period [i.e. t (output) t(input)]. This method is also known as tax credit method or invoice method. In practice,
most countries use this method and employ net-consumption VAT.
Total tax charged on the output or sales
VAT payable =
minus
Total tax paid to the supplies on inputs or
purchases
Tax Credit to invoice method has been adopted universally because of the inherent advantages in the credit method
of calculating tax liability. The other methods namely addition method and subtraction method are not calculating tax
liability. The other methods namely addition method and subtraction method are not worldwide in the case of a
manufacturer when the rate of tax is different in respect of inputs and outputs.

ADVANTAGES AND ADOPTION OF TAX CREDIT METHOD

573.3.1 The following points may be noted in this regard:
1. It makes cross checking of tax paid at earlier stage, more amenable, as dealers are required to state the amount
of tax in invoices.
2. Tax burden being dependent upon the tax rate at the final stage, dealers at intermediate stages do not have any
incentive to seek treatment in tax rate.
3. Under the invoice method, exports can easily be relieved of domestic indirect taxes through zero rating of exports.

Provision illustrated
537.4 The following examples are given to understand the implication under the aforesaid methods

A COMPARISON OF INPUT TAX CREDIT METHOD AND SUBTRACTION

METHOD WHEN TAX RATE IS SAME
537.4.1 In the able given below value addition is 100percent in the hands of a manufacturer, 30 percent in the hands
of a wholesaler and 20 percent in the hands of retailer. A uniform tax rate of VAT of 12.5 percent is adopted
Computing VAT by two methods with uniform tax rate of 12.5 %

Raw
materials supplier
Rs.
The economy
0
Purchase value
0
Value added
100
Sales value
Input tax credit
100
method
12.5 0
Sales value
0
Tax on sales (a)
12.5
Purchase value
Tax on purchase
(b)
VAT [i.e. (a)
(b)]
Subtraction
112.5
method
0
Sales inclusive
112.5
of tax (c)
12.5
Purchases
inclusive of tax
(d)
Difference [i.e.
(c) (d)] (e)
VAT [i.e. (e) *
12.5/112.5]

Manufacturer

Wholesaler

Retailer

Rs.
100
100
200

Rs.
200
60
260

200
25
100
12.5
12.5

260
32.5
200
25
7.5

312
39
260
32.5
6.5

292.5
225
67.5
7.5

351
292.5
58.5
6.5

225
112.5
112.5
12.5

Rs.
260
52
312

Note it should be noted that under the invoice credit method credit for tax paid at earlier stages is available only
when the good is purchased by a dealer registered as liable to pay VAT and the seller from whom it is purchased is
also a registered dealer. In other words, the sale is from business to business or what is called B2B. No such credit
is allowed in the case of the sale to an unregistered dealer or a final consumer, called B2C sale, going by the
current jargon.

COMPARATIVE ANALYSIS OF THREE METHODS OF COMPUTING VAT

537.4.2 A comparative chart of the three methods of calculating VAT is given below when rate of tax is uniform (rate
of VAT of 12.5 per cent is adopted in the illustration given below)
Methods
Manufacturer
Wholesaler
Retailer
Total Economy
Rs.
Rs.
Rs.
Rs.
Addition Method
150
300
200
650
Wages
50
100
20
170
Rent
25
75
20
120
Interest
25
25
10
60
Profit
Value added [(a)
250
500
250
1000
+(b)+(c)+(d)]
31.25
62.5
31.25
125
VAT
Subtraction
350
850
1100
2300
method
100
350
850
1300
Sales
250
500
250
1000 125
Purchases
31.25
62.50
31.25
Value added [(a)(b)]
VAT

Invoice method
Sales
Tax on sales
Purchases
Tax on purchases
VAT [(b)-(d)]

350
43.75
100
12.5
31.25

850
106.25
350
43.75
62.50

1100
137.5
850
106.25
31.25

2300
287.5
1300
262.5
125

COMPARATIVE ANALYSIS WHEN RATE OF VAT IS NOT UNIFORM

537.4.3 Although all the methods are identical, these are not likely to yield the same revenue when tax rates vary
according to commodities (i.e. the rates are different for inputs and that for outputs). As shown in the table given
below, the yield would be Rs. 30 under the subtraction
method while it is Rs. 25 only under the invoice method when the tax rate is 15 percent at wholesale stage and 10
percent at other stages.
Calculation of
Manufacturer
Wholesaler
Retailer
Total Economy
VAT
Rs.
Rs.
Rs.
Rs.
Sales (a)
100
200
250
550
Purchases (b)
0
100
200
300
Value added [(a) 100
100
50
250
(b)] (c)
Rate of VAT is
10
10
5
25
10% on all stages
VAT under
subtraction
method [i.e., 10%
of (c)]
Tax credit or
10 0 = 10
20 1 = 10
25 20 = 5
55 30 = 25
invoice method
[i.e., 10% of (a)
minus10% of (b)]
Rate of VAT is
10
15
5
30
15% at
10 0 = 10
30 10 = 20
25 30 = (5)
65 40 = 25
wholeselling level
and 10% at all
other stages
Subtraction
method [15% of
(c) in the hands of
wholeseller and
10% of (c) at other
stages]
Tax credit or
invoice method
The invoice method is widely used in most VAT countries because of its inherent advantages in calculating tax
liability. First, it makes cross-checking of tax paid at earlier stages more
amenable, as dealers are required to mention the amount of tax on invoices. Second, tax burden being dependent
upon the tax rate at the final stage, dealers at intermediate stages do not have any incentives to seek special treatment
in the tax rate. Finally, it facilitates border tax adjustments. If exports are zero rated, it can be done easily under
this method.

ADMINISTRATIVE PROCEDURES GENERALLY ADOPTED BY DIFFERENT

STATES
538. Generally the following procedures are adopted-

COMPULSORY ISSUE OF TAX INVOICE, CASH MEMO OR BILL

538.1 The entire design of VAT with input tax credit is crucially based on documentation of cash invoice, cash memo
or bill. Every registered dealer, having turnover of sales above an amount specified, shall issue to the purchases
serially numbered tax invoice with prescribed particulars. This tax invoice will be signed and dated by the dealer or
his regular employee, showing the required particulars. The dealer shall keep the counterfoil or duplicate of such tax
invoice duly signed and dated. Failure to comply with the above will attract penalty

REGISTRATION, SMALL DEALERS AND COMPOSITION SCHEME

538.2 Registration of dealers with gross annual turnover above a specified amount (say, Rs.5 lakh) is compulsory.
Generally, there is a provision for voluntary registration. Moreover, all dealers under the old system of local sales tax
have been automatically registered under the VAT Act. A new dealer is generally allowed 30 days time from the date
of liability to get registered. Small dealers with gross annual turnover not exceeding a specified amount (say, Rs.5
lakh) are not generally liable to pay VAT.
Small dealers with annual gross turnover not exceeding a specified amount (say,Rs.50 lakh) who are otherwise liable
to pay VAT, shall however have the option for the composition scheme with payment of tax at a small percentage of
gross turnover. The dealers opting for this composition scheme will not be entitled to input tax credit.

TAXPAYERS IDENTIFICATION NUMBER (TIN)

538.3 The taxpayers identification number consists of 11 digit numerals throughout the country. First two characters
will represent the State Code as used by the Union Ministry of Home Affairs, Government of India (census code).
The set-up of the next nine characters may. However, be different in different States. This will include 2 check digits.

RETURN
538.4 Under VAT, simplified form of returns has been notified. Returns are to be filed monthly/quarterly as
simplified in the State Acts/Rules, and will be accompanied with payment challans. Every return furnished by dealer
will be scrutinized expeditiously within prescribed time-limit from date of filling the return. If any technical mistake
is detected on scrutiny, the dealer will be required to pay the deficit appropriately.

PROCEDURE OF SELF-ASSESSMENT OF VAT LIABILITY

The major contribution of VAT is simplification. VAT liability will be self-assessed by the dealers themselves.
Voluntary return will be submitted after setting of the tax credit. There is no longer a compulsory assessment at the
end of each year as was application under the old system. If no specific notice is issued proposing departmental audit
of the books of the account of the dealer within a stipulated time, the dealer will be deemed to have self-assessed on
the basis of returns submitted by him.

AUDIT
538.6 Correctness of self assessment will be checked through a system of departmental audit. A certain percentage
of the dealers will be taken up for audit every year on a scientific basis. If,
however, evasion is detected on audit, the concerned dealer may be taken up for audit for previous periods. This
Audit Wing will remain de linked from tax collection wing to remove any bias. The audit report will be
transparently sent to the dealer also.
Simultaneously, a cross checking, computerized system is being worked out on the basis of coordination between
the tax authorities of the State and those of central excise and income tax. This comprehensive cross-checking
system will help reduce tax evasion and also lead to significant growth of tax revenue. At the same time, by
protecting transparently the interests of tax-complying dealers against the unfair practices of tax-evaders, the system
will also bring in more equal competition in the sphere of trade and industry.

DECLARATION FORM
538.7 there will be no need for any provision for concessional sale under the VAT Act since the provision for set-offs
makes the input zero-rated. Hence, there will be no need for declaration form, which will be a further relief for
dealers.

OTHER TAXES
538.8 A s mentioned earlier, all other taxes such as turnover tax, surcharge, additional surcharge and special
additional tax (SAT) have been generally abolished.

PENAL PROVISIONS
538.9 Penal provisions under VAT are not more stringent than in the sales tax system.

COVERAGE OF GOODS UNDER VAT

538.10 In general, all the goods, including declared goods will be covered under VAT and will get the benefit of
input tax credit. However, there are a few goods which are outside VAT. Generally, exempted category includes
liquor, lottery tickets, petrol, diesel, aviation turbine fuel and other motor spirit since their prices are not fully market
determined. These will continue to be taxed under Sales Tax Act or any other State Act or even by making special
provisions in the VAT Act itself, and with uniform floor rates.

VAT RATES AND CLASSIFICATION OF COMMODITIES

538.11 Under the VAT system covering about 550 goods, there will be only two basic VAT rates of 4 percent and
12.5 percent. Moreover, there is a specific category of tax-empted goods. Besides, a special VAT rate of 1 percent is
applicable only for gold and silver ornaments, etc. Thus the multiplicity of rates under the old structure has been
omitted.
Exempted category generally includes natural and unprocessed products in unorganized sector, items which are
legally barred from taxation and items which have social implication. Included in this exempted category is a set of
commodities flexibility chosen by individual States from a list of goods (finalized by the Empowered Committee
formed for the purpose of introduction of VAT) which are of local social importance for the individual States without
having any inter-state implication.

Q.4 What is the concept of avoidance of double taxation?

(2 Marks)

Module II: Assessment of Companies

Computation of taxable income, MAT , Set off & carry forward of losses in companies, Deductions
from Gross total income applicable to companies, Tax planning with reference to new
projects/expansions/rehabilitation plans including mergers, amalgamation or de-mergers of
companies, Concept of avoidance of double taxation.
10. Income-tax is not deductible ; however , the assessee can claim double
taxation relief in respect of doubly taxed income

MODULE IV: INDERECT TAXATION

BACKGROUND AND JUSTIFICATION
530. In the old sales tax structure, there were problems of double taxation of commodities and multiplicity of taxes,
resulting in a cascading tax burden. For instance, in the old structure, before a commodity is produced, inputs are
first taxed, and then the commodity is produced with input tax load, output is taxed again. This results an unfair
double taxation with cascading effects.
Suggested solution:
The patent should be transferred to a company in a low tax country from which the patents are licensed to one or
more licensing companies in countries with a dense tax treaty network and which does not levy a withholding tax on
royalties paid abroad. The set-up of a licensing company in Mauritius could meet these objectives. Mauritius has an
expanding network of double taxation treaties, thus substantially reducing the withholding taxes on royalties paid to
the Mauritius company. Although the Mauritius company is subject to tax in Mauritius at a rate of 15%, the spread
between royalties received and royalties paid to the offshore patent-holder can be minimised (Mauritius has not
adopted any transfer pricing regulations which could have an impact on the amount of the spread). Royalties paid by
the Mauritius company are not subject to a withholding tax in Mauritius. Note: If there is no double tax treaty
between Mauritius and the country from which the royalties are paid, the set-up of a sub-licensing company in a
third country might be considered, e.g. Luxembourg. Luxembourg has a good tax treaty with Mauritius.

http://www.dailymotion.com/video/xa4mz7_cyprus-double-taxation-jarl-moe-143_school
f_0qo-double-taxation.aspx

Module II: Assessment of Companies

Computation of taxable income, MAT , Set off & carry forward of losses in companies, Deductions from Gross total income
applicable to companies, Tax planning with reference to new projects/expansions/rehabilitation plans including mergers,
amalgamation or de-mergers of companies, Concept of avoidance of double taxation.

Provision relating to taxation of a Company

Indian companies are taxable in India on their worldwide income, irrespective
of its source and origin. Foreign companies are taxed only on income which
arises from operations carried out in India or, in certain cases, on income
which is deemed to have arisen in India. The later includes royalty, fees for
technical services, interest, gains from sale of capital assets situated in India
(including gains from sale of shares in an Indian company) and dividends from
Indian companies. Thus, the tax-liability on income of a company depends
upon the residential status of the company.
A Company is said to be resident in India during any relevant previous year
if:i. It is an Indian Company;or
ii. The control and management of its affairs is situated wholly in India. In case
of Resident Companies, the total income liable to tax includes [section 5(1)]:Any income which is received or is deemed to be received in India in the
relevant previous year by or on behalf of such company
Any income which accrues or arises or is deemed to accrue or arise in India
during the relevant previous year

Any income which accrues or arises outside India during the relevant previous
year.
Similarly, a Company is said to be non-resident during any relevant
previous year if:i. It is not an Indian company,and
ii. The control and management of its affairs is situated wholly/partially
outside India. In case of Non-Resident Companies, the total income liable to
tax includes[section 5(2)]:Any income which is received or is deemed to be received in India during the
relevant previous year by or on behalf of such company
Any income which accrues or arises or is deemed to accrue or arise to it in
India during the relevant previous year.
As a result a situation may arise where the same income becomes taxable in the
hands of the same company in one or more countries,leading to 'Double
Taxation'. The problem of double taxation may arise on account of any of the
following reasons: A company(or a person) may be resident of one country but may derive
income from other country as well,thus he becomes taxable in both the
countries.
A company/person may be subjected to tax on his world income in two or
more countries,which is known as concurrent full liability to tax.One country
may tax on the basis of nationality of tax-payer and another on the basis of his
residence within its border.Thus,a person domiciled in one country and
residing in another may become liable to tax in both the countries in respect of
his world income.
A company/person who is non-resident in both the countries may be
subjected to tax in each one of them on income derived from one of them.for
example,a non-resident person has a Permanent establishment in one country
and through it he derives income from the other country.
In India the relief against double taxation has been provide under Section 90
and Section 91 of the Income Tax Act.
Section 90 of the Income Tax Act relates to bilateral relief. Under it, the
Central Government has entered into an agreement with the Government of
any country outside India. These agreements called as "double taxation
avoidance agreements (DTAA's)" , provide for the following:- Granting of
relief in respect of:o Income on which income tax has been paid both in India and in that country
or

o Income tax chargeable in India and under the corresponding law in force in
that country to promote mutual economic relations, trade and investment, or
The type of income which shall be chargeable to tax in either country so that
there is avoidance of double taxation of income under this Act and under the
corresponding law in force in that country
In addition the Central Government may enter into an agreement to provide:For exchange of information for the prevention of evasion or avoidance of
income tax chargeable under the Act or under the corresponding law in force
in that country, or investigation of cases of such evasion or avoidance, or
For recovery of income tax under the Act and under the corresponding law in
force in that country.
India has entered into DTAA with 65 countries including countries like U.S.A.,
U.K., Japan, France, Germany, etc. In case of countries with which India has
double taxation avoidance agreements, the tax rates are determined by such
agreements.
Under the section, the assessee is given relief by credit/refund in a particular
manner even though he is taxed in both the countries. Relief may be in the
form of credit for tax payable in another country or by charging tax at lower
rate.The steps involved in granting such a bilateral relief are:- (a) Compute the
total income of person liable to pay tax in India in accordance with the
provisions of the Income Tax Act (b) Allow relief as per the terms of the tax
treaty entered into with the other contracting company,where the taxation has
suffered double taxation.
The liability to tax arising under the Income Tax Act are subject to provisions
of the double taxation avoidance agreements between India and foreign
country. Thus the treaty provisions shall prevail over the income tax
provisions.
The types of agreements under DTAA's can be majorly categorised as:Comprehensive Agreements:-These are elaborated documents which puts
forward in detail that how incomes under various heads may be dealt with.
Limited Agreements :-These are entered into to avoid double taxation related
to the income derived from operation of aircrafts,ships,carriage of cargo and
freight.
Other Agreements :-including double taxation relief rules.
Section 91 of the Income Tax Act relates to unilateral relief. Under it, if any
person/company is resident in India in any previous year and paid the
income,which accrued to him in India, to any country with which there is no
agreement (under Section 90) for relief from double taxation,he shall be
entitled to deduction from the Indian Income-tax payable by him of a sum

calculated on such doubly taxed income at the average Indian rate of tax or the
average rate of tax of said country, whichever is lower,or at the Indian rate of
tax if both the rates are equal.
The steps involved in calculating relief under this section are:- (a)Calculate tax
on total income(including foreign income) and claim relief applicable on it
(b)Add surcharge and education cess after claiming rebate under the Section
88E (c)Compute average rate of tax by dividing the tax computed in previous
step with the total income (d)calculate average rate of tax of foreign country by
dividing income-tax actually paid in the said country after deduction of all
relief due (e)Claim the relief from the tax payable in India at the rate
computed in previous two steps on the basis of whichever is less.
Double taxation:
Double taxation is the imposition of two or more taxes on the same income (in the case of income taxes), asset (in
the case of capital taxes), or financial transaction (in the case of sales taxes). It refers to two distinct situations:
taxation of dividend income without relief or credit for taxes paid by the company paying the dividend on the
income from which the dividend is paid. This arises in the so-called "classical" system of corporate taxation, used in
the United States.
taxation by two or more countries of the same income, asset or transaction, for example income paid by an entity of
one country to a resident of a different country. The double liability is often mitigated by tax treaties between
countries.

International Double Taxation Agreements

Main article: Tax treaty
It is not unusual for a business or individual who is resident in one country to make a taxable gain (earnings, profits)
in another. This person may find that he is obliged by domestic laws to pay tax on that gain locally and pay again in
the country in which the gain was made. Since this is inequitable, many nations make bilateral Double taxation
agreements with each other. In some cases, this requires that tax be paid in the country of residence and be exempt
in the country in which it arises. In the remaining cases, the country where the gain arises deducts taxation at source
("withholding tax") and the taxpayer receives a compensating foreign tax credit in the country of residence to reflect
the fact that tax has already been paid. To do this, the taxpayer must declare himself (in the foreign country) to be
non-resident there. So the second aspect of the agreement is that the two taxation authorities exchange information
about such declarations, and so may investigate any anomalies that might indicate tax evasion. [citation needed]

European Union savings taxation

Main article: European Union withholding tax
In the European Union, member states have concluded a multilateral agreement on information exchange. [1] This
means that they will each report (to their counterparts in each other jurisdiction) a list of those savers who have
claimed exemption from local taxation on grounds of not being a resident of the state where the income arises. These
savers should have declared that foreign income in their own country of residence, so any difference suggests tax
evasion.
(For a transition period, some states have a separate arrangement. [2] They may offer each non-resident account holder
the choice of taxation arrangements: either (a) disclosure of information as above, or (b) deduction of local tax on
savings interest at source as is the case for residents).
Cyprus Double Tax Treaties
Cyprus has concluded 34 double tax treaties which apply to 40 countries. The main purpose of these treaties is the
avoidance of double taxation on income earned in any of these countries. Under these agreements, a credit is
usually allowed against the tax levied by the country in which the taxpayer resides for taxes levied in the other treaty
country and as a result the tax payer pays no more than the higher of the two rates. Further, some treaties provide for
tax sparing credits whereby the tax credit allowed is not only with respect to tax actually paid in the other treaty

country but also from tax which would have been otherwise payable had it not been for incentive measures in that
other country which result in exemption or reduction of tax. [3]
German Taxation Avoidance
If a foreign citizen is in Germany for less than a relevant 183 day period (approximately six months) and are tax
resident (ie., and paying taxes on your salary/benefits) elsewhere, then it may be possible to claim tax relief under a
particular Double Tax Treaty. The relevant 183 day period is either 183 days in a calendar year or in any period of 12
months, depending upon the particular treaty involved. The Double Tax Treaty with the UK, for example, looks at a
period of 183 days in the German tax year (which is the same as the calendar year).
So, for example, you could work in Germany from 1 September through to the following 30 May, a total of 10
months, whilst being tax resident in Germany and could claim to be exempt from German tax under a Double Tax
Treaty. This is assuming that during this period you were tax resident in another country and paying taxes on your
salary and benefits there.
In some cases, it would be beneficial, from a tax standpoint, to claim exemption under a Double Tax Treaty, i.e., if
your other country of tax residence levies much lower taxes. In other cases, whilst the tax liability may be broadly
similar (e.g., as with the UK and Germany), claiming exemption under a Double Tax Treaty offers administrative
convenience and savings in professional fees (payroll bureau, tax return filing etc). In Germany, if the criteria of a
relevant Double Tax Treaty are satisfied then there is no requirement to submit a formal claim for relief; rather,
exemption may simply be assumed. The other criteria are that you are paid by a non-German company and that the
costs of your employment are borne by a non-German company. You should not, generally, have a problem
satisfying these criteria.
If you are receiving a salary for working in Germany and that salary is subject to German tax, i.e., relief under a
Double Tax Treaty is not available or desirable, you (as a company) or your employer is obliged to deduct a German
withholding tax and pay this over to the German Revenue authorities on a regular basis. You will need to seek
professional advice in Germany as to the calculation, regularity and transmission of these payments and contact
details can be provided if required.

Double Taxation Avoidance Agreement Signed By India

India has comprehensive Double Taxation Avoidance Agreement(DTAA ) with 79 countries. What it means is that
there are agreed rate of tax and jurisdiction on specified types of income arising in a country to a tax resident of
another country.Under Income Tax Act 1961 of India ,there are two provisions -section 90 and section 91 - which
provides specific relief to tax payers to save them from DTAA. Section 90 is for tax payer who have paid the tax to a
country with which India has signed DTAA. While Section 91 provides relief to tax payers who have paid tax to a
country with which India has not signed DTAA. Thus, India gives relief to both kind of taxpayers.
A large number of Foreign Institutional Investors who trade on the Indian stock markets operate from Mauritius.
According to the tax treaty between India and Mauritius, Capital Gains arising from the sale of shares is taxable in
the country of residence of the shareholder and not in the country of residence of the Company whose shares have
been sold. Therefore, a company resident in Mauritius selling shares of an Indian company will not pay tax in India.
Since there is no Capital gains tax in Mauritius, the gain will escape tax altogether.

U.S. Citizens and Resident Aliens Abroad

The US requires its citizens to file tax returns reporting their earnings wherever they reside. However, there are some
measures designed to reduce the international double taxation that results from this requirement. [4]
First, an individual who is a bona fide resident of a foreign country or is physically outside the US for an extended
time is entitled to an exclusion (exemption) of part or all of their earned income (i.e. personal service income, as
distinguished from income from capital or investments.) That exemption is currently set at $85,700 (2007). [4]
Second, the US allows a foreign tax credit by which income taxes paid to foreign countries can be offset against US
income tax liability attributable to foreign income. This can be a complex issue that often requires the services of a
tax advisor. The foreign tax credit is not allowed for taxes paid on earned income that is excluded under the rules
described in the preceding paragraph (i.e. no double dipping). [4]

Double taxation within the United States

Double taxation can also happen within a single country. This typically happens when subnational jurisdictions have
taxation powers, and jurisdictions have competing claims. In the United States a person may legally have only a
single domicile. However, when a person dies different states may each claim that the person was domiciled in that
state. Intangible personal property may then be taxed by each state making a claim. In the absence of specific laws

prohibiting multiple taxation, and as long as the total of taxes do not exceed the 100% of the value of the intangible
personal property, the courts will allow such multiple taxation.

Q.5 What is Gross Total Income?

(2 Marks)

Module II: Assessment of Companies

Computation of taxable income, MAT , Set off & carry forward of losses in companies, Deductions
from Gross total income applicable to companies, Tax planning with reference to new
projects/expansions/rehabilitation plans including mergers, amalgamation or de-mergers of
companies, Concept of avoidance of double taxation.

GROSS TOTAL INCOME (GTI)

As per section 14, income of a person is computed under the following five heads:
1. Salaries
2. Income from house property.
3. Profits and gains of business or profession.
4. Capital gains.
5. Income from other sources.
The aggregate income under these heads is termed as "gross total income".
PERMISSIBLE DEDUCTIONS FROM GROSS TOTAL INCOME AND TAX LIABILITY
These deductions are available from gross total income.
Aggregate amount of deductions under section 80C to 80U cannot exceed (gross total income minus short-term
capital gain under section 111A minus any long-term capital gain).
Deduction under section 80-IA to 80U is admissible in respect of net income computer under the provisions of
the Act (i.e. income arrived at at after deducting permissible deductions and adjusting current or brought forward
losses.)
Deduction under section 80-IA, 80-IAB, 80-IB, 80-IC and 80-ID is not available if return of income is not
submitted on or before the due date of submission of return of income.
Deduction in respect of profits and gains shall not be allowed under any provisions of section 10A or Section
10AA or section 10B or section 10BA or under section 80H to 80RRB, if a deduction in respect of same amount
under any of the aforesaid section has been allowed in the same assessment year. The aggregate deductions under
these provisions shall not exceed the profits and gains of the undertaking or units or enterprise or eligible business,
as the case may be. No deductions under the above provisions shall be allowed if the deduction has not been claimed
in the return of income.
For the purpose of claiming deduction under section 35AD or under Chapter VI-A (i.e., Sections 80C to 80U), the
transfer price of goods and services between the undertaking (i.e., unit or enterprise eligible for these deductions)has
not been claimed in the return of income.
Deduction under section 80C is available only to an individual or a Hindu undivided family.
Deduction is available on the basis of specified qualifying investments/contributions/deposits/ payments
(hereinafter referred to as gross qualifying amount ) made by the taxpayer during the previous year. Such
investment deposit etc. can be made out of taxable income or otherwise.
Amount deductible under section 80C cannot be more than Rs. 1lakh.
The maximum amount deductible under sections 80C, 80CCC and 80CCD cannot exceed Rs. 1 Lakh
1. Life insurance premium [subject to a maximum of 20% of sum assured]
2. Payment in respect of non-commutable deferred annuity
3. Any sum deducted from salary payable to a government employee for the purpose of securing him a deferred
annuity (subject to a maximum of 20% of salary)

4. Contribution (not being repayment of loan) towards statutory provident fund and recognized provident fund.
5. Contribution (not being repayment of loan) towards 15-year public provident fund
6. Contribution towards an approved superannuation fund .
7. Subscription to National saving certificates, VIII Issue.
8. Contribution for participating in the Unit-Linked Insurance plane (ULIP) of unit trust of India
9. Contribution for participating in Unit-Linked Insurance plane (ULIP) of LIC Mutual Fund.
10. Payment for notified annuity plane if LIC or any other insurer.
11. Subscription towards notified units of Mutual Fund or UTI
12. Contribution to notified pension fund set up by mutual fund or UTI
13. Any Sum paid (including accrued interest) as subscription to home loan Account Scheme on the National
Housing Bank or contribution to any notified pension fund set up by the national Housing Bank.
14. Any sum paid as subscription to any scheme of
a. Public sector company engaged in providing long-term finance for purchase/construction on residential house in
India (i.e., public deposit scheme of HUDCO )
b. Housing board constituted in India for the purpose of planning development or improvemer of cities/towns
15. Any sum paid as tuition fees (not including any payment towards development fees/ donation payment of similar
nature ) whether at the time of admission or otherwise to any university college/educational institution in Indi for full
time education of any two children of the assesse.
16. Any payment paid the cost of purchase/construction of a residential property (including repayment of loan taken
from government bank co-operative bank, LIC, National Housing Bank, Assessees employer where such employer
is public compay/public sector company university/co-operative society )
17. Amount invested in approved debentures of, and equity shares in a public company engage in infrastructure
including power sector or units of a mutual fund proceeds which are utilized for the developing maintaining etc., of a
new infrastructure facility.
18. Amount deposited as term deposite for a period of 5 years or more in accordance with a schem framed by the
Government.
19. Subscription to any notified bonds of National Bank for Agriculture and Rural Development. (NABARD).
20. Amount deposited under senior citizens saving scheme.
21. Amount deposited in five-year time deposit scheme in post office.
Notes
I. Interest on NSC will be chargeable to the basis of annual accrual Moreover, the accrue interest for the first 5
years is deemed as re-investment and the same is entitled for deduction under section 80C.
II. Investment/deposits are qualified on payment basis.
Amount paid or deposited under an annuity plan of the LIC of India or any other insurer from receiving pensions, is
deductible in the hands of an individual. Amount should be paid or deposited out of income chargeable to tax.
Deduction cannot exceed Rs. 1 lakh. Moreover, the aggregate deduction under section 80C, 80CCC and 80CCD
cannot exceed Rs.1,00,000.
1. Employees contribution to the notified pension scheme is deductible in the year in which contribution is made.
However, no deduction is available in respect of employees contribution which is in excess of 10 percent of the
salary of the employee. If contribution is
made by a person (other than an employee) no deduction is available in respect of his contribution, which is I exees
of 10 percent of his gross total income.
2. Contribution by the employer to the notified pension scheme is deductible in the hands of the concerned employee
in the year in which contribution is made. However no deduction is available in respect of employers contribution,
which is in excess of 10 percent of the salary of the employee.

3. The aggregate amount of defuction under section 80C, 80CC and 80CCD cannot exceed Rs. 1,00,000.
4. The amounts standing to the credit of the assessee in the pension account for which a deduction has already been
claimed by him, and accretions to such account, shall be taxed as income in the year in which such amounts are
received by the assessee (or his nominee) on closure of the account or his opting out of the said scheme or on receipt
of pension from the annuity plan. If, however, the amount of pension received from the pension account is used for
purchasing an annuity plan in the same previous year, then it will be exempt from tax.
5. Salary includes dearness allowance, it the terms of employment so provide, but excludes all other allowances
and perquisites.
1. Deduction is available in respect of medi-claim insurance premium (health insurance premium) paid by an
individual/Hindu undivided family out of income chargeable to tax. The premium should not be paid in cash.
Any taxpayer can claim this deduction. Donation to the following is deductible from
gross total income (the amount is given in the last column)
Done
Maximum
Deduction(as a% of net
qualifying amount)
(1)
(2)
(3)
NA
100
a. National Defence Fund
NA

50

NA

50

NA

100

NA

100

NA

100

NA

50

NA

50

NA

50

NA

100

b. Jawaharlal Nehru
Memorial Fund
c. Prime ministers Drought
Relief Fund
d. Prime Ministers National
Relief Fund
e. Prime Ministers Armenia
Earthquake Relief Fund
f. Africa (Public
Contributions-India) Fund
g. National Childrens Fund
h. Indira Gandhi Memorial
Trust
i. Rajiv Gandhi Foundation
j. National Foundation for
Communal Harmony

NA

100

NA

100

NA

100

NA

100

NA

100

NA

100

NA

100

NA

100

NA

100

NA

100

k. An Approved
university/educational
institution
l. Maharashtra chief
Ministers Relief Fund
m. Any fund set up set up by
the Government of Gujarat
for providing relief to
victims of earthquake in
Gujarat
n. Zila Saksharta Samiti
o. National Blood
Transfusion Council and
state Council for Blood
Transfusion
p. Fund set up by a state
Government for the medical
relief to the poor
q. Central Welfare Fund of
the Army and Air Force and
the Indian naval Benevolent
Fund
r. Andhra Pradesh chiefs
ministers cyclone Relief
fund
s. National illness fund
t. Chief Ministers Relief
Fund or Lieutenant
Governors Relief Fund
NA
u. National Sports fund

100

or national cultural
Fund or Fund for
Technology
Development and
Application
As given below

50

As given below

50

As given below

50

As given below

50

As given below

100

v. Any other fund any

institution which
satisfies conditions
mentioned in section
80G(5)
w. Government or any
local authority to be
utilized for any
charitable purpose
other than the purpose
of promoting family
planning
x. Any authority
constituted in India by
(or under)any law
enacted either for the
purpose of dealing
with and satisfying the
need for housing
accommodation or for
the purpose of
planning, development
or improvement of
cities, town and
villages, or for both
y. Any corporation
specified in section
10(26BB) for
promoting interest of
minority community
z. Government or any
approved local
authority, institution or
association to be
utilized for the purpose
of promoting family
planning

As given below

100

NA

100

NA

100

As given below

50

aa. Indian Olympic

association or to an
institute notified by the
central government for
the development of
infrastructure for
sports and games in
India (only donation by
a company)
bb. Any trust institution
or fund to which
section 80G
(5C)applies for
providing relief victims
of earthquake in
Gujarat
cc. National trust for
welfare of persons with
Autism cerebral palsy,
mental Retardation
and multiple
Disabilities
dd. Any notified
temple, mosque,
gurdwara, church or
other place (for
renovation or repair)
Maximum Amount where the aggregate of the sums mentioned in (v),(w)(x)(y)(z)(aa)(dd) supra exceeds 10 per
cent of the adjusted gross total income, then the amount in excess of excess of 10 per cent of the adjusted gross total
income will be ignored while computing the aggregate of the sums in respect of which deduction is to be allowed.
Gross total incomes minus the following is adjusted gross total income
a. Amount deductible under section 80C to 80U (but not section 80G);
b. Such incomes on which income-tax is not payable;
c. Long-term capital gains;
d. Short-term capital gain which is taxable under section 111A at the rate of 15 per cent and
e. Incomes referred to in section 115A, 115AB, 115AC or 115AD.
1. The taxpayer is an individual.
2. The taxpayer is a self-employed person. Alternatively, the taxpayer is an employee but he does not get house rent
allowance from the employer at any time during the previous year.
3. The following persons should not own any residential accommodation at the place where the taxpayer resides,
performs the duties of his office, or employment or carries on his business or profession
a. The taxpayer;

b. His/her spouse;
c. His/her minor child (including minor step child and minor adopted child); and
d. The Hindu undivided family of which the taxpayer is a member .
4. If the taxpayer owns a residential accommodation at a place other the place noted above, then in respect of that
house the concession in respect of self-occupied property is not claimed by him.
5. The taxpayer files a declaration in form no. 10BA regarding the expenditure incurred by him towards payment of
rent.
The amount deductible under section 80GG is the least of the following
a. Rs. 2,000 per month;
b. 25 per cent of total income; or
c. The excess of actual rent paid over 10 per cent of total income .
total income for this purpose gross total income minus long-term capital gains, short term capital gains under
section 11A, deductions under section 80C to 80U (not being section 80GG) and income under section 115A.
An assessee (other than an assessee whose gross total income includes income chargeable under the head profits
and gains of business or profession ) is entitled to deduction in the computation of his total income in respect of
payment /donations for scientific research or rural development .
Amount of deduction 100 per deduction will be available for 10 consecutive assessment years out of 15 years
beginning from the year in which an undertaking lays and begins to operate the cross-country natural gas distribution
network.
the following conditions should be satisfied
1. the taxpayer is a developer of a special economic zone.
2. the gross total income of the taxpayer includes profits and gains derived by an undertaking from any business of
developing a special economic zone.
3. Such special economic zone is notified on or after April 1, 2005.
4. Deduction should be claimed in the return of income. return of income should be submitted on or before the due
date of submission of return of income. Books of account should be audited.
Amount of deduction 100 percent deduction is available in respect of the aforesaid profit . Deduction is available
for 10 consecutive assessment years. The deduction may be claimed, at the option of the taxpayer for any 10
consecutive assessment years out of 15 years beginning from the year in which the special economic zone has been
notified by the Central government. Amount of deduction - the amount of deduction is equal to 30 percent of
additional wages (i.e. wages paid to new regular workmen in excess of 100 workmen wmployed during the year)
paid the new regular workmen employeement is provided. No deduction is however, available if the increasing
number of reqular woekmen employed during the year is less than 10 per cent of th sexisting number of workmen
employed in the undertakin as on the last day of a preceding year.
ta scheduled bank/foreign bank having an offshore banking uit in aspecia; economic zone ; or a unit of International
financial services center can claim deduction under section 80 LA if a few conditions are satisfied Amount of
deductions 100 per cent of the aforesaid income for 5 year.
the whole of the amount of the profits attributable to specified activities in the case of a co-operation society is
allowable as deducting
the following conditions should be satisfied
1- the taxpayer is an individual resident in India.
2- he is an author or joint author
3- the book authored by him is work of literary, artistic or scientific nature however the books shall not include
brochures, commentaries, diaries, guides journals magazines, newspaper amphles text books for schools tracts and
other publications of similar nature by what ever name called.
4- the gross total income of the taxpayer includes the following
a. royalty or copyright fees (payable in jump sum or otherwise ) in respect of aforesaid book (it also includes
advance payment which is not returnable ); and

5- the taxpayer shall have to obtain a certificate in form no. 10CCD from the person responsible or paying the
income.
6- deduction should be claimed in the return
Amount of deduction the amount of royalty is deductible up to Rs. 3 Lakh Moreover for calculating deduction
under section 80QDB if rate of royalty is more than 15 percent , the excess amount shall be ignored.
The following conditions should be satisfied
1. The taxpayer is an individual and resident in India.
2. He is a patentee (he may be a co-owner of patent).
3. He is in receipt of any income by way of royalty in respect of patent, which is registered.
4. The taxpayer shall have to obtain a certificate in Form No. 10CCE from the person responsible for paying the
income.
5. Where the eligible income is earned outside India deduction is not available unless such income is brought into
India in convertible foreign exchange on or before September 30 of the assessment year. A certificate of foreign
inward remittance should be taken in form No. 10H from a prescribed authority (i.e., RBI or an authorized bank).
6. Deduction should be claimed in the return of income .
Amount of deduction the amount of royalty is deductible up to Rs. 3 lakh.
The following conditions should be satisfied
1. The taxpayer is an individual.
2. He is resident in India.
3. The taxpayer suffers 40 percent or more than 40 per cent if any disability (i.e., blindness, low vision, leprosycured, hearing impairment, loco motor disability, mental retardation, mental illness).
4. The taxpayer shall have to furnish a copy of the certificate issued by the medical authority.
Amount of deduction fixed deduction of Rs. 50,000 is available. A higher deduction of Rs. 1 lakh is allowed in
respect of a person with severe disability (i.e., having disability of 80 percent or above.)

TAXABLE INCOME- HOW COMPUTED

41. It is determined as followsa) First ascertain income under the different heads of income.
b) Income of other persons may be included in the income of the company under sections 60 and 61.
c) Current and brought forward losses should be adjusted according to the provisions of sections 70 to 80. Provisions
of sections 79 regarding set off and carry forward of losses of closing held companies are given in para 40.
d) The total of income computed under different heads is the gross total income.
e) From the gross total income so computed, the following deductions are permissible under sections 80C to 80U-

Assignment B
(10 Marks)

Q.1 How the incidence of tax depends upon Residential Status of an

Assesse?

Module I : Basic Concepts

BASIC CONCEPTS
ASSESSMENT YEAR

"Assessment year" means the period starting from April 1 and ending on March 31 of the next year. Income of
previous year of an assessee is taxed during the next following assessment year at the rates prescribed by the relevant
Finance Act.

PREVIOUS YEAR
Income earned in a year is taxable in the next year. The year in which income is earned is known as previous year
and the next year in which income is taxable is known as assessment year. Previous year is the financial year
immediately preceding the assessment year. All assessees are required to follow financial year (ie, April 1 to March
31) as the previous year. This uniform previous year has to be followed for all sources of income.
(3 Marks)

ACCRUAL OF INCOME
Income accrued in India is chargeable to tax in all cases irrespective of residential status of an assessee. The words
"accrue" and "arise" are used in contradistinction to the word "receive". Income is said to be received when it
reaches the assessee when the right to receive the income becomes vested in the assessee, it is said to accrue or
arise. INCOME DEEMED TO ACCRUE OR ARISE IN INDIA
In some cases, income is deemed to accrue or arise in India under section 9 even though it may actually accrue or
arise outside India. The cases enumerated by section 9 are given below
Income from business connection in India.
Income from any property, asset or source of income in India
Capital gain on transfer of a capital asset situated in India.
Income from salary if service is rendered in India
Income from salary (not being perquisite/allowance) if service is rendered outside India (provided the employer is
Government of India and the employee is a citizen of India)
Dividend paid by the Indian company (this point does not have much practical utility. Normally in the hands of the
shareholders, dividend from an Indian company is exempt from tax, as an Indian company has to pay dividend tax).
Interest, royalty or technical fees received from the Government of India.
Interest, royalty or technical fees received from a resident (except when the payment pertains to business carried on
by the payer outside India).

RESIDENTIAL STATUS AND TAX INCIDENCE

RESIDENTIAL STATUS OF A COMPANY [SEC.6 (3)]
An Indian company is always resident in India. A foreign company is resident in India only if, during the previous
year, control and management of its affairs is situated wholly in India. In other words, a foreign company is treated
as non resident if during the previous year , control and management of its affairs is either wholly or partly situated
out of India. The table given below highlights the same proposition-

RESIDENTIAL STATUS OF AN INDIVIUAL

The tables given below summarize the rule of residence for the assessment year 2009-10 :
Resident and ordinarily
Resident but not ordinarily Non- resident
Resident
Resident
(3)
(1)
(2)
Must satisfy at least one of Must satisfy at least one of Must satisfy none of the
the basic conditions and
the basic conditions and
basic conditions
both of the additional
one or none of the
conditions
additional conditions

BASIC CONDITIONS AT A GLANCE

In the case of an Indian

citizen who leaves India
during the previous year for
the purpose of employment
(or as a member of the crew
of an Indian ship )
(1)
a. Presence of at least 182
days in India during the
previous year 2008-09
b. Non- functional

In the case of an Indian

citizen or a person of Indian
origin ( who is abroad ) who
comes on a visit to India
during the previous year
(2)
a. Presence of at least 182
days in India during the
previous year 2008-09
b. Non - functional

In the case of an individual [

other than that mentioned in
columns (1) and (2)]
(3)

a. Presence of at least 182

days in India during the
previous year 2008-09
b. Presence of at least 60
days in India during the
previous year 2008-09 and
365 days during 4 years
immediately preceding the
relevant previous year (i.e.,
during April 1,2004 and
March 31,2008).

ADDITIONAL CONDITIONS AT AGLANCE

Taxpayers other than an individual

Hindu undivided
family
Firm
Association of
persons
Indian company
Non-Indian
company
Any other person
except an individual

Resident

Control and management of the affairs of

the taxpayers are
Wholly in Wholly outside Partly in India
and
India India partly outside India
Non-resident
Resident

Resident
Resident

Non-resident
Non-resident

Resident
Resident

Resident
Resident

Resident
Non-resident

Resident
Non-resident

Resident

Non-resident

Resident

i. Resident in India in at least 2 out of 10 years immediately preceding the relevant previous year
[ or must satisfy at least one of the basic conditions, in 2 out of 10 immediately preceding previous years (i.e., 199899 to 2007-08)].

ii. Presence of at least 730 days in India during 7 years immediately preceding the relevant previous year (i.e.,
during April 1, 2001 and March 31, 2008).
Notes:
1. A resident Hindu undivided family is either ordinarily resident or not ordinarily resident .A resident Hindu
undivided family is ordinarily resident in India if karta or manager of the family (including successive kartas )
satisfies the following two conditions as laid down by section 6(6)(b) :
(a) he has been resident in India in at least 2 out of 1 0 previous years immediately preceding the relevant previous
year; and

(b) he has been present in India for a period of 730 days or more during 7 years immediately preceding the previous
year. If karta or manager of resident Hindu undivided family does not satisfy the two additional conditions, the
family is treated as resident but not ordinarily resident in India.
2. In order to determine the residential status of the aforesaid taxpayers, the residential status of the karta of the
family (except as stated in 1 supra), partners of the firm, members of the association, directors of the company, etc.,
is not relevant. For instance, it is possible that partners of a firm are resident in India but the firm is controlled from a
place outside India and, consequently, the firm is a non-resident in India.

Q.2 How the tax planning with reference to new business is to be

done? (3 Marks)
Course Contents:
Module I: Basic Concepts
Introduction to Income Tax Act, 1961, Residential Status, Exempted Incomes of Companies. An overview of various provisions of
Business & profession & Capital gains applicable to companies
Module II: Assessment of Companies
Computation of taxable income, MAT , Set off & carry forward of losses in companies, Deductions from Gross total income
applicable to companies, Tax planning with reference to new projects/expansions/rehabilitation plans including mergers,
amalgamation or de-mergers of companies, Concept of avoidance of double taxation.

(a) any gains or profits immediately derived by the individual from any trade, business, profession or vocation
carried on or exercised by the individual either as an individual or in the case of a partnership as a partner personally
acting therein;
"trade" includes a business, and every trade, manufacture, adventure or concern in the nature of a trade or business;
(c) gains or profits from any other trade or business;
The industrial undertaking should not have been formed by the transfer of a new business of machinery or plant
previously used for any purpose [there are two exceptions like 20 per cent old machinery and imported old
machinery].
3. The aforesaid business should be a new business (i.e., not set up by splitting up, o reconstruction of. of an existing
business ).
6. the undertaking should not be formed by way of reconstruction or splitting up or by transfer to a new business of
old plant and machinery (subject to certain exceptions).
1. The business of the hotel is not formed by the splitting up, or the reconstructing of a business already in existence
or by the transfer to a new business of a building previously used as a hotel or of any machinery or plant previously
used for any purpose.
2. The business of the multiplex theatre is not formed by the splitting up or the reconstruction, of a business already
in existence or by the transfer to a new business of any building or of my machinery or of plant previously used for
any purposes.
2. The convention centre is not formed by the splitting up, or the reconstruction, of a business already in existence or
by the transfer to a new business of any building or of any machinery or plant previously used for any purpose.
4. The aforesaid business is not formed by the splitting up or the reconstruction of a business already in existence. it
is nor formed by the transfer to a new business of machinery or plant previously used for any purpose.
TAX PLANNING WITH REFERENCE TO A NEW BUSINESS- LOCATION OF A BUSINESS
LOCATION OF NEW BUSINESS
57. Many factors affect location of a business. The following tax incentives are available under
the act:-

1. Under section 10A in the case of a newly established industrial undertakings in free trade
zones .
2. Under section 10AA in the case of newly established unites in special economic zone
3. Under section 10B in the case of a newly established hundred percent export oriented
undertakings
4. Under section 10BA in respect of artistic hand made wooden articles
5. under section 80-IA in respect of profits and gains from industrial undertaking or enterprises
engaged in infrastructure development, etc.
6. Under section 80-IAB in respect of profits and gains by an undertaking or enterprise engaged
in development of special economic zone .
7. Under section 80-IB in respect of profits and gains from certain industrial undertakings other
than infrastructure development undertakings .
8. Under section 80-IC in respect of profits and gains of certain undertakings in certain special
category of states .
9. Under section 80-ID in respect of profits and gains of hotels and convention centre in NCR.
10. Under section 80-IE in respect of profits and gains of certain undertakings in North eastern
states .

TAX PLANNING WITH REFERENCE TO NEW BUSINESS NATURE OF NEW BUSINESS

NATURE OF NEW BUSINESS
69. Many incentives are available under the act which are directly co-related in the nature of
business. Some of these incentives are as follows :i. Newly established industrial undertaking in free trade zones ( Sec. 10A )
ii. Exemption in the case of units in special economic zones ( Sec. 10AA )
iii. Newly established hundred percent export-oriented undertakings ( Sec. 10B)
iv. Export of artistic handmade wooden articles ( Sec. 10BA)
v. Tea development account ( Sec. 33AB)
vi. Telecommunication services ( Sec. 35ABB)
vii. Special provision for deduction in the case of business for prospecting for mineral oil ( Sec. 42
and 44BB)
viii. Special provisions for computing profits and gains for business of civil construction ( Sec.
44AD)
ix. Special provisions in the case of business of plying , hiring , or leasing goods carriages ( Sec.
44AE)
x. Special provisions for computing profits and gains of retail business ( Sec. 44AF)
xi. Profits and gains from industrial undertakings engaged in infrastructure, etc
( Sec. 80-IA)
xii. Profits and gains by an undertaking or enterprise engaged in development of
Special economic zone ( Sec. 80-IAB)
xiii. Profits and gains from certain industrial undertakings other than infrastructure
Development undertakings ( Sec. 80-IB)
xiv. Profits and gains of certain undertakings in certain special category of states
( Sec. 80-IC)
xv. Deduction in respect of employment of new workmen ( Sec. 80JJAA)
xvi. Tonnage Tax Scheme ( Secs, 115V to 115VZC)
70. An Assessee can claim deduction under section 33AB as follows :-

SPECIFIED BUSINESS SHOULD BE NEW BUSINESS

71.1-2 The specified business should not be set up by splitting up, or the reconstruction, of a
business already in existence. Moreover, it should not be set up by the transfer of old plant and
machinery.

20 percent old machinery is permitted- If the value of the transferred assets does not exceed 20
percent of the total value of machinery or plant used in the business, this condition is deemed to
have been satisfied.
Second-hand imported machinery is treated as new- Any new machinery or plant which was used
outside India by any person (other than the assessee) shall not be regarded as machinery or
plant previously used for the purpose, if the following conditions are fulfilled1. Such machinery or plant was not, at any time previous to the date of the installation by the
assessee, used in India.
2. Such machinery or plant is imported into India from any country outside India.
3. No deduction on account of depreciation in respect of such machinery or plant has been
allowed or is allowable under the act in computing the total income of any person for any period
prior to the date of the installation of the machinery or plant by the assessee.
TAX PLANNING WITH REFERENCE TO NEW BUSINESS - FORM OF ORGANISATION
86. among other considerations(like requirement of finance ,personal liability of owner ,level of operation, quantum
of profit, specified requirement of technical expertise),tax incentives play important role while comparing tax
liability under different organisation forms.
WHETHER SOLE PROPRIETORSHIP IS A BETTER ALTERNATIVE
87. Aggregate amount of tax liability on firm and partners is generally higher that of the case when the same amount
of income is generated through sole proprietorship. One should therefore consider the possibility of converting firms
into sole proprietorships. The same is evident from the case studies given below:

Q.3 Telco Ltd., a company incorporated and managed in South Africa

and engaged in telecommunication services, is going to invest in
China. Its Chinese operations will be both manufacturing and
providing services. Telco intends to penetrate the Chinese market
for telecommunication and according to some market research
carried out before, the operations will be highly profitable within a
couple of years.
How to structure Telco's investment in a tax effective manner?
(4 Marks)

Assignment C
(10 Marks)

Each question given below carry equal marks of 0.25

(i.e 0.25*40 = 10 Marks)
Q.1

A domestic company is always a company in which the public are substantially interested (a) True
(b) False
(c) None of the above

(d) True in some cases.

Q.2

A private limited company can never be a company in which

the public are substantially interested
(a)
(b)
(c)
(d)

Q.3

A company registered in the UK and makes arrangement for

payment of dividend in India is not a domestic company
(a)
(b)
(c)
(d)

Q.4

True
False
True in some cases
None of the above

True
False
True in some cases
None of the above

A company is said to be resident of a particular company if

(a)Control and management of the affairs of a company is
situated wholly in that particular country.
(b)Control and management of the affairs of a company is
situated outside that particular country.
(c) Control and management of the affairs of a company is
situated partly in that particular country and partly
outside that particular country.
(d) All of the above

Q.5

X Ltd. a foreign company manages its affairs partly from

India and partly outside India. X Ltd. is said to be
(a)
(b)
(c)
(d)

Q.6

Resident in India
Non-Resident in India.
Resident and Ordinary Resident in India,
Resident but not ordinary Resident in India.

A company owning the following hotels can claim deduction

under section 80-ID
(a)A 5 star hotel in X ( a place ).
(b)A 4 star hotel in Y ( a place ).
(c)A 3 star hotel in Z ( a place ).
(d)All of the above.

Q.7

A company is qualified to claim deduction under section 80-IB.

By mistake the deduction was not claimed in the return in the
return of income. However, the company claims the before the
Assessing Officer at the time of assessment under section 143(3)

(a)Deduction will be allowed by the assessing officer.

(b)Deduction will not be allowed by the assessing officer.
(c)Deduction will be allowed by the assessing officer, if the
Commissioner of Income-tax permits.
(d)Deduction will be allowed by the assessing officer, if the
it is permitted by the Chief Commissioner.
Q.8

A Government company cannot claim any deduction under

section 10A, 10AA and 10B
(a)True
(b)False
(c)None of the above
(d)True in some cases.

Q.9

A limited liability partnership owns an infrastructure facility. It can claim deduction under section
80-IA
(a)True
(b)False
(c)True in some cases
(d)None of the above

Q.10

Only a company(not a limited liability partnership) can claim deduction under section 10A, 10AA,
and 10B
(a)True
(b)False
(c)True in some cases
(d)None of the above

Q.11

Deduction under section 80JJJA is available in the following cases

(a)Indian Company
(b)Foreign Company
(c)Limited Liability Partnership.
(d)All of the above

Q.12

Tonnage tax scheme is applicable in the following cases

(a)Foreign Shipping Company,
(b)Indian Shipping Company,
(c)Limited liability partnership in shipping industry.
(d)All of the above

Q.13

A company will pay dividend tax if

(a)Bonus shares are allotted to equity shareholder.

(b)Bonus shares are allotted to preference shareholders,

(c)Shares are allotted to debenture holders free of cost.
(d)Shares are allotted to employees as ESOP shares free of
cost.
Q.14

Corporate taxation does not play any significance role in determining the choice between different
sources of finance
(a)True
(b)False

Q.15

A Company want to purchase a plant (cost: Rs. 80 crore).It can out rightly purchase it. Alternatively,
it can take the plant on lease. The following factors are taken into consideration to find out which
one is better
(a) Corporate tax rate;
(b) Corporate rate and depreciation rate;
(c) Corporate tax rate, depreciation rate, lease rent, cost of
capital and useful life of plant;
(d) None of the above.

Q.16

If corporate tax rate is reduced the tax saving on account of depreciation will increase (a) True
(b) False
(c) True in some cases
(d) None of the above

Q.17

If rate of depreciation is reduced the tax saving on account of

depreciation will increase (a) True
(b) False
(c)True in some cases
(d)None of the above

Q.18

If borrowed funds are used for purchase of a plant and tax rates are reduced, the tax saving will
increase (a) True
(b) False
(c) True in some cases
(d) None of the above

Q.19

Depreciation is not available in the case of machine acquired under higher purchase
(a) True
(b) False
(c) True in some cases
(d) None of the above

Q.20

X Limited is considering a proposal to manufacture a component itself or purchase from market. No

fresh investment in plant and machinery will be required if it decides to manufacture the component

within its factory. Total Variable Cost of manufacturing is $ 74 per unit of component. Net fixed cost
of use of plant and machinery comes to $ 20 per unit of component. The component is available in
market at $ 79 per unit of component. It is better to purchase the component from market(a) True
(b) False
(c) True in some cases
(d) None of the above
Q.21

Y Limited has an option to purchase a machine out of own funds or alternatively a bank can finance
it. At the current rate of corporate tax, the tax saving in the later option is higher. If the corporate tax
rate is reduced, the second option will become less attractive(a) True
(b) False
(c) True in some cases
(d) None of the above

Q.22

In case of demerger, accumulated loss and unabsorbed

depreciation of the
demerged company will be(a)Carried forward in the hands of demerged companies.
(b)Carried forward and set off in hands of resulting

companies.

(c) Set off in the hands of demerged companies.

(d) None of these.
Q.23

Amalgamation and demerger are considered as(a) Same terms always.

(b) Distinct terms always
(c) Same terms in certain cases.
(d) Distinct terms in certain cases.

Q.24

Net wealth is calculated as(a)

(b)
(c)
(d)

Q.25

Assets chargeable to wealth tax less the exempted assets

Assets chargeable to wealth tax less debt owned
Assets less debt owned
Assets less exempted assets

Wealth tax is chargeable

(a) @ 2% of the net wealth exceeding Rs. 30 Lakhs
(b) @ 1% of the net wealth exceeding Rs. 30 lakhs
(c) @ 1% of the entire net wealth provided it exceeds Rs. 30,00,000.
(b) @ 2% of the entire net wealth provided it exceeds Rs. 30,00,000.

Q.26

Wealth tax is payable if the net wealth of the assesee

(a) Exceeds Rs. 250,000

(b) Is Rs. 30,00,000 or more
(c) Exceeds Rs. 30,00,000
(d) None of the above
Q.27

A firm is
(a) Not liable to wealth tax
(b) Liable to wealth tax
(c) Not liable to wealth tax but partners share in the value of the assests of the firm shall be included
in the net wealth of the partner
(d) All of the above

Q.28

Asset held by a minor child is included in the net wealth of the

(a)Father
(b)Mother
(c)Father or mother whose net wealth before clubbing is
greater.
(d)Father or mother whose net wealth before clubbing is lesser.

Q.29

An assessee is one who pays the wealth tax, an assesse belongs

to which of the following category?
(a) A company
(b) HUF
(c) A dead persons legal representative, the executor or
(d)All of the above

Q.30

A house is not treated as an asset if

(a)
(b)
(c)
(d)

Q.31

administrator

it is meant exclusively for residential purposes

house held as stock-in-trade
house used for own business or profession
all of the above

VAT WAS FIRST INTRODUCED AS A TAX IN THE YEAR:-

(A) 1919
(B) 1921
(C ) 1948
(D) 1954
Q.32 VAT WAS FIRST INTRODUCED BY THE:(A) FRANCE
(B) GERMANY

(C ) USA
(D) UK
Q.33 WHICH IS MOST COMMON VARIANT OF VAT USED WORLD WIDE:(A) GROSS PROFIT VARIANT
(B) CONSUMPTION VARIANT
(C ) GROSS PRODUCT VARIANT
(D) GROSS INCOME VARIANT
Q.34 TIN MEANS:(A) TAX INFORMATION NUMBER
(B) TAX INDIA NUMBER
(C ) TAX IDENTIFICATION NUMBER
(D) TAX INTRODUCTION NUMBER
Q. 35 VAT INTRODUCTION WILL CERTAINLY:(A) MAKE THE REVENUE COLLECTION WORST.
(B) MAKE THE REVENUE COLLECTION BETTER.
(C ) THE REVENUE COLLECTION ARE THE SAME.
(D) REVENUE VOLUME HAS NOTHING TO DO WITH
INTRODUCTION OF VAT
Q.36 THE ACCOUNTING UNDER THE VAT WILL BE:(A) REGULAR AND CHEAP.
(B) REGULAR AND EXPENSIVE
(C) IRREGULAR AND CHEAP.
(D) IRREGULAR AND EXPENSIVE
Q.37 TO CLAIM THE INPUT CREDIT OF TAX PAID WHAT IS MOST IMPORTANT DOCUMENT:(A) PERMISSION OF THE SALES TAX AUTHORITY.
(B) PROPER VAT INVOICE
(C ) CASH BOOK
(D) LEDGER

Q.38 WHICH IS MOST COMMON VARIANT OF VAT USED WORLD WIDE:(A) GROSS PROFIT VARIANT
(B) CONSUMPTION VARIANT
(C ) GROSS PRODUCT VARIANT

(D) GROSS INCOME VARIANT

Q.39

DUE TO INTRODUCTION OF VAT:-

(A) TAX EVASION IS RESTRICTED.

(B) TAX EVASION IS INCREASED.
(C ) VAT HAS NOTHING TO DO WITH EVASION OF TAX.
(D) TAX EVASION HAS BECOME EASY.
Q.40 THE ACCOUNTING UNDER THE VAT WILL BE:(A) REGULAR AND CHEAP.
(B) REGULAR AND EXPENSIVE
(C) IRREGULAR AND CHEAP.
(D) IRREGULAR AND EXPENSIVE