GST (Goods and Service Tax) Composition Scheme: An optional composition scheme (i.e.

Composition Scheme: An optional composition scheme (i.e. to pay tax at a flat rate on turnover without credits) is
A just and viable tax regime is vital for the sustainable economic growth and fiscal consolidation of any economy in available to small taxpayers (including to manufacturers other than specified category of manufacturers and service
the world. providers) having an annual turnover of up to Rs. 1 crore (Rs. 75 lakh for special category States (except J&K and
The introduction of GST is truly a game changer for Indian economy as it has replaced multi- layered, complex indirect tax Uttarakhand) enumerated in article 279A of the Constitution). This limit shall be raised to Rs. 1.5 crore after necessary
structure with a simple, transparent and technology–driven tax regime. It will integrate India into a single, common amendments in the GST Acts.
market by breaking barriers to inter- State trade and commerce. By eliminating cascading of taxes and reducing transaction Zero rated Supplies: Export of goods and services are zero rated. Supplies to SEZs developers and SEZ units are also
costs, it will enhance ease of doing business in the country and provide an impetus to “Make in India” campaign. GST zero-rated. The benefit of zero rating can be taken either with payment of integrated tax, or without payment of integrated tax
will result in “ONE NATION, ONE TAX, ONE MARKET”. under bond or Letter of Undertaking.
At the central level GST subsume Central Excise Duty, Additional Excise Duty, Service Tax, Additional Customs Duty Cross-utilization of ITC: IGST credit can be used for payment of all taxes. CGST credit can be used only for paying CGST
(Countervailing Duty), and Special Additional, Duty of Customs. At the State level, Subsuming of State Value Added or IGST. SGST credit can be used only for paying SGST or IGST.
Tax/ Sales Tax, Entertainment Tax, Central Sales of Tax, Octroi and Entry Tax, Purchase Tax, Luxury tax, Taxes on The credit would be permitted to be utilized in the following manner:
lottery, betting and gambling. (a) ITC of CGST allowed for payment of CGST & IGST in that order; (b) ITC of
For this, The important changes introduced in the Constitution by 101th Amendment are : SGST allowed for payment of SGST & IGST in that order;
(c) Insertion of new article 246A which makes enabling provisions for the Union and States with respect to the GST (c) ITC of UTGST allowed for payment of UTGST & IGST in that order;
legislation. It further specifies that Parliament has exclusive power to make laws with respect to GST on inter- (d) ITC of IGST allowed for payment of IGST, CGST & SGST/UTGST in that order.
State supplies. ITC of CGST cannot be used for payment of SGST/UTGST and vice versa.
(d) Article 268A of the Constitution has been omitted. The said article empowered the Government of India to levy Settlement of Government Accounts: Accounts would be settled periodically between the Centre and the State to
taxes on services. As tax on services has been brought under GST, such a provision was no longer required. ensure that the credit of SGST used for payment of IGST is transferred by the originating State to the Centre.
(e) Article 269A has been inserted which provides for goods and services tax on supplies in the course of Similarly, the IGST used for payment of SGST would be transferred by Centre to the destination State. Further the SGST
inter-State trade or commerce which shall be levied and collected by the Government of India and such tax portion of IGST collected on B2C supplies would also be transferred by Centre to the destination State. The transfer of
shall be apportioned between the Union and the States in the manner as may be provided by Parliament by funds would be carried out on the basis of information contained in the returns filed by the taxpayers.
law on the recommendations of the Goods and Services Tax Council. It also provides that Parliament may,
by law, formulate the principles for determining the place of supply, and when a supply of goods, or Modes of Payment: Various modes of payment of tax available to the taxpayer including internet banking, debit/
of services, or both takes place in the course of inter-State trade or commerce. credit card and National Electronic Funds Transfer (NEFT) / Real Time Gross Settlement (RTGS).
(f) Article 270 has been amended to provide for distribution of goods and services tax collected by the Union
between the Union and the States. Impact of GST : Major Benefits to the
(g) Article 271 has been amended which restricts power of the Parliament to levy surcharge under GST. In Economy As A Whole:
effect, surcharge cannot be imposed on goods and services which are subject to tax under Article 246A. • The present scenario of differing tax rates in different states obstructs cooperative federalism.
(h) Article 279A has been inserted to provide for the constitution and mandate of GST Council. GST will bring uniformity and also deplete the cascading consequence of these taxes by giving input tax credit,
Goods and Services Tax (GST) is a reformatory legislation which is a single tax on the supply of goods and services, having a comprehensive tax inclusion with minimum exceptions which will in turn help the Industry to benefit from the
right from the manufacturer to the consumer. Credits of input taxes paid at each stage will be available in the subsequent stage proposed common procedures and claim credit for the tax paid.
of value addition , which makes GST essentially a tax only on value addition at each stage. The final consume will thus bear • GST is expected to increase the mobilization of resources available for property alleviation and development of the country.
only the GST charged by the last dealer in the supply chain with set-off benefits at all the previous stages. This will take place in two ways: (a) directly the resources available to the poorer states will increase substantially; (b)
For example, suppose a person wants to buy a shirt. Now in order to determine the price of the shirt, we need to start from the indirectly as the tax base becomes more buoyant.
very first step i.e. purchase of raw material. • The common base and common rates across goods and services and very similar rates across Centre and States will
Raw material was purchased for say Rs. 100 (inclusive of ₹10 as tax). A value of Rs. 50 is added to it by the manufacturer. result in effective administration and increase compliance while also ensuring the better management of taxes collected in the
This good is sold to wholesaler at Rs. 150 (10% Tax on 150 is 15 but Rs. 10 is already calculated on raw material State.
,so effective tax set aside at this stage is only RS. 5(Rs. 15-Rs. 10). Now the wholesaler adds his margin of ₹20 to it and sells it Also, there is a provision to maintain the requisite fiscal autonomy to the States with the
to the retailer at Rs. 170(10% tax on Rs. 170 is 17 but 15 is already set aside, so effective tax set aside at this stage us Rs. 2). power to levy additional excise taxes on certain “sin” goods like, tobacco, alcohol, etc.
Retailer then adds his margin of Rs. 20 more and sells this good to the consumer at Rs. 209 (inclusive of all earlier taxes • The complicated tax-levy system categorized by distortions between States and Cente which divides the country into
viz. Rs. 10+Rs. 5+Rs. 2+Rs. 2 {10%tax set aside on retailer stage}). separate economic zones with the help of GST will become one common national market.
Hence the good costs Rs. 209 to the consumer which includes Rs. 19 paid as tax. This impedes the Make in India process which will get a boost through GST as it is making tax compliance easier and
THE DESIGN OF INDIAN GST: removing ambiguity and at the same time as GST will be applied on imports, domestic manufacturing would be encouraged.
Concurrent dual model of GST: India has adopted dual GST model because of its unique federal nature. Under this model, • Tax Governance will get a positive boost through this regime, mainly, through the feature of input tax credit.
tax is levied concurrently by the Centre as well as the States on a common base, i.e. supply of goods or services or To claim input tax credit, each dealer has an incentive to request documentation from the dealer behind him in the tax
both. GST to be levied by the Centre would be called Central GST (Central tax / chain which will ensure tax compliance. Also this would further require producers to buy materials from registered dealers and
CGST) and that to be levied by the States would be called State GST (State Tax / SGST). State GST (State Tax / SGST) therefore will bring in more and more vendors in the taxation net.
would be called UTGST (Union territory tax) in Union Territories without legislature. CGST & SGST / UTGST shall be Furthermore, the dual monitoring structure of the GST by both Centre and State will make tax evasion more prone to detection.
levied on all taxable intra- State supplies. • There will be reduction in prices of goods as taxes would now be exempted from the production cost and at the
Tax Rates: Owing to unique Indian socio-economic milieu, four rates namely 5%, 12%, 18% and 28% have been adopted. same time it will put better goods and services within the reach of a larger number of the populace and as such increase the
Besides, some goods and services are exempt also. Rate for precious metals is an exception to „four-tax slab-rule‟ and living standards of the country.
the same has been fixed at 3%. In addition, unworked diamonds, precious stones, etc. attracts a rate of 0.25%. A cess over the • The successful implementation of GST give a strong signal to the foreign investors about India‟s increased
peak rate of 28% on certain specified luxury and demerit goods, like tobacco and tobacco products, pan masala, creditworthiness, lesser compliance and procedural costs in the taxation sphere and remove the complexities faced by
aerated water, motor vehicles is imposed to compensate States for any revenue loss on account of implementation of GST. The the foreign investors who were reluctant to invest in consonance with the existence of virtual economic zones throughout
list of goods and services in case of which reverse charge would be applicable has also been notified. the country.
Compensation to States: The Goods and Services Tax (Compensation to States) Act, 2017 provides for compensation GST: A GAME CHANGER FOR INDIAN ECONOMY:
to the States for the loss of revenue arising on account of implementation of the goods and services tax. Compensation GST will have a multiplier effect on the economy with benefits accruing to various sectors as discussed below.
will be provided to a State for a period of five years from the date on which the State brings its SGST Act into force. For the Benefits to the exporters: The subsuming of major Central and State taxes in GST, complete and comprehensive setoff of input
purpose of calculating the compensation amount in any financial year, year 2015-16 will be assumed to be the base year, for goods and services and phasing out of Central Sales Tax (CST) would reduce the cost of locally manufactured goods and
calculating the revenue to be protected. The growth rate of revenue for a State during the five-year period is assumed be 14% services. This will increase the competitiveness of Indian goods and services in the international market and give boost to
per annum. The base year tax revenue consists of the states‟ tax revenues from: (i) state Value Added Tax (VAT), (ii) central Indian exports. The uniformity in tax rates and procedures across the country will also go a long way in reducing the
sales tax, (iii) entry tax, octroi, local body tax, (iv) taxes on luxuries, (v) taxes on advertisements, etc. However, any compliance cost.
revenue among these taxes arising related to supply of alcohol for human consumption, and five specified petroleum Benefits to small traders and entrepreneurs: GST has increased the threshold for GST
products, will not be accounted as part of the base year revenue. registration for small businesses. Those units having aggregate annual turnover more than Rs
Concept of Supply: GST would be applicable on supply of goods or services as against the present concept of tax on 20 lakhs (10 lakhs in case of North Eastern States) have be registered under GST. Unlike multiple registrations under
manufacture of goods or on sale of goods or on provision of services. It includes all sorts of activities like different tax regimes earlier, a single registration is needed under GST in one State. An additional benefit under Composition
manufacture, sale, barter, exchange, transfer etc. It also includes supplies made without consideration when such scheme has also been provided for businesses with aggregate annual turnover upto Rs 1 crore. With the creation of a
supplies are made in certain specified situations. seamless national market across the country, small enterprises will have an opportunity to expand their national footprint
Threshold Exemption: A common threshold exemption would apply to both CGST and SGST. Taxpayers with an with minimal investment.
annual turnover of Rs. 20 lakh (Rs. 10 lakh for special category States (except J&K) as specified in article 279A of the Benefits to agriculture and Industry: GST will give more relief to industry, trade and agriculture through a more
Constitution) would be exempt from GST. The GST Act is being amended to raise threshold exemption limit in case of six comprehensive and wider coverage of input tax set-off and service tax set-off, subsuming of several Central and State taxes in
more special category States. The benefit of threshold exemption is not available in inter-State supplies of goods.
the GST and phasing out of CST. The transparent and complete chain of set-offs which will result in widening of tax base and The argument extended by most of the corporate houses is that, it leads to double taxation. Dividend is nothing but distribution of
better tax compliance may also lead to lowering of tax burden on an average dealer in industry, trade and agriculture. profit of the companies. It is after paying income-tax on the profits earned by the companies, that the profit is distributed among
Benefits for common consumers: With the introduction of GST, the cascading effects of CENVAT, State VAT and shareholders. Dividend distribution tax is further levied on the profits distributed to the shareholders of a company.
service tax will be more comprehensively removed with a continuous chain of set-off from the producer‟s point to The profits of a company are supposed to be the income of shareholders. This way they as part owners i.e. the shareholders have
the retailer‟s point than what was possible under the prevailing CENVAT and VAT regime. Certain major Central and already been taxed. Dividend distribution tax thus amounts to double taxation; the fact that the companies in India are already
State taxes will also be subsumed in GST and CST will be phased out. Other things remaining the same, the burden of tax on paying high corporate tax on these profits further deteriorates the condition of the shareholders. Here the company is assessed for
goods would, in general, fall under GST and that would benefit the consumers. both the taxes but it's been upheld in a catena of cases that “the principle of Income Tax Act is to charge the income with tax but in
P romote “Make in India ”: GST will help to create a unified common national market for India, giving a boost the hands of the same person only once”. The same income cannot be assessed under two different heads.
to foreign investment and “Make in India” campaign. It will prevent cascading of taxes and make products cheaper, thus CAPITAL AND REVENUE RECEIPTS
boosting aggregate demand. It will result in harmonization of laws, procedures and rates of tax. It will boost export and Since the subject matter of income-tax is ―income, as a matter of general rule and except for those which are specifically exempt
manufacturing activity, generate more employment and thus increase GDP with gainful employment leading to substantive under the Income-tax Act, all revenue receipts are taxable. A capital receipt is taxable, subject to the other provisions of the Act, if
economic growth. Ultimately it will help in poverty eradication by generating more employment and more financial it falls within the purview of Section 45.
resources. More efficient neutralization of taxes especially for exports thereby making our products more competitive Certain capital receipts which have been specifically included in the definition of income are compensation for modification or
in the international market and give boost to Indian Exports. It will also improve the overall investment climate in the country termination of services, income by way of capital gains etc.
which will naturally benefit the development in the states. Uniform CGST & SGST and IGST rates will reduce the It is not possible to lay down any single test as infallible or any single criterion as decisive, final and universal in application to
incentive for evasion by eliminating rate arbitrage between neighboring States and that between intra and inter-State determine whether a particular receipt is capital or revenue in nature. Hence, the capital or revenue nature of the receipt must be
supplies. Average tax burden on companies is likely to come down which is expected to reduce prices and lower prices mean determined with reference to the facts and circumstances of each case.
more consumption, which in turn means more production thereby helping in the growth of the industries. This will create India Distinction between capital and revenue receipts
as a “Manufacturing hub”. The following are some of the important criteria which may be applied to distinguish between capital and revenue receipts.
Ease of Doing Business: Simpler tax regime with fewer exemptions along with reduction in multiplicity of taxes that are at Fixed capital or Circulating capital: A receipt referable to fixed capital would be a capital receipt whereas a receipt referable to
present governing our indirect tax system will lead to simplification and uniformity. Reduction in compliance costs as circulating capital would be a revenue receipt. The former is not taxable while the latter is taxable. Tangible and intangible assets
multiple record-keeping for a variety of taxes will not be needed, therefore, lesser investment of resources and manpower in which the owner keeps in his possession for making profits are in the nature of fixed capital. The circulating capital is one which
maintaining records. It will result in simplified and automated procedures for various processes such as registration, is turned over and yields income or loss in the process.
returns, refunds, tax payments. All interaction shall be through the common GSTN portal, therefore, less public interface Income from transfer of capital asset or trading asset: Profits arising from the sale of a capital asset are chargeable to tax as capital
between the taxpayer and the tax administration. It will improve environment of compliance as all returns to be filed online, gains under section 45 whereas profits arising from the sale of a trading asset being of revenue nature are taxable as income from
input credits to be verified online, encouraging more paper trail of transactions. Common procedures for registration business under section 28 provided that the sale is in the regular course of assessee‟s business or the transaction constitutes an
of taxpayers, refund of taxes, uniform formats of tax return, common tax base, common system of classification of goods adventure in the nature of trade.
and services will lend greater certainty to taxation system. Capital Receipts vis-a-vis Revenue Receipts: Tests to be applied
(1) Transaction entered into the course of business: Profits arising from transactions which are entered into in the course
Dividend Distribution Tax or Corporate dividend tax : of the business regularly carried on by the assessee, or are incidental to, or associated with the business of the assessee would be
A domestic company shall in addition to the income-tax chargeable in respect of the total income be liable to pay tax o revenue receipts chargeable to tax.
distributed profits @15% (plus 12% surcharge and EC & SHEC @3%) of any amount declared, distributed or paid by such For example, a banker‟s or financier‟s dealings in foreign exchange or sale of shares and securities, a shipbroker‟s purchases of
company by way of dividends(whether interim or otherwise) (other than dividends referred under section 2(22)(e)) ship in his own name, a share broker‟s purchase of shares on his own account would constitute transactions entered and
whether out of current or accumulated profits. yielding income in the ordinary course of their business. Whereas building and land would constitute capital assets in the hands of
Dividends received from subsidiary company to be reduced from dividend to be distributed [Section 115-O(IA)] a trader in shares, the same would constitute stock-in-trade in the hands of a property dealer.
Meaning of subsidiary company: A company shall be a subsidiary of another company, if such other company, holds more than (2)Profit arising from sale of shares and securities: In the case of profit arising from the sale of shares and securities the nature of
half in nominal value of the equity share capital of the company. the profit has to be ascertained from the motive, intention or purpose with which they were bought. if the shares were acquired as
Net distributed dividend to be grossed up for calculating DDT: For the purpose of determining the tax on distributed an investor or with a view to acquiring a controlling interest or for obtaining a managing or selling agency or a directorship the
profits payable in accordance with this section, any amount by way of dividends referred to in Section 115-O(1) as reduced by profit or loss on their sale would be of a capital nature; but if the shares were acquired in the ordinary course of business as a
the amount referred to in Section 115-O(1A) [hereafter referred to as net distributed profits], shall be increased to such dealer in shares, it would constitute his stock-in-trade. If the shares were acquired with speculative motive the profit or loss
amount as would, after reduction of the tax on such increased amount at the rate specified in Section 115-O(1), be equal (although of a revenue nature) would have to be dealt with separately from other business.
to the net distributed profits. (3)A single transaction - Can it constitute business? : Even a single transaction may constitute a business or an adventure in the
Gross Dividend = Net Dividend x 100/[100-(Rate of DDT i.e. 15) nature of trade even if it is outside the normal course of the assessee‟s business. Repetition of such transactions is not necessary.
Notwithstanding that no income-tax is payable by a domestic Company on its total income computed in accordance Thus, a bulk purchase followed by a bulk sale or a series of retail sales or bulk sale followed by a series of retail purchases would
with the provisions of this Act, the tax on distributed profits, shall be payable by such company. constitute an adventure in the nature of trade and consequently the income arising therefrom would be taxable. Purchase of any
Time limit for deposit of dividend distribution tax: The principal Officer of the domestic company and the company article with no intention to resell it, but resold under changed circumstances would be a transaction of a capital nature and capital
shall be liable to pay the tax on distributed profits to the credit of the Central Government within 14 days from the date of – gains arise. However, where an asset is purchased with the intention to resell it, the question whether the profit on sale is capital or
(i) Declaration of any dividend; or (ii) Distribution of any dividend; or (iii) Payment of any dividend, revenue in nature depends upon (i) the conduct of the assessee, (ii) the nature and quantity of the article purchased, (iii) the nature
Whichever is earliest. of the operations involved, (iv) whether the venture is on capital or revenue account, and (v) other related circumstances.
Dividend distribution tax is final levy: The tax on distributed profits so paid by the company shall be treated (4)Liquidated damages: Receipt of liquidated damages directly and intimately linked with the procurement of a capital asset,
as the final payment of tax in Respect of the amount declared, distributed or paid as dividends and no further credit therefore which lead to delay in coming into existence of the profit- making apparatus, is a capital receipt. The amount received by the
shall be claimed by the company or by any other Person in respect of the amount of tax so paid. assessee towards compensation for sterilization of the profit earning source is not in the ordinary course of business. Hence, it is a
Dividend distribution tax is not deductible: No deduction under any other provision of this Act shall be allowed to the capital receipt in the hands of the assessee.
company or a Shareholder in respect of the amount on which dividend distribution Tax has been charged to tax or the tax (5)Compensation on termination of agency: Where an assessee receives compensation on termination of the agency business
thereon. being the only source of income, the receipt is a capital nature, but taxable under section 28(ii)(c). However, where the assessee
Interest payable for non-payment of tax by domestic companies [Section 115P] : Where the principal officer of a domestic has a number of agencies and one of them is terminated and compensation received therefore, the receipt would be of a revenue
company and the company fails to pay the whole or any part of the tax on Distributed profits within 14 days as aforesaid he or nature since taking agencies and exploiting the same for earning income is the ordinary course of business and the loss of one
it shall be liable to pay simple interest at the rate of 1% p.m. or part thereof on the amount of such tax for the period agency would be made good by taking another. Compensation received from the employer for premature termination of the
beginning on the date immediately after the last date on which such tax was payable and ending with the date on which the service contract is a capital receipt, but is taxable as profit in lieu of salary under section 17(3).
tax is actually paid. (6)Gifts: Normally, gifts constitute capital receipts in the hands of the recipient. However, certain gifts are brought within the
When company is deemed to be in default [Section 115Q]: If any principal officer of a domestic company and the purview of income-tax, for example, receipt of property without consideration is brought to tax under section 56(2). For example,
company does not pay tax on distributed profits in accordance with the provisions of Section 115-O, then, he or it shall be any sum of money or value of property received without consideration or for inadequate consideration by any person, other than a
deemed to be an assessee in default in respect of the amount of tax payable by him or it and all the Provisions of this Act for relative, is chargeable under the head “Income from Other Sources”
the collection and recovery of income-tax shall apply. Instances of transactions which are capital in nature but specifically taxable:
Penalty under section 271C : Section 271C provides that, if any Person fails to comply with the provisions of section •Capital gains arising from sale of capital assets defined in section 2(14). [Section 45]
115-O, he shall be Liable to pay as penalty a sum equal to the amount of tax which he has Failed to pay. Such •Compensation for termination of service or modification in the terms of service [Section 17(3)]
penalty shall be imposed by the Join Commissioner. However, such penalty shall not be imposed if the assessee proves that •Compensation or other payments due to or received by the persons specified u/s 28(ii)/ u/s 28(va).
there was reasonable cause for failure. The differences between Capital Receipts and Revenue Receipts are as follows -
Prosecution under section 276B: If a person fails to pay to the credit of the Central Government the tax payable by him, as [Link] relating to fixed capital are capital receipts. E.g.:
required by or under the provisions of section 115-O, he shall be punishable with rigorous imprisonment for a term which shall Receipt on sale of asset is a capital receipt. Receipts relating to circulating capital are revenue receipts. E.g.: Receipt on
not be less than 3 months but which may extend to 7 years and with fine. However, no person will be punishable if he sale of stock-in-trade is a revenue receipt
proves that there was a reasonable cause for the default/failure.
 2. Compensation received for extinction of a profit earning source (in whole or in part) is a capital receipt. (iii) Educational benefit in a school run by employer provided value of benefit does not exceed 1,000 per month per
Compensation received for loss of profits or earnings is a revenue receipt child.
3. Receipt in substitution of source of income is a capital receipt. E.g.: Compensation for loss of employment is a (7) Retirement benefits: Incidence of tax on retirement benefits like gratuity, commuted pension, accumulated balance of
capital receipt. Receipt in substitution of income is revenue receipt unrecognized provident fund, etc. is lower if they are paid at the beginning of the financial year. Therefore, the employer
4. Capital receipts are exempt from tax unless expressly taxable, E.g.: Capital gains, Revenue receipts are and the employees should mutually plan their affairs in such a way that retirement, termination or resignation, as the case
taxable unless expressly exempt from tax, E.g.: Income exempt under section 10 to 13A. may be, takes place at the beginning of a financial year.
5. Compensation received for relinquishing interest (in whole arm part) in a capital asset is a capital receipt. Tax planning considerations in relation to business.
Compensation received for relinquishing interest in stock-in- trade of the business is a revenue receipt. Ans: The tax planning considerations relating to business are as follows —
6. Profits from transactions outside the purview of regular trading activities of the assessee are capital receipts. (1) Form of business organisation: The exemptions, allowances, deductions and tax rates, etc. vary with the form of
Profits from transactions entered into the course of business regularly carried on by the assessee or are incidental to organisation which may be sole proprietorship, HUF, AOP, firm, company, co-operative society, trust, etc.
or are associated with business, are revenue receipts. (2) Nature of business: Many incentives like deductions under section 80-IA, 80-lB. etc. are available under the Act which
7. Subsidy is treated as capital receipt if it is given to set-up a new business; or to complete a project; or to acquire an are directly co-related to the nature of business.
aseet. Subsidy is treated as revenue receipt if it is given for an existing business or to meet any specific revenue expenditure (3) Location of business: If the business is located in notified places, districts, or zones, then, deductions under sections
or by way of reimbursement of such expenditure. 10AA, 80-lB. 80-IC, 80-ID or 80-IE, etc. are available.
8. Profits from sale of shares or securities, which were purchased as an investor, are capital receipts. Profits from (4) Financial structure or sources of Funds: The means of finance may be share capital, debentures, term loans, retained
sale of shares,which were acquired in the ordinary course of business as a dealer in shares, are revenue receipts. earnings, etc. Dividend is subject to dividend tax while interest on borrowing is allowed as deduction.
TAX PLANNING (5) Acquisition of ‘Fixed Assets’: Assets can be bought or hired, if these are bought and are depreciable, then the assessee
Concept of Tax planning, Tax management, Tax avoidance & Tax evasion. can claim depreciation on the cost and over the years, the entire cost can be claimed as deduction against the profit. if
Ans: The concepts are discussed as under – hired, however, the charge for hire becomes an admissible deduction. A decision as to buy an asset or get it hired should
(1) Tax Planning: Tax planning may be defined as an arrangement of one‘s financial affairs in such a way that, without be made on the basis of tax benefits.
violating in any way the ‗egal provisions, maximum advantage is taken of all tax exemptions, deductions, concessions, International taxation
rebates, allowances and other reliefs or benefits permitted under the Act so that the burden of taxation on the assessee is International taxation is a body of legal provisions in the tax laws of each country which covers the tax aspects of cross border
reduced to the minimum. transactions.
(2) Tax Management: Tax management means systematic, well-devised and well-organised steps taken by an organisation in TAX HAVEN
order to ensure compliance with tax laws within the specified time and in the specified manner with a view to minimize the A Tax Haven is a place where there is no tax on income or it is taxed at low rate. Individuals or corporate entities move from high
tax cost. rates of taxes regions to the region of low tax in order to lower their overall tax liability.
Thus, tax management refers to compliance of tax laws so as to avoid interest and penalties which can be levied on such non Determining Factors of Tax Haven
compliances whereas tax planning is aimed to minimize the tax liability. The factors to be considered in taking decision whether a country is tax haven or not are:
(3) Tax Avoidance: Tax avoidance is a device which takes advantages of the loopholes in the law to reduce or avoid or 1. Nil or Nominal tax Rate: There is no or nominal tax on income (generally or in specified circumstances.
transfer one‘s tax burden. It is also defined in Mc Dowell & Co. Ltd v. [Link] Exchange of Information: There is no system of exchange of information with respect to the tax regime in the tax haven
CTO (1985) 154 ITR 148 (SC) that tax avoidance is an art of dodging tax without breaking law. country.
(4) Tax Evasion : Tax evasion means avoiding tax liability by dishonest means like concealment of income, falsification of [Link] of Transparency: The regime lacks transparency.
accounts, inflation of expenses, violation of law, etc. Tax evasion devices are unethical and evasion, once proved, attracts [Link] Regulatory supervision: No proper regulatory supervision and lack of financial disclosures to the government would
heavy penalties and prosecution. also categories a country as Tax Haven.
The various areas of tax planning are as under – [Link] Government of the country facilitates the foreign owned enterprises without the need for strict compliance of local laws or
(a) Form of the organisation; prohibits such entities from having any mechanical impact on the local economy.
(b) Location of the business; The OECD has outlined three parameters to consider whether a jurisdiction is tax haven or not.
(c) Nature and size of the business; (a)Rate of tax applicable
(d) Financial structure of the organisation; b)Withholding personal financial information.
(e) Corporate restructuring i.e. Amalgamation/Demerger, etc.; (c)Lack of transparency.
(f) Managerial decisions like make or buy, own or lease; The way outs in doing business through tax havens are as under :
(g) Employees Remuneration; (a)Personal Residency : Wealthy individuals reallocate themselves from high tax zones to low tax zones.
(h) Foreign collaborations and joint ventures; (b) Asset Holding : In this case, an entity from high tax jurisdiction transfers its assets to a trust in a low tax jurisdiction and
(i) Investments, accounts and audit; settles his share in the trust on himself and later to his descendents.
(j) Method of accounting; (c) Business Activity : by transferring activities to low tax jurisdiction,as in case of
(k) Double Taxation Avoidance Agreements/Double Taxation Relief. Reinsurance companies, they can earn ‘margin’ even though they are not performing any financial activity.
Tax planning considerations in relation to employees remuneration. Doing business through tax haven countries may not always be profitable. Some tax havens have become failure adventures or
Ans: The following tax planning consideration can be taken note of – misadventures, like Beirut, Tangiers, Liberia, etc.
(1) Salary structure: The employer should not pay a consolidated amount as salary to the employee. If it is so paid, the Action taken to avoid harmful tax practices : OECD in May 1998 issued a report on Harmful Tax Competition and has made
entire amount of salary will become taxable without any exemption. Therefore, he can split the same and pay it as basic certain specific recommendations. Some of these are:
salary plus various allowances and perquisites. 1. Adopt Controlled Foreign Corporation (CFC) or equivalent [Link] Foreign Information Reporting rules.
(2) Dearness Allowance: The employer should ensure that dearness allowance should form part of ―salary‖. This is because 2. Enter into Tax Information Exchange Agreement (TIEA).
certain items like entertainment allowance, gratuity, commuted pension and the employer‘s contribution to the recognised 3. Apply the provisions of withholding tax when payments are made to offshore recipients.
provident fund, etc. are calculated on the basis of salary. Therefore, if dearness allowance is included in salary, the above 4. Curbing treaty shopping term nation of existing treaties with tax havens like Mauritius.
benefits will also increase leading to higher exemption in the hands of the employee. 5. Mutual assistance of tax authorities in the recovery of cross border tax claims etc.
(3) Employee’s welfare schemes: There are several employees‘ welfare schemes such as recognised provident fund, 6. More international co-operation by establishing forums to avoid harmful tax practice etc.
approved superannuation fund, gratuity fund. Payments received from such funds by the employees are totally exempt or CONTROLLED FOREIGN CORPORATION (CFC)
exempt upto significant amounts. Hence, the employer is well advised to institute such welfare schemes for the benefit of A CFC is a legal entity that exists in one jurisdiction but is owned or controlled primarily by taxpayers of a different jurisdiction.
the employees. The CFC rules may also be termed as ‘anti-deferral rules'. The use of intermediary entities in a tax-free or low-tax
(4) Leave travel facility: The employer should extend leave travel facility to the employees at all levels. Under section 10(5) jurisdiction enables a tax resident to defer (or avoid) the domestic tax on the income until it is repatriated to the
of the Act, exemption is provided in the hands of the employee in respect of leave travel concession. Such exemption is residence state.
available for the employee, spouse, dependent children, parents, brothers and sisters. Under the CFC rules, the domestic law effectively extends the residence rules to tax the income. It requires that the tax on profits,
(5) Rent free accommodation/House Rent Allowance (HRA): An employee should analyse the tax incidence of a whether distributed or not, be paid by resident tax-payers.
perquisite and an allowance, whenever he is given an option, in order to choose the one which i more beneficial to him. In Residency Issue
the case of Rent Free Accommodation vs. HRA, it must be noted that the perquisite of rent free accommodation is taxed Residence as defined in double taxation treaties is different from residence as defined for domestic tax purposes. The situation of
as per Rule 3(1) of the Income-tax Rules, 1962 and HRA is exempt to the extent mentioned in Section 10(13A) read with double taxation will arise where the income gets taxed in two or more than two countries whether due to residency or
Rule 2A. The employee should, therefore, work out his tax liability under both the options and then decide on whether to source principle as the case may be. The problem of double taxation arises if the income of a person is taxed in one
receive HRA or choose a rent free accommodation. country on the basis of residence and on the basis of residency in another country or on the basis of both.
(6) Exempt perquisites : The following are the perquisites which are exempt from tax – MEANING OF THE TERM ‘RESIDENT OF CONTRACTING STATE’
(i) Use of computers and laptop by employee; The term ‘Resident of a Contracting State’ means any person who, under the laws of that State, is liable to tax therein by reason of
(ii) Medical facility in employer‘s own hospital or a public hospital or Government or other approved hospital; his domicile, residence, (UNMC also; place of incorporation), place of management or any other criterion of a similar
nature, and also includes that State and any political sub-division or local authority thereof. This term, however, does
 not include any person who is liable to tax in that State in respect only of income from sources in that State or Capital purchase and sale or transactions of preparatory or auxiliary nature. The liability of Tax in the source country generally
situated therein. arises out of Business connection or out of PE.
Where an individual is a resident of both Contracting States, then his status shall be determined as follows: As per the Double Taxation Avoidance Agreements, PE includes, a wide variety of arrangements i.e. a place of management, a
(a) he shall be deemed to be a resident only of the State in which he has a permanent home available to him; if he has a branch, an office, a factory, a workshop or a warehouse, a mine, a quarry, an oilfield etc.
permanent home available to him in both States, he shall be deemed to be a resident only of the State with which his
personal and economic relations are closer; Imposition of tax on a foreign enterprise is done only if it has a PE in the contracting state. Tax is computed by treating the
(b) if the State in which he has his centre of vital interests cannot be determined, or if he has not a permanent home available PE as a distinct and independent enterprise.
to him in either State, he shall be deemed to be a resident only of the State in which he has an habitual abode; Some Salient aspects concerning a PE could be discussed as under :
(c) if he has an habitual abode in both States or in neither of them, he shall be deemed to be a resident only of the State of PE is defined with reference to place and persons;
which he is a national; PE could be a fixed place, a construction site, service PE, agency PE branch etc.
(d) if he is a national of both States or of neither of them, the competent authorities of the Contracting States shall settle the An enterprise is liable to tax on its profits in a foreign country, if it conducts its subsidiary in that country through PE.
question by mutual agreement. ‘Permanent’ in PE does not mean [Link] activities must be value creating activities requiring capital and lesson.
DOUBLE TAXATION RELIEF Hence To avoid double taxation it is provided that if a resident of India becomes liable to pay tax either directly or by Tax
: OECD-MC [Organization for Economic Co-operation and Development–Model Convention] defines double taxation as, “the deduction in the other country in respect of income from any source, he shall be allowed credit against the Indian tax
imposition of comparable taxes in two (or more) states on the same tax payer in respect of the same subject matter and payable of an
for identical periods”. amount not exceeding the tax borne by him in the other country on that income taxed in the said other country. The
The situation of double taxation arises when the income gets taxed in two or more countries on the grounds of residency or source same benefit is available to the resident of the other Country, on income taxed in India.
principle . TRANSFER PRICING
The country in which the assesse resides exercises the right to tax the income on the basis of residential status and the country in Transfer Price refers to the price of goods/services which is used in accounting for transfer of goods or services from one
which he earns his income exercises the right to tax the income on the basis of source. company to another associated company. Transfer price affect the revenue of transferring division and the cost of
The double taxation relief is available in two ways : receiving division. if the related party transactions are measured at less value, one unit may incur loss and other unit
BILATERAL RELIEF : Sec 90: Agreements (DTAAs)with Foreign Countries or specified territories : Sec 90 of the Income may earn undue profit. This will result in income tax imbalances at both parties end, and thus requires an
Tax Act, 1961 deals with agreements entered by Government of India with Government of other countries. Double Tax understanding of how to deal in such situations. Section 92 of the Income Tax Act primarily deals with it.
Avoidance Agreement is a kind of bilateral treaty or agreement, between Government of India and any other foreign The fundamental of transfer pricing provision is that transfer price should represent the arm’s length price of goods
country or specified territory outside India. transferred and services rendered from one unit to another unit.
UNILATERAL RELIEF : Sec 91 deals with provisions relating to those issues for which India does not have any formal WHAT IS ARM’S LENGTH PRICE?
agreements with Government of other countries, regarding avoidance of double taxation. ARM’S LENGTH PRICE means the price which is chargeable from an independent party in uncontrolled conditions. In other
Sec 90A granting of permissions to ‘specified association’ to enter into agreement with any specified association in the specified words, arm’s length price means fair price of goods transferred or services rendered.
territory outside India, and the central govt. make such provisions to adopt and implement such agreement to give Arm’s length price calculation is very important for a company because Transfer price affects the revenue of transferring division
relief for double taxation. and the cost of receiving division, which may have a significant impact on tax liability.
BILATERAL RELIEF : Sec 90 : Two countries enter into an agreement / Treaty to avoid Double Taxation, called DTAA ie Arm’s length price may be applied only where it causes benefit to the revenue.
Double Tax Avoidance Agreement. Thus DTAA is a kind of bilateral treaty or agreement, between Government of “The concept of associated enterprises and International transaction are very important for applying the transfer pricing
India and any other foreign country or specified territory outside India. provisions. Sec 92A and Sec 92B deals with these two important concepts of chapter X of Income Tax Act, 1961.”
Sec 90 of the Income Tax Act 1961 deals with relief granted to assesses involved in paying taxes in India as well as in Foreign ASSOCIATED ENTERPRISES (AE) 92A
Countries or specified territory outside India. Deemed Associated Enterprises : As per Sec 92(2), two enterprises shall be deemed to be
Double Taxation Avoidance Agreement (DTAA) requires because of different rules in two different countries regarding In Summary, two enterprises will be deemed as Associated Enterprises if
chargeability of income based on receipt and accrual, residential status etc. Through DTAAs Double taxation is  Interest in Associated Enterprises 26% or more
avoided by two countries on the same income by sharing revenues arising out of international transactions.  Shareholding with voting power – either direct or indirect 51% or more
The DTAA is based on four basic models of DTAA and they are  Advancement of loan by one entity to other constituting certain percentage of the book value of the total assets of the
 OECD Model Tax Convention (emphasis is on residence principle), other entity 51% or more
 UN Model (combination of residence and source principle but the emphasis is on source principle),  Based on the board of directors appointed by the governing board of the entity in the other 90% or more
 US Model (it’s the Model to be followed for entering into DTAAs with the U.S. and its peculiar to the US) and the  Based on the quantum of supply of raw materials and consumables by one entity to the other 10% or more
 Andean Model (model adopted by member States namely Bolivia, Chile, Ecuador, Columbia, Peru and Venezuela).  Total Borrowing Guarantee by one enterprises for other 10% or more
Bilateral relief may be granted by any of the two methods :  Interest by a firm or association of Person(AOP) or by a body of Individual (BOI) in other firm AOP or firm or BOI
Exemption Method : Where the two countries agrees on segregating incomes in a way that certain specified income would get MEANING OF INTERNATIONAL TRANSACTION
taxed only in one country and rest in the other country without having any overlapping , is called exemption method. 92B Deemed International Transaction 92B(2)
Certain Incomes to certain extent gets exemption in one country and shall be taxable only in the other country and TRANSFER PRICING – METHODS
vice-versa. Sec 92C of Income Tax Act defines the methods which are to be used in determination of Arm's Length prices for International
Tax Credit Method : Under this Method , if any income is taxed in both the countries , the assesse shall be given a deduction Transaction and specified domestic transaction. The arm's length price in relation to an international
from the tax payable in the country of residence based on the tax payment /rate in the source country. Generally the transaction/specified domestic transaction shall be determined by any of the following methods, being the most
income is taxed in both countries, but credit for tax paid in one country is given against tax payable in other country. appropriate method, having regard to the nature of transaction or class of transaction or class of associated persons or
The Bilateral relief shall be granted as under : functions performed by such persons or such other relevant factors as the Board may prescribe, namely :-
Step – I compute Total Income of the assesse liable to tax in India as per [Link] Act. Step – II Allow relief as per (A) Comparable Uncontrolled Price Method (CUP)
terms of the DTAA (Treaty) (B) Resale Price Method (RPM)
(C) Cost Plus Method (CPM)
(D) Profit Split Method (PSM)
Where the Government has entered into an agreement with any country or specified territory outside India for granting relief of (E) Transactional Net Margin Method (TNMM)
tax or avoidance of double taxation, then, the provisions of Income Tax Act, 1961 shall apply to the assessee to the (F) Such other method as may be prescribed by the Board.
extent they are more beneficial to him. The assessee shall have a Tax Resident certificate and other prescribed SELECTION OF TRANSFER PRICING METHOD
documents for claiming benefit under DTAA. Rule 10C of the Indian Income Tax Rules, 1962 states that: In selecting a most appropriate method, the following factors shall be
Sec 90A granting of permissions to ‘specified association’ to enter into agreement with any specified association in the specified taken into account namely,
territory outside India, and the central govt. make such provisions to adopt and implement such agreement to give (a) The nature and class of the international transaction.
relief for double taxation. (b) The class or classes of Associated Enterprises entering into the transaction and the functions performed by them taking
The Central Government is empowered by Sec 90A to enter into an agreement with any specified association in the specified into account assets employed or to be employed and risks assumed by such enterprises.
territory outside India. and the Central Government has been authorized to make such provisions as may be necessary (c) The availability, coverage and reliability of data necessary for application of the method.
for adopting and implementing such agreement. The provisions may be made: (d) The degree of comparability existing between the international transaction and the uncontrolled transaction and between
“Specified Territory” means any area outside India which may be notified as such by the Central Government for the purpose Sec the enterprises entering into such transactions.
90A. The provision under this Sec will apply to the assessees to the extent these are beneficial to them. This Sec (e) The extent to which reliable and accurate adjustments can be made to account for differences, if any, between the
provides relief in respect of double taxation in respect to countries with which India has no DTAA. international transaction and the comparable uncontrolled transactions or between the enterprises entering into such
The Concept of Permanent Establishment (PE) transactions.
The basis of PE is that Isolated or occasional transactions through some persons or agency do not create liability for tax, There (f) The nature, extent and reliability of assumptions required to be made in the application of a method.
has to be continuity of activities contributing to the earning of income–something more than mere transaction of
Tolerance Band for Arm’s length price : As per section 92C(2) where more than one price is determined by the most
appropriate method , the arm’s length price shall be taken to be the arithmetical mean of such prices . If the variation 2. An officer of the Indian Revenue Service (IRS) who is qualified to be a member of the Central Board of Direct Taxes;
between the Arm’s length price and the transection price is upto 3% , the transaction price shall be taken as Arm’s 3. An officer of the Indian Legal Service who is, or is qualified to be, an Additional Secretary to the Government of India.
length price. Since variation is within 3% of Rs 50 crore , ALP shall be Rs 50 crore. This Authority is a quasi-judicial body having full powers of a civil court under the Income-tax Act to give its rulings in respect of
REFERENCE TO TRANSFER PRICING OFFICER specific questions of law or fact.
Sec 92CA of Income Tax Act deals with Reference to Transfer Pricing Officer by assessing officer. It provides that Assessing Questions on which ruling can be sought :
Officer with prior approval of Commissioner may refer the computation of Arm’s Length Price in an International (i) Even though the word used in the definition is singular namely “question”, it is clear that there can be more than one
Transaction to transfer pricing officer if he considers it necessary or expedient to do so. On reference by Assessing question in one application. This has been made amply clear by Column No.8 of the Form of application for obtaining
officer, Transfer Pricing Officer (TPO) shall serve a notice to the Assessee requiring him to produce the evidence in an advance ruling (Form No.34C).
support of computation made by him of Arm’s Length Price in relation to an International transaction. (ii) a question can be both of law or fact, pertaining to the income tax liability of the non-resident or the transaction undertaken
WHO IS TRANSFER PRICING OFFICER (TPO) or proposed to be undertaken.
For the purpose of Sec 92CA “Transfer Pricing Officer” means a Joint Commissioner or Deputy Commissioner or Assistant (iii) The questions may be on points of law as well as on facts or could be mixed questions of law and facts. There should be
Commissioner authorized by the Board to perform all or any of the functions of an Assessing Officer specified in Secs so drafted that each question is capable of an answer. This may need breaking-up of complex questions into two or
92C and 92D in respect of any person or class of persons. more simple questions.
ADVANCE PRICING AGREEMENT : Advance Pricing Agreement (APA) is an agreement between a taxpayer and a taxing (iv) The questions should arise out of the statement of facts given with the application. No ruling will be given on a purely
authority(Board) on an appropriate transfer pricing methodology for fixing the arm’s length price for a set of hypothetical question. Question not specified in the application can be raised during the course of hearing. Normally a
transactions over a fixed period of time in future. question is not allowed to be amended but in deserving cases AAR may allow amendment of one or more questions.
As per Sec 92CC of Income Tax Act, 1961, w.e.f. 1st July, 2013, the Central Board of Direct Taxes (Board), with the approval of POWERS OF THE ADVANCE RULING AUTHORITY
the Central Government, may enter into an Advance Price Agreement with any person, determining the arm’s length Sec 245U deals with the Powers of the Authority. Sub-Sec (1) provides that for the purpose of exercising its powers, the Authority
price or specifying the manner in which arm’s length price is to be determined, in relation to an international shall have all the powers of a Civil Court under the Code of Civil Procedure, 1908 (5 of 1908) as are referred to in Sec
transaction to be entered into by that person. 131 of the Income-tax Act, when trying a suit in respect of the following matters, namely :
Documentation: The legal framework for maintenance of information and documentation by a taxpayer is provided in Sec 92D (a) Discovery and inspection;
of Income Tax Act, 1961 which lays down that every person who enters into an international transaction with an (b) Enforcing the attendance of any person, including any officer of a banking company and examining him on oath;
associated enterprise shall maintain prescribed information and documents. (c) Compelling the production of books of account and other documents; and
Certificate: Form 3CEB contains a certificate from the Accountant that in his opinion proper information and documents as (d) Issuing commissions.
prescribed have been maintained by the taxpayer. BENEFITS OF OBTAINING AN ADVANCE
Penalty: Contravention of Transfer Pricing provisions as contained in Chapter X of the Income tax Act, 1961 may invite hefty RULING Obtaining an Advance Ruling:
penalties. 1. Helps non-residents in planning their income tax affairs well in advance;
VALIDITY OF ADVANCE PRICING AGREEMENT 2. Brings certainty in determination of the tax liability;
The Advance Pricing Agreement shall be valid for a period as specified in the Advance Pricing Agreement. However, this period 3. Helps in avoiding long drawn litigation; and
will not be more than 5 consecutive years. 4. It is relatively inexpensive, expeditious and binding.
BINDINGNESS OF ADVANCE PRICING GENERAL ANTI-AVOIDANCE RULES (GAAR)
AGREEMENT Advance Pricing Agreement shall be GAAR is a concept which generally empowers the Revenue Authorities in a country to deny the tax benefits of transactions or
binding on: arrangements which do not have any commercial substance or consideration other than achieving the tax
(a) the person in whose case, and in respect of the transaction in relation to which, the agreement has been entered into; and [Link] is an anti avoidance measure which empowers tax authorities to call a business arrangement or a
(b) on the Commissioner, and the income-tax authorities subordinate to him, in respect of the said person and the said transaction ‘impermissible avoidance arrangement’ and thereby denying tax benefits to the parties. Avoidance is legal
transaction However the advance pricing agreement shall not be binding if there is a change in law or facts having provision which allows investors to legally reduce their tax liability.
bearing on the agreement so entered. Whenever revenue authorities question such transactions, there is a conflict with the tax payers. Thus, different countries
Advance Ruling and GAAR started making rules so that tax cannot be avoided by such transactions. Australia introduced such rules way back in
The concept of advance rulings under the Act was introduced by the Finance Act, 1993,Chapter XIX-B of the Act, 1981. Later on countries like Germany, France, Canada, New Zealand, South Africa etc too opted for GAAR.
Under the scheme, the power of giving advance rulings has been entrusted to an independent adjudicatory body designated, as GAAR IN INDIA : In India, the real discussions on GAAR came to light with the release of draft Direct Taxes Code Bill
Authority for Advance Rulings (AAR). AAR is empowered to give rulings, which are binding both on the Income-tax (popularly known as DTC 2009) on 12th August 2009. It contained the provisions for GAAR.
Department and the applicant. Concept of avoidance has been an area of debate and Supreme Court in the latest Vodafone judgment has held it to be valid
Advance Ruling and GAAR : In order to provide the facility of ascertaining the Income-tax liability of a non-resident, to plan provided it is allowed by the law and also opining that India has room to enact GAAR.
their Income-tax affairs well in advance and to avoid long drawn and expensive litigation, a scheme of The introduction of GAAR is inevitable but it has to be reasonable to facilitate conducive investment environment. As per the
Advance Ruling has been introduced under the Income-tax Act, 1961. A non-resident or certain categories of resident can obtain final recommendations of expert committee on GAAR, GAAR needs to be deferred for 3 years upto A.Y 2017-18.
binding rulings from the Authority for advance Ruling on question of law or fact arising out of any GAAR versus SAAR : In addition to GAAR there also exists SAAR- Specific Anti-Avoidance Rules which specifically aim at
transaction/proposed transactions which are relevant for the determination of his tax liability. certain arrangements of tax avoidance. SAAR have many points to its favour, since its specific there is no scope of
The term advance ruling has been defined in Sec 245N of the Act. “Advance ruling” means, confusion, it doesn’t provide taxation authorities any discretion and from the point of view of tax payer it
(i) a determination by the Authority in relation to a transaction which has been undertaken or is proposed to be undertaken by a providescertainty regarding the nature of his arrangement. Provisions of SAAR are there in Chapter X of the Income
non-resident applicant; Tax Act 1961 and some of the provisions pertaining to SAAR are in various other chapters of Income Tax Act.
(ii) a determination by the Authority in relation to the tax liability of a non-resident arising out of a transaction which has been
undertaken or is proposed to be undertaken by a resident applicant with such non resident and such determination shall
include the determination of any question of fact specified in the application,
(iii) a determination or decision by the Authority in respect of an issue relating to computation of total income which is
pending before any income-tax authority or the Appellate Tribunal

(iv) a determination or decision by the Authority whether an arrangement, which is proposed to be undertaken by any person
being a resident or a non-resident, is an
impermissible avoidance agreement as referred to in Chapter X-A or not. (Inserted by Finance Act, 2014, w.e.f. 1-4-
2016).
Further, advance ruling may be determined for both the question of law or fact.
WHO CAN SEEK ADVANCE RULING?
As per Sec 245N(b) of the Income Tax Act, the advance ruling under the income-tax act could be sought by:
(a) A non-resident;
(b) Resident having transactions with non-residents.
(c) Specified categories of residents.
AUTHORITY FOR ADVANCE RULING
Under the scheme of Advance Ruling, the power of giving advance rulings has been entrusted to an independent adjudicatory
body designated, as Authority for Advance Rulings (AAR). The AAR consists of the following members who are
appointed by the Indian Government:
1. A Chairman who is a retired judge of the Supreme Court;
 to the Central Agency which will act as a clearing house mechanism, verify the claims and inform the respective
governments to transfer the funds.

Radha Rani Holdings

POEM with OECD and DTAA - India does not adhere to the interpretation that the POEM is the place where key management
and commercial decisions that are necessary for the conduct of the entity’s business as a whole are in substance made. It is of the
view that the place where the main and substantial activity of the entity is carried on is also to be taken into account when
determining the place of effective management. 6(4) is the residential status of other persons.
As regards the situs of control and management of the company, the Tribunal inter alia observed that the situs of the board of
directors of the company should determine the place of control and management of the company and the situs of the board of
directors is not determined with reference to the place where one or more directors reside but with reference to the place where
board actually meets for the purposes of determination of the key issues relating to the company.
Further, the relevant aspect is 'from where' business is conducted rather than where it is actually conducted'. Therefore, relevant
test is place from where the Singapore Company has taken decision of making investment in India]
CIT v. RD Aggarwal
The Supreme Court held that The 1922Act did not contain a definition of the expression 'business connection' and that its precise
connotation was 'vague and indefinite'. The Court further stated that the expression undoubtedly means something more than a
'business'. A business connection in section 42 of the 1922 Act involves a relation between the a business carried on by the non-
resident which yields profits or gains and some activity in the taxable territories which contributes directly or indirectly to the
earning of such profits or gains. It predicates an element of continuity between the business of the non-resident and the activity in
the taxable territories. A stray or isolated transaction is not normally regarded as a business connection. Business connection may
take several forms. It may include carrying on a part of the main business or activity incidental to the main business of the non-
resident through an agent , or it may merely be a relation between the business of the non-resident and the activity in the taxable
territories which facilitates or assists the carrying on of that business. A relation to be a business connection must be real and
intimate and through or from some income must accrue or arise directly or indirectly to the non-resident. The income which
accrues or arises through or from the 'connection' must arise outside the taxable territories and not within. (This is because income
arising within a taxable territory need not be brought within the scope of a deeming provision to subject it to tax in the taxable
territories).
Vodafone Case
Facts of the Case: ‘Hutchison (Hongkong)’ is a Non resident having no tax implications in India. ‘Cayman Island (Mauritius)’ was
a 100 % Subsidiary of Hutchison (Hongkong). Hutchison Essar was an Indian co. in which Cayman Island (Mauritius) was
holding 67 % shares and Essar had total holding of 33 % only. Mauritius is considered as a tax Heaven Country, So Cayman
Island was incorporated for this transaction exclusively. Vodafone is a co. incorporated in Nederland (UK), treated as foreign co.
in India. Transactions: Cayman has acquired 67 % shares in Hutchison Essar initially, Hutchison (Hongkong) has sold Cayman
Island to Vodafone (UK) @ $ 10 billion in 2007 and Vodafone has paid entire sum to Hutchison (Hongkong) without deducting
any TDS. Impact: As per Indian tax law, this transaction was not taxable in India, because Buyer and seller both were non resident
of India and company sold (Cayman Island) was also a foreign co. Indirectly the controlling Interest of Hutchison Essar (Indian
Co.). has been sold through this transaction. Because Cayman Island was only a paper co., which has no value in itself without
controlling interest in Hutchison Essar (Indian Co.). Hutchison has sold shares of Indian co. in form of Cayman Island to
Vodafone UK. But by this method they have saved capital gain taxes (Ought to be arisen in India) on such Transaction.
Supreme Court’s held ruling to set aside the Bombay High Court judgement asking the company to pay income tax of INR
11,000 crore. The court also asked the IT department to return Rs 2,500 crore deposited by Vodafone, in compliance of its interim
order, within two months along with 4 per cent interest. “The government has no jurisdiction over Vodafone’s purchase of mobile
assets in India as the transaction took place in Cayman Islands between HTIL & Vodafone.” Chief Justice S.H. Kapadia said.
The apex court pronounced a landmark judgment in Vodafone International Holding v. Union of India and cleared the uncertainty
with respect to imposition of taxes. The apex court through this judgment recognized:
The principles of tax planning:
Business entities or individual may arrange the affairs of their business so as to reduce their tax liability in absence of any
statutory stipulation prohibiting the same.
The multinational companies often establish corporate structures and all these structures should be established for business and
commercial purposes only.
The corporate veil may be lifted in case facts and circumstances reveal that the transaction or corporate structure is sham and
intended to evade taxes.
The transactions should be looked holistic manner and not in a dissecting manner and the presence of corporate structures in tax
neutral/investor friendly nations should not lead to the conclusion that these are meant to avoid taxes.
In the end, it can be said that this judgment has helped in removing uncertainties with respect to imposition of taxes and
recognized the principle the if motive of the transaction is to avoid tax does not necessarily lead to assumption of evasion of taxes
and the supreme court has endorsed the view of legitimate tax planning.
Jindal Stainless Steel
For a nation to compete in the present era of globalisation, it needs to come out to the rest of the world as a unified body. There
must be a minimisation of discrimination between the states and especially in the trad-able sector. The Bhagatram decision left a
scope to resort to the levying of unreasonable taxes by the states to earn revenue. A unified tax system (like GST) for interstate
trades is much needed. And this decision provides towards gaining clarity in setting the applicability of a valid levy which, to the
least, is a positive step. The decision will add to the firmness in the implementation of a uniform entry tax system throughout the
nation. Thus, the judgement will encourage the free flow of trade subject to Part-XIII of the Constitution.
The IGST Model: Inter-State supply of goods or services shall be subjected to integrated GST (Integrated tax / IGST). The
IGST model is a unique contribution of India in the field of VAT. The IGST Model envisages that Centre would levy
IGST (Integrated Goods and Service Tax) which would be CGST plus SGST on all inter-State supply of goods or services or
both. The inter-State supplier will pay IGST on value addition after adjusting available credit of IGST, CGST, and SGST
on his purchases. The Exporting State will transfer to the Centre the credit of SGST used in payment of IGST. The person
based in the destination State will claim credit of IGST while discharging his output tax liability in his own State. The Centre
will transfer to the importing State the credit of IGST used in payment of SGST. The relevant information will also be submitted