Basic Concepts of

Corporate Taxation
& Tax treaties

Samir Kanabar

Page 1 * Presentation title

Agenda

► Why Tax

► Overview of tax regime

► Need for Corporate Taxation

► Scheme of the Income Tax Act

► Tax Treaties – Overview & Concepts

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Why Tax

Page 3
TAX ??

► As taxes are a financial imposition on citizens, they can only be

levied and collected by the authority of law. The same is
required by Article 265 of the Constitution of India, 1950.
► Why Tax?
► Should everybody pay Tax?
► Tax Exemptions
► Equitable, Proportionate
► Tax Planning, avoidance, exemption
► Cross Border Taxation

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Overview of tax regime

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How are tax proposals decided
► In September every year, the Budget Division issues a circular to all Union Ministries,
States and departments to prepare budget estimates for the next year

► After ministries and departments send in their demands, extensive consultations are
held between ministries and department of expenditure of the Finance Ministry

► Simultaneously, the Department of Economic Affairs and Department of

Revenue meet stakeholders

After holding discussions, a final call on the tax proposals is taken by the
finance minister, which are discussed with PM

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Type of taxes

Page 7
Direct Tax

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Structure of Income Tax Law

Structure of Income Tax Law

1 2 3 4 5
Judicial
Explanatory
Income-tax Circulars/ precedents
Income-tax memorandum
Act, 1961 Notifications/ (Legal
Rules, 1962 / Annual
Instructions Decision of
Finance Acts
(“the Act”) Courts)

► Effective date – 1 April 1962 and it extends to whole of India

► Provides for levy, administration, collection and recovery of Income Tax
► XXIII Chapters and 298 sections
► Income-tax Act started its journey as Income-tax Act, 1922.

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Structure of Income Tax Act

Computational
Charging sections
sections

Incentives/ Tax
Anti-Abuse sections
Holiday

Structure of Income
Tax Act
Assessments &
Special tax regime
Appeals

Interest,
Search & Seizure
Penalties &
Prosecution

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Structure of Income Tax Act….

► Charging sections provide the scope and ambit of levy of taxes

Charging by the government
sections ► Different categories of assesses can have different rates of tax
► E.g – section 4, 5 & 9 provide the basic charge of taxation

► These sections provide the manner in which taxable income is to

be computed
Computational ► Generally they provide for Inclusions & Exclusions of Incomes &
sections Expenditure for the purpose of computing taxable income
► E.g. – Salary tax computation, Business profits computation,
House property computation

► Incentives & Tax Holiday’s are available in certain cases upon

Incentives/ Tax satisfaction of certain conditions
Holiday ► Incentives based on capital investments, Exemptions from taxes
if business set-up in backward areas, etc

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Structure of Income Tax Act….

► These sections are incorporated to restrain taxpayers from

making dubious claims and attempting to circumvent taxes
Anti-Abuse ► E.g – Transfer pricing provisions to regulate pricing in case of
sections transactions with foreign group companies; General Anti-
Avoidance Rules (‘GAAR’) to regulate that transactions are not
carried out solely to obtain tax benefits; Gift Taxation

► There is special tax regime available to certain category of

taxpayers or in case of some specific sectors. Special rate of tax
Special tax to incentivize or promote certain business
regime ► E.g Non-resident Oil & Gas companies (10% deemed to be
profits); Shipping companies taxed basis tonnage handled;
Insurance companies

► These sections provide for manner of scrutiny to be done by the

Assessments tax department of the Incomes declared by the assesses
& Appeals ► Also, the manner in which appeals can be filed in courts in case
of disputes between the assessee and the tax department

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Structure of Income Tax Act….

► These sections are provided to act as deterrent for the

assesses to avoid payments of taxes
► Where taxes are not paid before on time (either through
advance tax of TDS) interest is levied for the late payment of
taxes
Interest, ► Penalties are levied where false claims are made by the
Penalties & assesses or contravention of certain provisions. Eg. Penalties
Prosecution are imposed if assessee makes a false claim for a deduction
which is otherwise not available.
► Assessees who commits defaults can also be liable to
prosecution/ imprisonment. E.g – Where taxes are deducted
but not paid to the government, the deductor can be
prosecuted

► Tax department has power to carry out a survey, search * seizure

Survey, Search at the premises of the assessee (either at residence or business
& Seizure premises) if there is knowledge or information that the assessee
has evaded taxes

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Scheme of the Income Tax Act

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Basis of charge

The section which brings into charge the income of any person to tax is
section 4 of the Act, which is given as under:

Income-tax shall be charged for any “assessment year”

Section 2(9) - “assessment year” means the period of twelve months commencing on the
1st day of April every year (ie 1 April 2019 to 31 March 2020)

In respect of the “total income”

Section 2(45) - “total income” means the total amount of income referred to in section 5,
computed in the manner laid down in this Act

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Basis of charge

Of the “previous year”

Section 3 - “previous year” means the financial year immediately preceding the assessment year. In
the case of setup of a new business or profession or a source of income newly coming into
existence in the said financial year, the previous year shall be the date of setup and in case of a new
source of income, from the day on which it arises and ending with the said financial year (ie for AY
2019-20, the previous year will be FY 2018-19)

Of every “person”

Section 2(31) - “person” includes (i)An individual, (ii) A Hindu undivided family, (iii) A company, (iv) A
firm, (v) An association of persons or a body of individuals, whether incorporated or not, (vi) A local
authority, (vii) every artificial juridical person, not falling within any of the preceding sub-clauses.

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Heads of income

Income
from
salaries

Income Income
from from
other house
sources property
Heads of
income

Profits and
Capital gains of
gains business or
profession

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Income from salaries

Computation of income from salary

Salaries/ Wages earned xxx
Add: Income by way of any allowance xxx
Add: Taxable value of perquisite (ie meals, car, etc) xxx
Gross salary xxx
Less: Exemptions with respect to income received from (xxx)
employer
Less: Standard deduction of 50,000 or salary whichever is lower (xxx)
Less: Entertainment allowance (*) (xxx)
Less: Professional tax (xxx)
Taxable income under Salary xxx
(*) – Maximum INR 5,000 only for government employees

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Income from house property

Computation of income from house property

Gross annual value xxx
Less: Municipal taxes (xxx)
Net annual value xxx
Less: Standard deduction @ 30% on NAV (xxx)
Less: Interest on borrowed capital* (xxx)
Taxable income from house property xxx

(*) – Restricted to Rs 2,00,000 or actual whichever is lower

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Profits and gains of business or profession

► Business should be carried on during the previous year

General
► Business should be carried on by the assessee
principles
► If taxable under a specific head, it cannot be taxed as business
income e.g. dividend income, rent of house property

Computation of income from profits and gains from business or profession

Net profit as per Profit & Loss account xxx

Add: Amounts which are debited to the P&L A/c but are not allowable as deductions under the Act xxx

Less: Expenditures which are not debited to the P&L A/c but are allowable as deductions under the Act (xxx)

Less: Incomes which are credited to P&L A/c but are exempt under sections 10 to 13A or are taxable (xxx)
under other heads of income

Add: Incomes which are not credited to P&L A/c but are taxable under the head profits and gains from xxx
business or profession

Taxable income under the head of income from business or profession xxx

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Capital gains

Computation of income from capital gains

Full value of consideration xxx
Less: Expenditure incurred wholly and exclusively in connection (xxx)
with such transfer
Less: Cost of acquisition/ Indexed cost of acquisition (xxx)

Less: Cost of improvement/ Indexed cost of improvement (xxx)

Less: Exemption under section 54 series (xxx)

Taxable income under the head of capital gains xxx

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Income from other sources

Computation of income from other sources

Gross income xxx
Less: Deductions under section 57 (xxx)
Taxable income under the head of other sources xxx

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Tax rate for domestic companies – New vs Old regime
Domestic Cos
► Cos with more than INR 4bn Turnover
► ETR at 34.94%
Old Regime
► MAT at 21.55%
► Exemption/incentives available
Domestic Cos
► Option to pay tax at 25.17%
► Exemption/incentive not
available
New Regime ► Option exercised can’t be
withdrawn
► No MAT
Tax exemptions/incentives not available if lower tax rate opted
► Profits of SEZ Units
► Profit linked deductions
► Additional depreciation/Investment allowance
► On installation of new plant & machinery
► Deduction of amount deposited tea development, etc.
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Manufacturing Cos
► Cos with less than INR 4bn ► ETR at 29.12%
Turnover
► ETR at 29.12%
► MAT at 21.55%
► Exemptions/incentives not
► MAT at 21.55% available
► Exemption/incentives available
Incentives Contd. Cos New Manufacturing Cos
► Cos with less than INR 4bn Turnover
ETR to be at 29.12% ► New domestic Manufacturing Cos
►
formed on or after 1 Oct 19 can
► Exemption/incentive available pay 17.16% if they start operations
► MAT cut from 21.55% to 17.47% by 31 Mar 23
► Exemption/incentive not available
► Option exercised can’t be
withdrawn
► No MAT
► Deduction of amount deposited ‘site restoration fund’
► Weighted deductions on specified expenditures
► Deduction of sum paid to a research
association/university/college/company for use of
Scientific research/research association
Rate cut : Impact – What needs to be evaluated?

When to opt for lower tax rate ? Tax matters to be evaluated

► Comparison of existing ETR (including eligibility to claim
incentives/exemptions) vis-à-vis revised lower ETR
No ► Changes in financial / tax models for evaluating
Is Indian Co taking any tax Is ETR i n excess of
investments and expected ROI
incentives /exemption? 17.16%/25.17%?
► Impact on the tax return for FY19 for entities availing
tax exemptions/incentives
Yes Yes ► Potential past uncertainties in relation to allowability of
exemptions / incentives
No ► Evaluation of availability existing MAT credit, if any
Is ETR l ess than
Opt for lower tax rate
17.16%/25.17%? ► Evaluate timing to opt for lower tax rate
► Carry forward past tax losses arisen due to specified
incentives and exemptions
Yes
► Evaluation of the precise year for exercising option for
lower tax rate
Wait till the ► Acquisition models - involving acquisition of entities
incentives/exemption is expired under IBC
and MAT credit is absorbed ► Company vs LLP
► Hiving off/separation of business for ETR planning

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Corporate Tax Rates for other than domestic company

Current
Particulars
effective rate2

Company other than domestic company (ie. Foreign companies)

⮚ Income > 1 cr, but <10 cr 42.43%
⮚ Income > 10 cr 43.68%

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Tax treaty – Overview & Concepts

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Tax Treaties

Written agreement entered into between countries to regulate matters concerning tax

Treaties allocate taxing rights between nations; do not create charge

Focus on elimination of double taxation and relief from double taxation

Tax treaties

Standardize fiscal situation of taxpayers who are engaged in activities in other countries

Even out any discrimination among taxpayers of different nations

Provide reasonable level of legal & fiscal certainty

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What is a tax treaty?

Vienna Convention on Law of Treaties 1969:

“An international agreement concluded between States in written form and governed by
international law, whether embodied in a single instrument and whatever its particular designation”

► Treaties are signed by two national jurisdictions to regulate matters concerning taxes
► Taxpayer is not a party to a tax treaty
► Desire of signatories to make business environment in their jurisdictions tax friendly
► Treaty represents understanding as to rights and obligations of respective country
► to forego its right to tax,
► to limit scope or rate of taxation,
► to grant credit of tax paid directly or indirectly in other jurisdiction/s etc.
► Understanding between Governments to share tax revenues equitably as between themselves, while
mitigating hardship for taxpayers

Vogel : “A tax treaty neither generates a tax claim that does not otherwise exist under
domestic law nor expands the scope or alters the type of an existing claim”

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When to invoke a tax treaty?

Non-residents

► To determine their taxability in the Source state for payment of taxes and/or undertaking
compliance requirements

Residents

► To determine taxability of the non-resident Payee for the purpose of withholding taxes in the
country of the Resident Payer
► To claim credit of taxes already withheld on income earned in the Source state

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Formulation of a tax treaty

Negotiation of Drafting of
a treaty the articles Signing Ratification
Text Notification
Text Coming into
effect

Entry into Force refers to date of later of the Confirmation by Date of The period as
notifications by each contracting state informing each contracting publishing in specified in the
the other State of completion of procedures state, that the the Official treaty once the
required by its law for bringing the Treaty into constitutional Gazette to treaty is
force. requirements for notify general notified
implementation of public
the treaty fulfilled (after Entry
India has recently signed tax treaties with Hong into force).
Kong and Iran

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Categories of Tax Treaties

*Many countries have adopted MLI and incorporated into double taxation avoidance agreements. Some of which have also come into force

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Models of tax treaty
OECD
•Entered into between developed nations with
comparable tax systems and objectives
•Lays emphasis on the right of state of
residence to tax (e.g. Taxation based on
residence and not where source of income
arises)
•India not member; Observer status
US has a Model Convention and Commentary to form basis for its Treaties
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UN
•Entered into between developing or less
developed nations
•Focus on attracting investments into such
developing countries
•More emphasis on Source principle
•Income should be taxed where it arises
•Most of India’s tax treaties are based on this
model
 Articles of a Treaty - Overview

SCOPE PROVISIONS SUBSTANTIVE PROVISIONS

1. Article 1 - Personal Scope
DEFINITION PROVISIONS 1. Article 6 - Immovable property
1. Article 3 - General definitions
2. Article 2 - Taxes covered
2. Article 4 - Residence
2. Article 7 - Business Profits
3. Article 29 - Entry into force 3. Article 8 - Shipping, etc.
3. Article 5 - Permanent
4. Article 30 - Termination 4. Article 10 - Dividends
Establishment
5. Article 11 -
Interest
6. Article 12 - Royalties & FTS
MISCELLANEOUS PROVISIONS 7. Article 13 - Capital gains
1. Article 24 - Non-discrimination 8. Article 14 - Independent
2. Article 27 - Diplomats Personnel Services
3. Article 28 - Territorial Extension
9. Article 15 - Dependent Personal Services
10. Article 16 - Directors
ELIMINATION OF
11. Article 17 - Artistes & Sports persons
DOUBLE TAXATION ANTI-AVOIDANCE
1. Article 23 - Elimination of 1. Article 9 - Associated 12. Article 18 - Pensions
double taxation Enterprises 13. Article 19 - Government service
2. Article 25 - Mutual 2. Article 26 - Exchange of 14. Article 20 - Students
Agreement Information 15. Article 21 - Other income
16. Article 22 - Capital

* In addition to above, the new synthesized double taxation avoidance agreements (incorporating MLI provisions) shall include additional provisions and the
same will be dealt in detail in a separate session

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 Questions ??

Page 34 Presentation title

 Thank You

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