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Tax planning and management

MBA 3rd semester FM02

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Tax planning and management

  1. 1. TAX PLANNING AND MANAGEMENT The Income-tax Act, 1961 is the charging Statute of Income Tax in India. It provides for levy, administration, collection and recovery of Income Tax. The Government of India brought a draft statute called the "Direct Taxes Code" intended to replace the Income Tax Act,1961 and the Wealth Tax Act, 1957. However the bill was later scrapped because of wealth tax act being repealed. Tax- A tax is a mandatory financial charge or some other type of levy imposed upon a taxpayer (an individual or other legal entity) by a governmental organization in order to fund various public expenditures.[1] A failure to pay, or evasion of or resistance to taxation, is punishable by law. Taxes consist of direct or indirect taxes and may be paid in money or as its labour equivalent Types Of Taxes- Business may be required to remit the following types of taxes: Direct taxes are paid in entirety by a taxpayer directly to the government. It is also defined as the tax where the liability as well as the burden to pay it resides on the same individual. Direct taxes are collected by the central government as well as state governments according to the type of tax levied. Major types of direct tax include: Income Tax: Levied on and paid by the same person according to tax brackets as defined by the income tax department. Corporate Tax: Paid by companies and corporations on their profits. Wealth Tax: Levied on the value of property that a person holds. Estate Duty: Paid by an individual in case of inheritance. Gift Tax: An individual receiving the taxable gift pays tax to the government. Fringe Benefit Tax: Paid by an employer that provides fringe benefits to employees, and is collected by the state government. Indirect tax, as mentioned above, include those taxes where the liability to pay the tax lies on a person who then shifts the tax burden to another individual. Some types of indirect taxes are:
  2. 2. Excise Duty: Payable by the manufacturer who shifts the tax burden to retailers and wholesalers. Sales Tax: Paid by a shopkeeper or retailer, who then shifts the tax burden to customers by charging sales tax on goods and services. Custom Duty: Import duties levied on goods from outside the country, ultimately paid for by consumers and retailers. Entertainment Tax: Liability is on the cinema owners, who transfer the burden to cinemagoers. Service Tax: Charged on services rendered to consumers, such as food bill in a restaurant. Indirect taxes, on the other hand, are taxes which can be shifted to another person. An example would be the Value Added Tax (VAT) that is included in the bill of goods and services that you procure from others. The initial tax is levied on the manufacturer or service provider, who then shifts this tax burden to the consumers by charging higher prices for the commodity by including taxes in the final price. Canons-of-Taxation 1. Canon of Equality: The word equality here does not mean that everyone should pay the exact, equal amount of tax. What equality really means here is that the rich people should pay more taxes and the poor pay less. 2. Canon of Certainty: The tax payers should be well-aware of the purpose, amount and manner of the tax payment. Everything should be made clear, simple and absolutely certain for the benefit of the taxpayer. 3. Canon of Convenience: Canon of convenience can be understood as an extension of canon of certainty. Where canon of certainty states that the taxpayer should be well-aware of the amount, manner and mode of paying taxes, the canon of convenience states that all this should easy, convenient and taxpayer-friendly. 4. Canon of Economy:
  3. 3. The whole purpose of collecting taxes is to generate revenue for the company. This revenue, in turn, is spent on public welfare projects. The canon of economy – keeping in view the above-mentioned purpose – states that the cost of collecting taxes should be as minimum as possible 5. Canon of Simplicity: The system of taxation should be made as simple as possible. The entire process should be simple, non-technical and straightforward. 6. Canon of Diversity: Canon of diversity refers to diversifying the tax sources in order to be more prudent and flexible. 7. Canon of Flexibility: Canon of flexibility means that the entire tax system should be flexible enough that the taxes can easily be increased or lowered, in accordance with the government needs. Definition of ‘Assessee’ – Income Tax As per S. 2(7) of the Income Tax Act, 1961, unless the context otherwise requires, the term “assessee” means a person by whom any tax or any other sum of money is payable under this Act, and includes- (a) every person in respect of whom any proceeding under this Act has been taken for the assessment of his income or assessment of fringe benefits or of the income of any other person in respect of which he is assessable, or of the loss sustained by him or by such other person, or of the amount of refund due to him or to such other person; (b) every person who is deemed to be an assessee under any provision of this Act; (c) every person who is deemed to be an assessee in default under any provision of this Act. From above definition, we can construe that normally the term ‘Assessee’ is considered as one who is supposed to pay tax under the Income Tax Act, however for better understanding of the term ‘assessee’, we need to understand the following as well: a. Normal Assessee any person against whom proceedings under Income Tax Act are going on, irrespective of the fact whether any tax or other amount is payable by him or not;
  4. 4. any person who has sustained loss and filed return of loss u/s 139(3); any person by whom some amount of interest, tax or penalty is payable under this Act; any person who is entitled to refund of tax under this Act. b. Representative Assessee A person may not be liable only for his own income or loss but he may also be liable for the income or loss of other persons e.g. agent of a non-resident, guardian of minor or lunatic etc. In such cases, the person responsible for the assessment of income of such person is called representative assesses. Such person is deemed to be an assessee. c. Deemed Assessee In case of a deceased person who dies after writing his will the executors of the property of deceased are deemed as assessee. In case a person dies intestate (without writing his will) his eldest son or other legal heirs are deemed as assessee. In case of a minor, lunatic or idiot having income taxable under Income-tax Act, their guardian is deemed as assessee. In case of a non-resident having income in India, any person acting on his behalf is deemed as assessee. d. Assessee-in-default A person is deemed to be an assessee-in-default if he fails to fulfill his statutory obligations. In case of an employer paying salary or a person who is paying interest, it is their duty to deduct tax at source and deposit the amount of tax so collected in Government treasury. If he fails to deduct tax at source or deducts tax but does not deposit it in the treasury, he is known as assessee-in-default. Person [Section 2(31)] : Defination under I.Tax
  5. 5. Person includes : (i) an Individual; (ii) a Hindu Undivided Family (HUF) ; (iii) a Company; (iv) a Firm (v) an association of persons or a body of individuals, whether incorporated or not; (vi) a local authority; and (vii) every artificial juridical person not falling within any of the preceding sub-clauses. (viii) Association of Persons or Body of Individuals or a Local authority or Artificial Juridical Persons shall be deemed to be a person whether or not, such persons are formed or established or incorporated with the object of deriving profits or gains or income. The word person is a very wide term and embraces in itself the following : (i) Individual. It refers to a natural human being whether male or female, minor or major. (ii) Hindu Undivided Family. It is a relationship created due to operation of Hindu Law. The manager of HUF is called “Karta” and its members are called ‘Coparceners’. (iii) Company. It is an artificial person registered under Indian Companies Act 1956 or any other law. (iv) Firm. It is an entity which comes into existence as a result of partnership agreement between persons to share profits of the business carried on by all or any one of them. Though, a partnership firm does not have a separate legal entity, yet it has been regarded as a separate entity under Income Tax Act. Under Income Tax Act, 1961, a partnership firm can be of the following two types (i) a firm which fulfill the conditions prescribed u/s 184. (ii) A firm which does not fulfill the conditions prescribed u/s 184.
  6. 6. It is important to note that for Income Tax purposes, a limited liability partnership (LLP) constituted under the LLP Act, 2008 is also treated as a firm. (v) Association of Persons or Body of Individuals.: Co-operative societies, MARKFED, NAFED etc. are the examples of such persons. When persons combine togather to carry on a joint enterprise and they do not constitute partnership under the ambit of law, they are assessable as an association of persons. Receiving income jointly is not the only feature of an association of persons. There must be common purpose, and common action to achieve common purpose i.e. to earn income. An AOP. can have firms, companies, associations and individuals as its members. A body of individuals (BOl) cannot have non-individuals as its members. Only natural human beings can be members of a body of individuals. Whether a particular group is AOP. or BOl. is a question of fact to be decided in each case separately. (vi) Local Authority. Municipality, Panchayat, Cantonment Board, Port Trust etc. are called local authorities. (vii) Artificial Juridical Person. A public corporation established under special Act of legislature and a body having juristic personality of its own are known to be Artificial Juridical Persons. Universities are an important example of this category. PREVIOUS YEAR As per Section 4 of the Income Tax Act, the income earned in a year is taxable in the next year. This is known as Previous Year Rule. However, there are certain exceptions in which income earned in a year is taxable in the same year. The exceptions to the above rule are as follows: (1) Shipping business by Non-residents [Section 172]: • This section applied to non-resident(s) engaged in shipping business and deriving income therefrom by carrying passengers, livestock, mail or goods from a port of India. • 7.5% of the freight paid or payable to the owner or charterer or any person on his behalf, whether in or outside India, shall be deemed to be his total income and shall be taxed at the rate applicable for foreign company i.e. 40% (plus surcharge and education cess). Such tax shall be taxed before the departure of the vessel. Thus, income is taxable in the same year in which carriage is collected and not in the immediately following assessment year.
  7. 7. (2) Persons leaving India [Section 174]: • This section applied when it appears to Assessing Officer that an individual may leave India during the current assessment year or shortly after its expiry and he has no intention of returning back to India. • In case of such person, the total income from 1st April of that assessment year up to the probable date of his departure from India shall be taxable in that year itself at the rates applicable to that assessment year. (3) Association of persons / Body of Individuals or artificial juridical person formed for a particular event or purpose [Section 174A]: • This section applies where the Assessing Officer is of the opinion that any association of persons or body of individuals or an artificial juridical person, formed for a particular event or purpose, may be dissolved in the assessment year in which it is formed or shortly thereafter. • The total income from 1st April of that assessment year up to the date of its dissolution shall be chargeable to tax in that assessment year itself at the rates applicable to that assessment year. (4) Persons likely to transfer property to avoid tax [Section 175]: • It applies when it appears to the Assessing Officer that a person is likely to charge, sell, transfer, dispose of or otherwise part with any of his assets so as to avoid his tax liability. • The total income from 1st April of that assessment year to the date when the Assessing Officer commences proceedings under this section shall be chargeable to tax in that assessment year itself at the rates applicable to that assessment year. (5) Discontinued business [Section 176]: • This section applied where any business or profession is discontinued in any assessment year. • The total income from 1st April of that assessment year upto the date of discontinuance shall be taxable in the year of discontinuance at the discretion of Assessing Officer. Exempted Incomes : Sec.10(1) to Sec.(4)(ii)
  8. 8. 1. Agricultural Income [Section 10(1)] As per section 10(1), agricultural income earned by the taxpayer in India is exempt from tax. Agricultural income is defined under section 2(1A) of the Income-tax Act. As per section 2(1A), agricultural income generally means: (a) Any rent or revenue derived from land which is situated in India and is used for agricultural purposes. (b) Any income derived from such land by agriculture operations including processing of agricultural produce so as to render it fit for the market or sale of such produce. (c) Any income attributable to a farm house subject to satisfaction of certain conditions specified in this regard in section 2(1A). Any income derived from saplings or seedlings grown in a nursery shall be deemed to be agricultural income. 2. Amount received by a member of the HUF from the income of the HUF, or in case of impartible estate out of income of family estate [Section 10(2)] As per section 10(2), amount received out of family income, or in case of impartible estate, amount received out of income of family estate by any member of such HUF is exempt from tax. Example- HUF earned ` 90,000 during the previous year 2016-17 and it is not chargeable to tax. Mr. A, a co-parcener is earning individual income of ` 20,000 p.m. Besides his individual income, Mr. A receives ` 30,000 from his HUF. Mr. A will pay tax on his individual income but any sum of money received by him from his HUF is not chargeable to tax in the hands of co-parcener whether the HUF has paid tax or not on that income. 3. Share of profit received by a partner from the firm [Section 10(2A)] As per section 10(2A), share of profit received by a partner from a firm is exempt from tax in the hands of the partner. Further, share of profit received by a partner of LLP from the
  9. 9. LLP will be exempt from tax in the hands of such partner. This exemption is limited only to share of profit and does not apply to interest on capital and remuneration received by the partner from the firm/LLP. 4. Leave Travel Concession [Section 10(5)] An employee can claim exemption under section 10(5) in respect of Leave Travel Concession. Exemption under section 10(5) is available to all employees (i.e. Indian as well as foreign citizens). Exemption is available in respect of value of any travel concession or assistance received or due to the employee from his employer (including former employer) for himself and his family members in connection with his proceeding on leave to any place in India. 5. Interest to Non-Resident on Non-Resident (External) Account [Section 10(4)(ii)] Any income by way of interest on moneys standing to his credit in a Non-Resident (External) Account in any bank in India shall be exempt from tax in case of an individual who is a person resident outside India or is a person who has been permitted by the RBI to maintain the aforesaid account. 6. Certain Interest to Non-Residents [Section 10(4)] As per section 10(4)(i), in the case of a non-resident any income by way of interest on certain notified securities or bonds (including income by way of premium on the redemption of such bonds) is exempt from tax. 7. Income of Employees of Consultant [Section 10(8B)] In case of an individual who is assigned duties in India under technical assistance programme— the remuneration received by him directly or indirectly from any consultant as referred u/s 10 (8A) above and any other income accruing or arising to him outside India (which is not deemed to accrue or arise in India) and which is subject to income-tax or social security tax in foreign country. shall be fully exempted provided such individual is not a citizen of India ; or
  10. 10. if citizen but is not ordinarily resident and the contract of service is approved by the competent authority. 8. Income of a Consultant [Section 10(8A)] Any remuneration or fee received by a consultant from an international organisation who derives its fund under technical assistance grant agreement between such organisation and the Foreign Government, and any other income accruing or arising to him outside India. The consultant means : an individual who is (a) not a citizen of India; or (b) if citizen but is not ordinarily resident in India ; or any person who is non-resident ; and is rendering technical services in India in connection with any technical assistance programme or project. Definition of Tax Planning By the term ‘tax planing’ we mean the arrangement of one’s financial affairs in such a way that utmost tax benefits can be availed. This can be done by applying the majority of advantageous provisions which are permissible by law and entitles the assessee to obtain the benefit of the deductions, exemptions, credits, concessions, rebates and reliefs so that the incidence of tax on the assessee would be minimum. Tax planning is an art of logically planning one’s financial affairs, in such a manner that benefit of all eligible provisions of the taxation law can be availed effectively so as to reduce or defer tax liability. As tax planning follows an honest approach, by conforming to those provisions which fall within the framework of the taxation law. Definition of Tax Avoidance Tax avoidance implies any arrangement of financial activities, though done within the legal framework, overpowers the basic intention of the law. It involves taking benefit of the shortcomings in the statute, by deliberately parking the financial affairs in a way that it neither violates the tax law nor it attracts more tax. Tax avoidance includes cases, wherein the assessee seemingly mislead the law, without making an offence. And to do so, the tax payer uses any scheme or arrangement, which reduces, defers and even completely prevents the payment of tax. This may also be done by shifting of tax liability to another person, so as to minimise the incidence of tax.
  11. 11. Definition of Tax Evasion An illegal act, made to escape from paying taxes is known as Tax Evasion. Such illegal practices can be deliberate concealment of income, manipulation in accounts, disclosure of unreal expenses for deductions, showing personal expenditure as business expenses, overstatement of tax credit or exemptions suppression of profits and capital gains, etc. This will result in the disclosure of income which is not the actual income earned by the entity. Tax Evasion is a criminal activity for which the assessee is subject to punishment under the law. It involves acts like: Deliberate misrepresentation of material facts. Hiding relevant documents. Not maintaining complete records of all the transactions. Making false statements. Key Differences Between Tax Avoidance and Tax Evasion The following are the major differences between Tax Avoidance and Tax Evasion: 1. A planning made to reduce the tax burden without infringement of the legislature is known as Tax Avoidance. An unlawful act, done to avoid tax payment is known as Tax Evasion. 2. Tax avoidance refers to hedging of tax, but tax evasion implies the suppression of tax. 3. Tax avoidance is immoral that tends to bend the law without causing any damage to it. Unlike tax evasion, which is illegal and objectionable both accordTaing to law and morality. 4. Tax avoidance aims at minimising the tax burden by applying the script of law. However, tax evasion minimises the tax liability by exercising unfair means. 5. Tax Avoidance involves taking benefit of the loopholes in the law. Conversely, Tax Evasion includes the deliberate concealment of material facts. 6. The arrangement for tax avoidance is made prior to the occurrence of tax liability. Unlike Tax Evasion, where the arrangements for it, are made after the occurrence of the tax liability.
  12. 12. 7. Tax avoidance is completely legal however Tax Evasion is a criminal activity. The result of tax avoidance is the postponement of tax, whereas the consequence of tax evasion if the assessee is found guilty of doing so, is either imprisonment or penalty or both. Key Differences Between Tax Planning and Tax Avoidance The difference between tax planning and tax avoidance can be drawn clearly on the following grounds: Tax planning refers to a mechanism through which one can intelligently plan his/her financial affairs in such a manner that all the eligible deductions, exemptions and allowances, as per law, can be enjoyed. Tax avoidance is an act of intentionally structuring one’s financial affairs, in such a way that his tax liability is minimum or even nil. While tax planning is both legal and moral, tax avoidance is legally correct, but it is an immoral act. Tax planning is basically savings of tax. Conversely, tax avoidance is hedging of tax. Tax avoidance is accomplished with a malafide motive. On the flip side, tax planning has the element of bonafide motive. Tax planning aims at reducing tax liability, by practising the script and moral of law. As against this, tax avoidance aims at minimising tax liability, by practising the script of law only. Tax planning is permissible by law, as it involves adhering to the provisions of tax. In contrast, tax avoidance is not permissible by law as it attempts to take advantage of the defects in the law. Tax planning uses the advantages, provided by the law to the assessee. Unlike tax avoidance, which uses the loop holes of the law. The benefits of tax planning can be seen in the long run. On the contrary, the benefits of tax avoidance are for short term only.
  13. 13. Difference between Tax Planning and Tax Management 1. Tax planning is a wider term and tax management is narrow term which is a part of tax planning. 2. Tax planning emphasizes on tax minimization whereas, tax management is compliance of legal formalities. 3. Every person does not requires tax planning but tax management is essential for everyone. 4. Tax planning is about future benefits and tax management is about present benefits. The written down means – Section 43(6) Income Tax Act In the case of assets acquired in the previous year, the actual cost of the assets to the assessee. In the case of assets acquired before the previous year the actual cost of the assets to the assessee less all depreciation actually allowed to him in that Previous Year. WDV of an asset = Actual cost to the assesse – All depreciation actually allowed to him (included unabsorbed depreciation, if any) WDV of Block of Assets Aggregate of WDV of all the assets falling within that block at the beginning of the year XXX Add: Actual cost of any assets falling within block acquired during the previous year XXX Less: Money received or receivable in respect of any asset in the block which is sold, discarded, demolished or destroyed during the previous year
  14. 14. XXX WDV at the end of the year XXX Less: Depreciation at block rate (if WDV at the end of year is positive) XXX Closing value of the block of the asset at the end of the year XXX If the amount of WDV comes at a negative amount then no depreciation is allowed and the amount will be considered as capital gain and the closing WDV will be zero. If such amount is positive and no asset exists in the block then such amount will be treated as short term capital loss and no depreciation is alllowed. ADDITIONAL DEPRECIATION UNDER SECTION 32(1)(IIA) Additional depreciation shall be allowed if following condition are fulfilled by the assessee: 1. Additional deprecation is allowed only on new machinery or plant excluding ships and aircraft which has been purchased and installed after 31-03-2005 2. The assessee shall be engaged in the business of manufacturing and production of any article or thing (computers used for data processing in industrial premises are eligible for additional depreciation). From financial year 2016-17 additional depreciation is also allowed to assessees engaged in business of generation and distribution of power. Printing and Publishing is also considered as manufacturing. 3. Depreciation @ 20% of actual cost of assets is allowed as additional depreciation. 4. If assesse is engaged in production or manufacturer of any article or thing on or after 1st Apr, 2015 in any notified backward area of Andhra Pradesh, Bihar, Telangana, West Bengal and acquires and installs any new machinery or plant during 1st April, 2015 to 31st March 2020 then additional depreciation is allowed at the rate of 35%. 5. However if the asset is put to use for less than 180 days then additional deprecation will be allowed at half of actual rate i.e 10% or 17.5% as the case may be. From financial year 2015-16, if additional depreciation is allowed in year of put
  15. 15. to use at half of the rate then remaining half depreciation is allowed in the succeeding year. 6. Specific cases in which depreciation is not allowed  Second hand plant and machinery – Plant and machinery which, before installation by assessee, was used whether inside and outside India by any person.  Any office appliance or road transport vehicle.  Any machinery or plant installed in any office premises or any residential accommodation, including accommodation in the nature of guest house  Any plant and machinery, the whole of the actual cost of which is allowed as a deduction (whether by way of depreciation or otherwise) in computing income chargeable under the head “Profits and gains of business or profession” of any on previous year. UNABSORBED DEPRECIATION If there is a loss under business and profession and the reason for such loss is depreciation, then it is called unabsorbed deprecation and it shall be allowed to be carried forward. Additional Points 1. The depreciation shall be carried forward even the business/profession to which is relate even of the business/profession not in existence. 2. Return of loss is not required to be submitted for carry forward of unabsorbed depreciation 3. The assesse should set off brought forward losses in the following manner: – 1. First of all current year depreciation will be adjusted. 2. Then brought forward business losses will be set off (speculative or non- speculative) 3. Then unabsorbed depreciation will be set-off against business income. 4. Unabsorbed depreciation can be carried forward for indefinite number of years. 5. Unabsorbed depreciation can be set off from any head of income other than Salary and Capital Gain in any year.
  16. 16. Examples for calculation of unabsorbed depreciation  Example 1 Profit from business before depreciation 4,00,000 Depreciation 6,00,000 Unabsorbed depreciation 2,00,000 Meaning of Set off and Carry forward. Set off means adjusting the losses against the profit of that Financial year.In case if there is no adequate profits to set off the entire loss it can be carry forward to next Assessment Years subject to the conditions stated in the Act. What is a Capital Gain? Any profit or gain that arises from the sale of a ‘capital asset’ is a capital gain. This gain or profit is charged to tax in the year in which the transfer of the capital asset takes place. Capital gains are not applicable when an asset is inherited because there is no sale, only a transfer. However, if this asset is sold by the person who inherits it, capital gains tax will be applicable. The Income Tax Act has specifically exempted assets received as gifts by way of an inheritance or will. What is a Capital Asset? Here are some examples of capital assets: land, building, house property, vehicles, patents, trademarks, leasehold rights, machinery, and jewellery. This includes having rights in or in relation to an Indian company. It also includes rights of management or control or any other legal right. The following are not considered capital assets:  Any stock, consumables or raw material held for the purpose of business or profession.
  17. 17.  Personal goods such as clothes and furniture held for personal use.  Agricultural land in rural India.  6½% gold bonds (1977) or 7% gold bonds (1980) or national defence gold bonds (1980) issued by the central government.  Special bearer bonds (1991).  Gold deposit bond issued under the gold deposit scheme (1999). Definition of rural area (from AY 2014-15) – Any area which is outside the jurisdiction of a municipality or cantonment board, having a population of 10,000 or more is considered rural area. Also, if it does not fall within a distance (to be measured aerially) given below – (population is as per the last census). 2 kms from local limit of municipality or cantonment board If the population of the municipality/cantonment board is more than 10,000 but not more than 1 lakh 6 kms from local limit of municipality or cantonment board If the population of the municipality/cantonment board is more than 1 lakh but not more than 10 lakh 8 kms from local limit of municipality or cantonment board If the population of the municipality/cantonment board is more than 10 lakh What are Long-Term and Short-Term Capital Assets? Short-term capital asset – An asset which is held for not more than 36 months or less is a short-term capital asset. Long-term capital asset – An asset that is held for more than 36 months is a long- term capital asset. From FY 2017-18 onwards – The criteria of 36 months has been reduced to 24 months in the case of immovable property being land, building, and house property. For instance, if you sell house property after holding it for a period of 24 months, any income arising will be treated as long-term capital gain provided that property is sold after 31st March, 2017.
  18. 18. But this change is not applicable to movable property such as jewellery, debt oriented mutual funds etc. They will be classified as a long-term capital asset if held for more than 36 months as earlier. Some assets are considered short-term capital assets when these are held for 12 months or less. This rule is applicable if the date of transfer is after 10th July, 2014 (irrespective of what the date of purchase is). The assets are:  Equity or preference shares in a company listed on a recognized stock exchange in India  Securities (like debentures, bonds, govt securities etc.) listed on a recognized stock exchange in India  Units of UTI, whether quoted or not  Units of equity oriented mutual fund, whether quoted or not  Zero coupon bonds, whether quoted or not When the above listed assets are held for a period of more than 12 months, they are considered long-term capital asset. In case an asset is acquired by gift, will, succession or inheritance, the period this asset was held by the previous owner is also included when determining whether it’s a short term or a long-term capital asset. In the case of bonus shares or rights shares, the period of holding is counted from the date of allotment of bonus shares or rights shares respectively. Tax on Short-Term and Long-Term Capital Gains Tax on long-term capital gain: Long-term capital gain is taxable at 20% + surcharge and education cess. Tax on short-term capital gain when securities transaction tax is not applicable: If securities transaction tax is not applicable, the short-term capital gain is added to your income tax return and the taxpayer is taxed according to his income tax slab. Tax on short-term capital gain if securities transaction tax is applicable: If securities transaction tax is applicable, the short-term capital gain is taxable at the rate of 15% +surcharge and education cess.
  19. 19. Clubbing of income means Income of other person included in assessee’s total income, for example: Income of husband which is shown to be the income of his wife is clubbed in the income of Husband and is taxable in the hands of the husband. Under the Income Tax Act a person has to pay taxes on his income. A person cannot transfer his income or an asset which is his one of source of his income to some other person or in other words we can say that a person cannot divert his income to any other person and says that it is not his income. If he do so the income shown to be earned by any other person is included in the assessee’s total income and the assessee has to pay tax on it. What is Minimum Alternate Tax or MAT? Under the provisions of the Minimum Alternate Tax Act, as per section 115JB, every company domestic or foreign is required to pay MAT. The rule was put to practice so as to ensure that no taxpayer with substantial economic income gets to avoid significant tax liability on account of various exclusions, deductions and credits. MAT is a tax levied under Income Tax Act of India, 1961. For Example: There are several “zero tax companies” that book high profit but pay almost nil taxes by rolling out substantial dividends to their shareholders. This nil tax comes as a result of various exemptions, deductions and incentives provided to them due to several conditions that they meet. However, the aim of MAT is to ensure that no company which has the ability to pay taxes, gets to avoid payment of income tax. Features and Provisions of the Current MAT Regime: Listed below are some of the most unique and significant features of Minimum Alternate Tax or MAT. 1. Advance Payment of Tax: Under the Income Tax Act, 1961, every taxpayer is required to pay tax in advance as computed in accordance with, if the tax liability is Rs.10,000 or more for a particular financial year. Similarly, all companies are liable for payment of advance tax under section 115JB of the Income Tax Act. 2. MAT Credit:
  20. 20. Any company that pays minimum alternate tax under the MAT clause instead of regular tax, then if the tax paid is more than that accrued, the excess amount is credited back as Tax Credit to the company. Thus, MAT credit can be understood as the difference between the tax calculated under the general provisions of the Income Tax Act and that calculated under the MAT provisions of the Act.. Example: Suppose a company ABC books a profit of RS.8 lac. After claiming all applicable deductions, exemptions and depreciation, the gross taxable income comes out to be Rs.4 lac. Income tax applicable in this case will be = 30% of Rs.4 lac = Rs.1,20,000 However, applicable MAT = 18.5% of Rs.8 lac = Rs. 1,48,000 So excess tax payable will be Rs.1,48,000 – Rs. 1,20,000 = Rs.28,000 This excess Rs.28,000 can be carried forward and set-off against regular Tax payable in future. 3. MAT Report: All companies that are liable to pay MAT have to furnish a MAT report as prescribed in Form 29B. This report has to be submitted along with the ROI filed. 4. MAT Applicability in Special Economic Zones (SEZs): Initially when the MAT was rolled by the government, MAT directives did not apply to profit earned by any company via operations and business activities in Special Economic Zones or SEZs. However, in the year 2011, the law was modified to include all such companies operating in SEZs and earning profit from business there, under the Section 115JB for MAT payment. Definition of ‘Amalgamation’ – Income Tax As per S. 2(1B) of the Income Tax Act, 1961, unless the context otherwise requires, the term “amalgamation”, in relation to companies, means the merger of one or more companies with another company or the merger of two or more companies to form one company (the company or companies which so merge being referred to as the amalgamating company or companies and the company with which they merge or which is formed as a result of the merger, as the amalgamated company) in such a manner that—
  21. 21. (i) all the property of the amalgamating company or companies immediately before the amalgamation becomes the property of the amalgamated company by virtue of the amalgamation; (ii) all the liabilities of the amalgamating company or companies immediately before the amalgamation become the liabilities of the amalgamated company by virtue of the amalgamation; (iii) shareholders holding not less than three-fourths in value of the shares in the amalgamating company or companies (other than shares already held therein immediately before the amalgamation by, or by a nominee for, the amalgamated company or its subsidiary) become shareholders of the amalgamated company by virtue of the amalgamation, otherwise than as a result of the acquisition of the property of one company by another company pursuant to the purchase of such property by the other company or as a result of the distribution of such property to the other company after the winding up of the first-mentioned company.