TAXATION ISSUES FOR ENTREPRENEURS by : DR. T.K. JAIN AFTERSCHO ☺ OL centre for social entrepreneurship sivakamu veterinary hospital road bikaner 334001 rajasthan, india FOR – PGPSE / CSE PARTICIPANTS mobile : 91+9414430763
My words.... Ours is a great country with immense entrepreneurial potential. However, our legal system and taxation system is so cumbersome that our creativity and talent is wasted / unnecessarily diverted in these sectors. I wish that these are simplified so that an ordinary entrepreneur can understand these without help from any expert. Here I present a few basic questions for fundamental understanding of taxation system in India. I wish that more people should become entrepreneurs. An ordinary Indian entrepreneur wishes to remain an honest entrepreneur and contribute to the development of nation, but our systems and processes ...
Medical expenses reimbursed by employer: Rs. 7,200 for the period from 1/4/ 2010 to 30/4/10. Is it tax free ? Yes (upto Rs. 15000 in one year)
Mr. Anand and his family also availed LTC - they visited Mumbai and the expenses of Rs. 5,600 being the cost of air conditioned second class rail tickets was reimbursed by the employer. It is tax free (we assume that other conditions are fulfilled) (rule 2b and sec. 10(5) )
The employer provides Ravi a car for personal purposes and expenses are incurred by the employer amounted to Rs. 9,900. It is taxable there is no tax exemption here
Employer of A made payment of club bills to the extent of Rs. 3600 for the year. Is it tax free ? No however, if it is proved that this club membership was for office purpose only then it will be tax free
An employee having his own house was given HRA is it taxable ? Yes
Mr. Ajay received Rs. 1,50,000 as gratuity. He is not covered by the Payment of Gratuity Act. He worked for 20 years and 9 months and the average salary for last 10 months has been 20000. The least of the following is taxfree : 1. 20*20000 * ½ = 200000 2. 3.5 lakhs 3. actual gratuity amount = 1.5 lakhs
Is hill allowance taxable ? Yes, It is given to employees working in hilly areas on account of high cost of living in hilly areas as compared to plains. It is fully taxable, if the place is located at less than 1,000 metres height from sea level.
Is group medical insurance of employees taxable in salary head ? No it is tax free Group medical insurance obtained by the employer for his employees (including family members of the employees) or all medical insurance payments made directly or reimbursement of insurance premium to such employees who take such insurance.
Are reimbursement of medical expenses taxable ? They are tax free upto a limit Reimbursement of medical expenses actually incurred by the employee upto a maximum of Rs. 15,000 in the aggregate.
Is reimbursement of travel and stay expenses abroad tax free ? Yes, but only when the employee’s gross total income reimbursement of this expenditure does not exceed two lakh rupees
Is recreational facility tax free ? Yes The value of recreational facilities provided is exempt. However, the facility should not be restricted to a selected few
Is value of free rations given to the armed forces personnel taxfree. Yes
Is the amount spent by an employer on the promotion of family planning amongst its employees tax free? yes
Are privilege ticket orders granted by Railways to its employees tax free? Yes
Are Sum paid by an employer to pension or deferred annuity scheme taxfree? Yes
Is Rent-free furnished residence provided to an Officer of Parliament / Union Ministry / leader of opposition in Parliament tax free? Yes
Is Interest free loan to an employee tax free? Yes but Only if the amount of loan does not exceed Rs. 20,000/-.
a professional jockey receives present from his employer on winning the race – is it taxfree? No
Are legal charges incurred by the employer to defend the employee taxable ? Yes even if the legal charges are related to work performed during employment
Are payments made by employer of any loan due to the employee taxfree. No
Are reimbursement of tuition fees of the children of the employee taxfree? Only upto Rs. 100 per month per child (for 2 children)
Is payment (by employer) of club bills of the employee taxfree ? No
Is payment (by employer) of hotel bills of the employee taxfree? No
Is income-tax paid by the employer due from the employee taxfree? No
Is the value of recreational facilities provided taxfree? Yes
What will be the income under the head salary from the following : Basic : Rs. 20000 per month DA : 50% of basic Bonus : 8% of basic + DA Commission : 1% of sales, commission = Rs. 100000 HRA : 30% of basic Free telephone, mobile, car facility is provided to employee. Education expenses of his two sons (Rs. 10000 per annum) is borne by employer. He is also provided 1 LTC in 4 years.
Solution : Basic : 20000*12 = 2,40,000 DA : 1,20,000 Bonus : = 28,800 commission = 1,00,000 HRA is tax free upto 40% or 50% of basic + DA = nil all other perquisites are tax free, so they will not be taxed. Total salary = 488800 answer
An employee is a director of a company. He also has 12% of the shares of the company. Will his salary be a salary of income from business and profession ? Yes, it will be salary as he is getting it as salary for working in a company
Calculate salary from the following information : Sitting fees Rs. 20000 Non-practising allowance : Rs. 24000 Hill allowance : Rs. 10000 (the place 800 meter high) Technical journal allowance Rs. 5000 solution : 20000+24000+10000 = 54000 technical journal allowance is tax free
A company provides free lunch facility to company. It costs Rs. 40 per lunch. Is it taxable as perquisite? No Upto Rs. 50 is tax free
A company provides free transport facility to office and home. Is it taxable ? Tax free
Example : For the financial year 2008-09, ‘A’, a Central Government Officer receives salary of Rs. 77,000 (including dearness allowance of Rs. 42,000) and entertainment allowance of Rs. 18,000. His contribution to provident fund during this period is Rs. 7,200. In addition, he has purchased National Savings Certificates (VIII Issue) for Rs. 6,000. He has been provided with accommodation by the Government for which the rent determined is Rs. 375 per month and this is recovered from A’s salary. Compute A’s tax liability for the assessment year 2009-10 assuming that he has no other income.
Solution .. Salary+ DA is taxable : 77000 entertainment allowance : (exemption 1/5 or 5000, for govt. Employee) (18000-5000) = 13000 contribution to PF and NSC is allowed as deduction in 80C : 13200 taxable income : 90000 – 13200 =76800, which is tax free.
What are Sections 15 to 17 of income tax about ? Salary
What are Sections 22 to 27 of Income tax about ? Income from house property
What are Sections 28 to 44D of Income tax about ? Profits and gains of business or profession
What are Sections 45 to 55A of income tax about ? Capital gains
What are Sections 56 to 59 of Income tax about ? Income from other sources
Where can we include the income of official liquidator? An official liquidator appointed by the Court or by the Central Government is also become an employee of the Central Government under Section 448 of the Companies Act, 1956 and consequently the remuneration due to him would also be assessable under the head ‘Salaries’.
if an employee receives any money from his employer as part of the terms of employment for not carrying on any profession, where will go as per income tax ? Salary
Where will you put personal gifts received by the employee from his own employer on account of the personal regard or love and affection for income tax purpose ? It is tax free
What should we take as salary – amount actually received or gross amount ? Gross amount any tax deducted at source or other deductions on account of provident fund, insurance premium, or on any other account made by the employer from the salary income, should be added to the net salary received by the employee.
The employer becomes insolvent and therefore salary remains outstanding for an employee. Is he still liable to pay tax ? Yes Salary is taxable even if the money is not received or could not be recovered from the employer due to his insolvency or any other reason
A payment in appreciation of personal qualities is a salary or not, it is made by employer ? No it is not salary
Raju is employed in a Gas supply company, the company supplies free gas to Raju, is it taxable ? Yes it is taxable at cost to the employer
Are the following facilities taxable to a non-specified employee : free sweeper, gardener, cook, lunch, car facility ? No
Are the following facility taxable to a non-specified employee :Rent free house? Rent Free house is taxable in the hands of all the assessees
How much exemption is provided for Compensation received by a workman under the Industrial Disputes Act, 1947 ? Rs. 50000 (the limit may change as per govt. Notification)
An employee gets commuted pention, he also receives gratuity, how much is tax free ? (Assuming it to be a non-government employee) one-third of the pension which he is normally entitled to receive
Can a firm avoid income from housing property by transferring it to individuals ? No If a firm transfers its house property to its partners, before dissolution, merely by book entries, annual value of the property is taxable in the hands of the firm
Can an individual have concession for self occupied property for two houses? No Where the assessee has occupied more than one house for the purposes of residence for himself and family members, he has to make a choice of one house only in respect of which he would like to claim exemption. Other self-occupied houses will be treated as if they were let out
Can depreciation be claimed in respect of leased assets ? No Depreciation is allowable to the assessee only in respect of those capital assets which are owned by him.
What is the difference between salary and wages ? ‘Salary’ is generally used in respect of payment for services of a higher class, whereas ‘wages’ is confined to the earnings of labourers. However, for income-tax purposes there is no difference between salary and wages.
What is pension ? Pension is a periodical payment for past services.
What is annuity ? Annuity is annual grant made by the employer to the employee.
What is gratuity ? Gratuity is a lump sum payment for past services.
What is perquisite ? Any gain or profit incidentally made from employment in addition to the regular salary / wages / remuneration.
What are tax-free perquisites ? Medical benefits tea, snacks residetial accommodation at site reimbursement of mobile / telephone bills employer's contribution to staff insurance scholarship to children of employee interest free or concessional upto 20000 journal / periodicals related to work refresher courses/ training laptops / computers
What are taxable perquisites ? Rent free accommodation (sec. 17(2)(i)) residential accommodation club membership payment of loans of employees payment of educational expenses of employee domestic servant interest free loan / concessional interest loan
What is the difference between revenue and capital receipt ? An amount referable to fixed capital is a capital receipt whereas a receipt referable to circulating capital would be a revenue receipt Only revenue receipt is taxable in income tax and only revenue expenditure is allowed
If you receive any compensation on cancellation of a contract, is it a capital receipt ? compensation received for the loss of a capital asset is a receipt of a capital nature whereas the compensation received for damage to or loss of a trading asset is a revenue receipt.
What type of receipt is commutation of service or insurance amount received? a lump sum payment received in commutation of salaries or pension is a capital receipt, However, it would be taxable as salary income. Any amount received under a policy of insurance would be a revenue receipt if the policy was held by the assessee as a trading asset and it would be a capital receipt if the policy was held as a capital asset.
Will it be taxable for a debenture holder : the premium received on redemption or the discount on issue of the debentures by the company No, It would be a capital receipt and would not consequently be liable to tax
Royalty received by a mine owner shold be income from business and profession – is it true ? No Royalties in every case are taxable as ‘income from other source
Compensation received on cancellation of agency should be a capital receipt, so it should not be taxed – is it true ? No it is taxable as business income by virtue of the specific provision in Section 28 of the Act
An employee director of a company was paid Rs. 7,50,000 as a lump sum consideration for not resigning from the directorship. Should it be taxed ? It is a reward received from the employer. Therefore it is a revenue receipt.
the sales-tax collected from the buyer of goods is a capital receipt. - it is true ? No the sales-tax collected from the buyer of goods is a revenue receipt.
Receipt in substitution of a source of income is a capital receipt – is it true ? Yes
If you have spent money on training of production manager abroad to study new methods of production- is it a revenue expenditure Yes Amount spent by a company for sending its production manager abroad to study new methods of production is a revenue expenditure
What will be the date of receipt – the date of cheque / date of encashment ? If the payment is made by the drawee on presentment of the cheque, the date of receipt of the cheque and not the date of its encashment shall be the date of receipt.
How will you determine the place of receipt of some payment ? If the postal expenses are borne by the creditor, the place of debtor would be place of receipt. If, on the other hand, the debtor bears the postal expenses, the place of creditor would be the place of receipt.
What will be the Date and place of receipt in case of articles sent by V.P.P. In this case the place of the delivery by the Post Office would be the place of receipt and the date of receipt would be the date of payment by the buyer.
What are the incomes deemed to be received ? All sums deducted by way of taxes at source (Section 198). Incomes of dependent persons which are included in the income of the assessee under Sections 60 to 64. unexplained or unrecorded investments (Section 69). unexplained or unrecorded moneys. (Section 69A)
Where does income acrue – at your registered office or at the place of contract ? Income accrues at the place where the source of the income is situated, which may or may not be the same as the place from which the business activities are carried on. Normally, income accrues at the place where the contract yielding the income is entered into and for this purpose the contract should be taken to have been entered into at the place where the offer is accepted
What part of income of business of which all the operations are not carried out in India, will be deemed as income arising out in India in the case of a business of which all the operations are not carried out in India, only such part of the income as is reasonably attributable to the operations carried out in India is deemed to have arised in India
What is relation between business connection and income ? Income arising through or from business connection to any assessee is deemed to accrue or arise in India where a business connection actually exists
What is business connection? a branch office, factory, agency, receivership, management or other establishment for the purchase or sale of goods or for transacting any other business a factory where goods are made for export outside India agent or agents in India for the systematic and regular purchase of raw materials or for the sale of the non-residents' goods a close financial association between a resident and a non-resident company a subsidiary company to sell or otherwise deal with the products of the non-resident parent company a continuing licence to a non-resident
What are the cases when income is assessed in the same year when it accrues ? Assessment of non-residents in respect of their income from shipping business (Section 172). Assessment of persons leaving India (Section 174). artificial juridical person formed for a particular event or purpose (section 174A). persons trying to alienate their assets with the object of avoiding liability to tax (Section 175). Assessment of the income from discontinued business (Section 176).
Can tax be levied when it appears to the Assessing Officer that an individual may leave India during the current assessment year without any intention of returning to India Yes
Suppose your employer reimburses your expenses (incurred for office work) is it taxable ? No Mere relief or reimbursement of expenses is not treated as income.
If an employer gives goods instead of salary, how can its value be identified for tax purpose ? If income is received in kind, its valuation will be made in accordance with the rules prescribed in the Income-tax Rules, 1962. Where there is no prescribed value in the rules, valuation thereof is made on the basis of its market value.
If a person buys and sells a crop, is it agricultural income ? If a person purchases a standing crop, and makes a profit out of it, the income is not agricultural income to the buyer of the standing crop. The income to the seller of standing crop, who has put in labour and skill to make the crop sprout out of the land, is agricultural income.
What are the cases when operations on agricultural produce is also treated as agricultural income ? The operation must be one which is ordinarily employed by the cultivator to make the produce fit for market, i.e., threshing, winnowing, cleaning, drying, etc. There is no market for the produce as received from the farm. The process to make it marketable has been performed either by the cultivator or receiver of rent-in-kind. The produce must not change its original character.
Can income tax assessment be postponed in the event of dispute regarding income ? No Income-tax assessment cannot be held up or postponed merely because of existence of a dispute regarding the title of income.
What is ‘carry-over’ concession in the case of LTC ? If travel concession or assistance is not availed during any of the four year block period, exemption can be claimed provided he avails the concession or assistance in the calendar year immediately following that block
Can a person claim taxi fare for visit on LTC ? No air -economy class or AC rail first class or first class by public transport is permitted
Is tiffin allowance taxable ? Yes It is given for lunch and refreshments to the employees. It is taxable.
Is servant allowance taxable ? Yes It is fully taxable even if it is given to a low paid employee, not being an officer, i.e., it is taxable for all categories of employees.
Is non practicing allowance taxable ? Yes It is generally given to those medical doctors who are in government service and they are banned from doing private practice. It is to compensate them for this ban. It is fully taxable.
Is hill allowance taxable ? Yes It is given to employees working in hilly areas on account of high cost of living in hilly areas as compared to plains. It is fully taxable, if the place is located at less than 1,000 metres height from sea level.
Is overtime allowance taxable ? When an employee works for extra hours over and above his normal hours of duty he is given overtime allowance as extra wages. It is fully taxable.
Is deputation allowance taxable ? Yes When an employee is sent from his permanent place of service to some other place or institution or organisation on deputation for a temporary period, he is given this allowance. It is fully taxable.
Is warden allowance taxable ? Yes These allowances are given in educational institutions for working as Warden of the hostel and/or working as Proctor in the institution. These allowances are fully taxable.
Vehicle provided to travel from place of work to home is taxable or not ? No use of any vehicle provided by a company or an employer for journey by the assessee from his residence to his office or other place of work, or from such office or place to his residence, is not be regarded as a benefit or amenity granted or provided to him free of cost or at concessional rate for the purpose of computation of perquisite.
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