Excellence in direct taxation - Orientation for new CA's
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This document provides an overview of taxation in India from CA Pankaj G. Shah. It discusses key aspects of direct and indirect taxes, important changes introduced by GST, international taxation treaties and regulations, tax planning strategies, and consequences of tax evasion. It emphasizes the need for updated technical knowledge of tax laws and ethical tax planning to minimize tax liability within legal frameworks.
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Excellence in direct taxation - Orientation for new CA's
- 1. CA. Pankaj G. Shah BBA, LLB Hons, CS, FCA, DISA(ICA) A good career in corporate world
- 3. Income tax Act Master Guide to Act Commentary on Taxation Journals – CA Journal, BCAJ, CTC Journal, taxsutra.com, AIFTP Journal Legal decisions
- 4. Tax is a cost to civilization Progressive system of taxation in developing economy Complicated tax laws Substantial tax costs Complex Direct and Indirect taxes
- 5. Taxation Direct taxes (Income tax) Indirect taxes GST Customs Other taxes
- 6. Game changer Seamless Input tax Credit Reverse Charge Mechanism Periodical reporting and planning Inventory and quantitative monitoring Backward area subsidies and grants
- 7. Classification of Products Determination of Time, Value and Place of supply Exemption to SEZ from IGST Refund of taxes Compliance of conditions Unsettled law and Procedures
- 8. Ind-AS – Departure from Historical cost to Fair Value Accounting Income Computation and Disclosure Standards(ICDS) MAT Adjustments for Ind-AS Litigations bound to increase
- 9. Closely associated with taxation Transactions to evade tax are considered Benami Such property can be confiscated Financial Penalty and Prosecution prescribed Minimise the impact and take precautionary measures
- 10. Effective Interest Rate v. Effective Tax Rate Proper Tax planning results in substantial savings Balancing approach • More expansion higher tax savings but may lead to wrong financial decision • Inflation of turnover and margins may result in high tax incidence and complications • Both have to work in tandem
- 12. Residence and Source based taxation High Rates of taxes Globalisation and WTO Expatriate and Non residents taxation Foreign Exchange Management Act Tax determination by CA in Form 15CA and 15CB
- 13. Nature Taxable in India Business Income PE Must Interest PE Irrelevant Royalty PE Irrelevant Fees for technical services PE Irrelevant Capital Gains Asset located in India Salary Service rendered in India
- 14. Tax residency Certificate Beneficial shall prevail Important clauses •Make available •Non existence of FTS •Most Favoured Nation •Restrictive definition
- 15. Most appropriate method CUP CPM RPM PSM TNMM Any other method Arm’s Length Price International Transactions Associated Enterprises
- 17. Base erosion and Profit Shifting (BEPS) Revision of Treaties with Tax Havens •Mauritius •Cyprus •Limitation of Benefits Place of Effective Management
- 19. Caution – Severe Consequences Commercial substance Transaction to be within corners of law Deductions, Exemptions, Concessions More Investible surplus Reduction of Tax Outflow
- 20. • Availing Exemptions • Claiming deductionsTax Planning • Fraud / False methods • MisrepresentationTax Evasion •B/w Planning and Avoidance •Method to Circumvent Legal provisions to minimize tax without violation of law Tax Avoidance
- 21. “Every man is entitled if he can, to order his affairs so that the tax attaching under the appropriate Acts is less than it otherwise would be. If he succeeds in ordering them so as to secure this result, then, however unappreciative the Commissioners of Inland Revenue or his fellow taxpayers may be of his ingenuity, he cannot be compelled to pay an increased tax” Literal Interpretation of Statute Spirit of Law not Binding Pay Minimum Tax
- 22. Step 1 Step 2 Step 3 Step 4 Individually Every Step is Legal But all steps in Totality is to be seen “Where there is a series of steps taken by the taxpayer, the court can look at the end result alone in determining whether the law has been breached rather than applying the law to each individual step“ Purpose of Legislation is Important
- 23. Colourable Device Not Tax Planning Dubious Methods Substance over Form Moral Obligation of Every Citizen to pay tax Departed from Tradition of Holding Tax Avoidance as Legal and Legitimate “No one can now get away with a tax avoidance project with the mere statement that there is nothing illegal about it.” 5 Judge Bench of SC
- 24. Tax Avoidance and Evasion was obiter dicta of Justice Reddy in Mcdowell’s. Duke of Westminster N.A. only in case of artificial and colourable device Mcdowell’s majority view - tax planning within framework of law is permissible Colourable device if series of preordained steps without any commercial substance. Vodafone -every taxpayer can arrange his affairs to minimize taxes and not bound to choose pattern toreplenish the treasury
- 25. A Single transaction may attract implications and liabilities under various statutes. Therefore caution has to be ensured while planning. Transfer of Property to spouse without consideration General Law – Transfer complete Income tax Act – Clubbing of Income from such property in hands of transferor Wealth tax Act – Clubbing of wealth in hands of transferor Power of Attorney Transactions saved stamp duty and capital gains taxes but now are considered as Benami u/s 2(9) of Benami Act
- 26. Legislative Intent Intent not to be ignored Tax obligations are met Flexibility Adaptable to subsequent statutory negation Watchful of significant developments in the field Comprehensive knowledge of law and Regulations including Statutes Case Law Civil and Personal Law
- 27. •Shifting to Tax havens, Transaction with Tax haven countries Varying the Residential Status •Individual, HUF, Firm, Cooperative Society, AOP, Company (Tax holidays only to Company), LLP Choosing Suitable Form of Assessable Entity Eg. •Share capital, Loan capital, Lease, Mortgage, Tax Exempt Investments, Priority Sector. Choosing Suitable Investment mode •Accelerated Depreciation, Investment Allowance Programmed Replacement of Assets
- 28. •Hotel Industry, Agro Industries, Export Oriented Industry, MAT Diversification of Business Activities •Sub Partnerships Diversion of Income by overriding Title •Expenses not expressly allowed can be claimed. Commercial Expediency
- 29. Interpretation of ‘transfer’ Slump sale Immovable properties Startup taxation and Benefits Deductions under Section 54 Long term capital Gains •Penny stocks and other cases
- 30. Fair Market Value Profit based Method • Discounted Cash Flow method Asset Based methods • NAV Rule 11UA
- 31. Section 56 Transactions received without consideration is income Family Arrangements and restructurings Rights issue and Bonus issue Share pricing Immovable and Movable property transfers
- 32. Taxation of new financial instruments developed by Banks Mark to market loss/ gains not recognized in taxation Taxation of Future and options No guidance available
- 34. Section 2(22)(e) Loan or advance Given to substantial shareholder By Company out of accumulated reserves Deemed as income
- 35. Expense related to Exempt Income Not allowable Strategic Investments in subsidiaries and associates Special purpose vehicles Rule 8D – Adhoc formula
- 36. Amalgamations and Demerger • Tax neutral if qualifying • Carry forward of losses • Eligibility of MAT credit Conversion from Company to Limited Liability Partnership Slump Sale Slump Exchange
- 37. Settlement of Loans and NPA Waiver of term loan towards capital purposes Waiver of Interest Waiver of Working capital loans Waiver of creditors and other trade liabilities
- 38. Benefits under SICA Treatment of transactions under IBC
- 39. Section 10A – Special Economic Zones Section 80IA – Infrastructure development – Roads, Port, Rail, Bridges, etc. Section 80IB/IC – Units in Backward areas Works Contract
- 40. Sales tax subsidy Sales tax Deferral schemes Industrial promotion schemes of State Governments
- 42. TDS on • Contract payment, Rent, Interest, Commission, Professionals Disallowances for non deduction Recovery provisions Penal Interest Prosecution on late deposit
- 43. Taxing Statutes to be construed Strictly Deductions, Exemption provisions to be read liberally Circulars binding only on Department Laws of Natural Justice Opportunity of hearing Cross examination Cooperation in proceedings Commercial Expediency
- 44. Rights and Duties Evidentary Value of Statements and Submissions Year of declaration Demonetisation impact Section 115BBE Block Assessment
- 45. One time opportunity Immunity from Penalty and Prosecution Additional tax to be paid Reasonable assessment Non appealable
- 46. Writ Jurisdiction Challenging validity of provisions Stay Petitions •Balance of convenience, Irreparable loss, Prima facie case
- 47. Scrutiny Assessment Reassessment Revision First Appeal Second Appeal - ITAT Questions of Law Time limits
- 49. Tax on Book Profits Rate of Tax 18.5%
- 51. CA. Pankaj G. Shah +91 96918 93040 pankajgshah@gmail.com
Editor's Notes
- Everybody does planning for getting some benefit/result. Government plans to optimally utilise its limited resources for eg. Budget Similarly a Person also plans to save funds and reinvest the accruals in his business to maximise wealth and prosperity. Planning in Existing Business or in a New Project/Deal. Tax planning in Vodafone's case ended up in row. Tax planning should not be sham i.e. a transaction which is commercially inert.
- Whether it is planning or avoidance or evasion depends on the method adopted. Truly Tax Planning for eg. Is Investment in New house property u/s 54F to claim deduction in Capital Gains or investment in REC Bonds, etc. Tax Evasion: Involves element of deceit, Misrepresentation, Concealment, Fraud. For eg. Unaccounted Sales, Bogus expenses, Taking Accommodation entries. Tax Avoidance: Making various schemes to bypass the legal framework. Between Planning and Evasion. No fraud or deceit but smartly circumventing. For eg. Dividend Stripping, Bonus stripping, Vodafone deal.
- There is a Series of Transactions. Some or all transactions may have no business purpose and may be only for tax avoidance
- So far as the contention that it is open to every one to so arrange his affairs as to reduce the brunt of taxation to the minimum, was concerned, the tax planning may be legitimate provided it is within the framework of law. Colourable devices cannot be part of tax planning and it is wrong to encourage or entertain the belief that it is honourable to avoid the payment of tax by restoring to dubious methods. It is the obligation of every citizen to pay the taxes honestly without resorting to subterfuges. Courts are now concerning themselves not merely with the genuineness of a transaction, but with the intended effect of it for fiscal purposes.
- Similarly every planning must be seen from various points of view to be successful.
- By changing residential status to tax havens tax can be saved significantly. Availing of Technical Services from a tax US or UK reduced 30% cost of services due to tax as compared to other countries due to tax treaties. Entity Form is important – Like HUF gives additional tax slab benefit, Partnership, LLP etc. save Dividend distribution tax and MAT over a Company, etc. However Tax holiday to Hotel Industry is only available to Company form of business. Investments –
- Expenses not expressly provided for in the Act can be claimed as Commercial Expediency such as Legal Expenses, Various Compensations, Business Promotion expenses, etc.