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Unit 1-tk-part-2

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Corporate Tax Planning - Residential Status of Persons - Assessment Year 2016-17 by Dr. Thulasi Krishna. K

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Unit 1-tk-part-2

  1. 1. Corporate Tax Planning - Unit I RESIDENTIAL STATUS (AY: 2016-17) Dr. THULASI KRISHNA. K, Ph.D. Dept. of Management Studies MITS – Madanapalle, A.P., India
  2. 2. Residential Status Dr.TK • Determination of residential status of a person is very important for the purpose of levy of income tax, as income tax is levied based on the residential status of tax payer. • What is essential is the status during the previous year and not in the assessment year. Moreover, the concept of residential status is nothing to do with the nationality or domicile of a person. • The residential status of the assessee may change from year to year. • An Indian, who is a citizen of India, can be non-resident for Income Tax purposes, whereas a foreigner can be resident of India for Income Tax purpose.
  3. 3. Tax Liability = Total Income * Rate of Tax Residential Status ≠ Citizenship Residential Status Resident Non - Resident Ordinarily Resident Not Ordinarily Resident Section 6(1) Section 6(6)
  4. 4. Taxable Entity A taxable entity can be: • An Individual • A Hindu Undivided Family • A firm • An Association of Persons • Joint stock company • any other person
  5. 5. • The following table explains how these are subcategorized with respect to their residential status. INDIVIDUAL/HUF RESIDENT ORDINARY NOT-ORDINARY NON- RESIDENT Others Included in the Definition of “Person” RESIDENT NON-RESIDENT
  6. 6. Determining the Residential Status of An Individual • Section 6(1): This section applies to individuals. If an individual is to qualify as resident of India, he has to fulfill at least one of the following two basic conditions: Condition Explanation 1 He is in India in the previous year for a period of 182 days or more 2 He is in India for a period of 60 days or more during the previous year and 365 days or more during 4 years immediately preceding the previous year
  7. 7. Exceptions: In the following two cases, an individual needs to be present in India for a period of 182 days or more in order to become resident in India: 1. An Indian citizen who leaves India during the previous year for the purpose of taking employment outside India 2. An Indian citizen leaving India during the previous year as a member of the crew of an Indian ship. 3. An Indian citizen or a person of Indian origin who comes on visit to India during the previous year (a person is said to be of Indian origin if either he or any of his parents or any of his grand parents was born in undivided India).
  8. 8. Determining if A Resident is an Ordinary Resident Section 6(6): This section applies to individuals. If an individual is to qualify as an ordinary resident of India, he has to fulfill both of the following two conditions in addition to fulfilling the criteria as provided in section 6(1): Condition Explanation 1 He has been resident in India in at least 2 out of 10 previous years immediately preceding the relevant previous year. 2 He has been in India for a period of 730 days or more during 7 years immediately preceding the relevant previous year.
  9. 9. • Individuals who satisfy any one of the basic conditions and do not satisfy the two additional conditions, are classified as Resident but not ordinary resident. • Individuals not satisfying anyone of the basic conditions will be classified as Non-Resident.
  10. 10. Determining the Residential Status of HUF/Firm/AOP/AJP • Section 6(2): This section applies to Hindu Undivided Family. The distinction under this section is made as: “A Hindu undivided family is said to be resident in India if control and management of its affairs is wholly or partly situated in India. A Hindu undivided family is non- resident in India if control and management of its affairs is wholly situated outside India.” • Control and management is situated at a place where the head, the seat and the directing power are situated.
  11. 11. • Section 6(6)(b): A resident Hindu undivided family is an ordinarily resident in India if the karta or manager of the family business satisfies the following two additional conditions: Condition Explanation 1 He has been resident in India in at least 2 out of 10 previous years immediately preceding the relevant previous year. 2 He has been in India for a period of 730 days or more during 7 years immediately preceding the relevant previous year.
  12. 12. Residential Status of Company • As per section 6(3), an Indian company is always resident in India. • A foreign company is resident in India only if, during the previous year, control and management of its affairs is situated wholly in India. • However, a foreign company is treated as non-resident if, during the previous year, control and management of its affairs is either wholly or partly situated out of India.
  13. 13. To put it simple, • Resident: If Control and Management of its business affairs is wholly in India. • Non-Resident: If Control and Management of its business affairs is wholly or partly outside India.
  14. 14. • The residential status of a company and the place of its control and management should not be decided by the location of the registered office of the company. • As a rule, the direction, management and control, the head, seat, and directing power of a company’s affairs are situated at the place where the directors’ meetings are held. • Consequently, a company would be resident in the country if the meetings of directors who manage and control the business are held there.
  15. 15. Case: Narottam & Periera Ltd., Vs CIT (1953) • It is not what directors have power to do, but what they actually do, that is of importance in determining the question of the place where the control is exercised.
  16. 16. Definition of Company Company [Sec. 2(17)]: The expression ‘company’ is defined to mean the following: • Any Indian company; or • Any body corporate incorporated under the laws of a foreign country; or • Any institution, association or a body which is assessed or was assessable/assessed as a company for any assessment year commencing on or before April 1, 1970; or • Any institution, association or a body, whether incorporated or not and whether Indian or non-Indian, which is declared by general or special order of the Central Board of Direct Taxes to be a company.
  17. 17. Indian Company [Sec. 2(26)]: An Indian company means a company formed and registered under the Companies Act, 1956. Besides, it includes the following: • A company formed and registered under any law relating to companies formerly in force in any part of India other than the State of Jammu and Kashmir and the Union territories; • A corporation established by or under a Central, State of Provincial Act; • Any institution, association or body which is declared by the Board to be a company under section 2(17); • A company formed and registered under any law in force in the State of Jammu and Kashmir; • A company formed and registered under any law for the time being in force in the Union territories of Dadra and Nagar Haveli, (State of) Goa, Daman and Diu and Pondicherry. In the aforesaid cases, a company, corporation, institution, association or body will be treated as an Indian company only if its registered office is in India.
  18. 18. Domestic Company: • As per Section 2(22A)​, "domestic company" means an Indian company, or any other company which, in respect of its income liable to tax under this Act, has made the prescribed arrangements for the declaration and payment of dividends within India in accordance with section 194.
  19. 19. Foreign Company: • As per Section 2(23A) of the Income Tax Act, 1961, Foreign Company is a company which is not a domestic company. Thus, all those companies which do not qualify the conditions to be considered domestic company shall be considered foreign companies.
  20. 20. Industrial Company: • It means a company which is mainly engaged in the business of generation or distribution of electricity or any other form of power or in the construction of ships or in the manufacture or processing of goods or in mining.
  21. 21. The following activities are held as ‘manufacture’ or ‘processing’ of goods on the basis of judicial pronouncements: • Book publishing • Mixing different types of tea to arrive at a desired blend • Manufacture and selling of carpets but having major source of income from sale of import entitlement (generated by export of carpets) • Production of cinematographic films • Tailoring clothes • Conversion of computer cash vouchers, invoices, etc., into balance sheet, stock account, etc. • Sorting out, washing, drying and blending wool. • Undergoing a change in a commodity as a result of some operation (many be manual or mechanical) and as a result a new and distinct commodity emerges.
  22. 22. A Company in which Public are Substantially Interested: [Sec. 2(18)] • Owned by Government/RBI – A company owned by the Government or the RBI or in which not less than 40% shares (in terms of value) are held by the Government or the Reserve Bank or a corporation owned by the Reserve Bank. Ex. BEML, BHEL, BPCL etc. • Section 25 companies – A company registered under section 25 of the Companies Act, 1956, namely companies for promotion of commerce, art, science, religion, charity and prohibiting the payment of any dividends to its members. Ex: International Bible Society India, Association of Lady Entrepreneurs of Andhra Pradesh, Ravindranath Medical Foundation, etc.
  23. 23. • A company without share capital - A company having no share capital and declared by the Central Board of Direct Taxes to be a company in which the public are substantially interested. • Nidhi or Mutual Benefit Society- A company which carries on, as its principal business, the business of acceptance of deposits from its members and which is declared by the Central Government under section 620A of the Companies Act to be a Nidhi or Mutual Benefit Society. • Company owned by a Co-operative Society - If it is company in which shares carrying at least 50% of the voting power have been allotted unconditionally to or acquired unconditionally by, and are throughout the relevant previous year beneficially held by, one or more cooperative societies; or • Listed Companies - If it is company which is not a private company as defined in Section 3 of the Companies Act, 1956 and equity shares of the company were, as on the last day of the relevant previous year, listed in a recognised stock exchange in India;
  24. 24. Investment Company: • It means a company whose gross total income consists mainly of income which is chargeable under the heads ‘Income from House Property’, ‘Capital Gains’ and ‘Income from other sources’. Ex.: Larsen & Toubro Mutual Fund, Tata Investment Corporation
  25. 25. Widely-held Company • A company in which the public are substantially interested is known as widely-held company.
  26. 26. Closely-held Company : • A company in which the public are not substantially interested is known as a closely-held company. Ex.: Family owned companies
  27. 27. Incidence Of Tax for Corporate Assessees Particulars Resident in India Non-resident in India Indian income Taxable in India Taxable in India Foreign income Taxable in India Not Taxable in India
  28. 28. • Indian income is always taxable in India irrespective of the residential status of the taxpayer. • Foreign income is taxable in the hands of resident in India. Foreign income is not taxable in the hands of non-resident in India.
  29. 29. Indian Income Any of the following three is an Indian income – • If income is received or deemed to be received in India during the previous year and at the same time it accrues or is deemed to accrue in India during the previous years. • If income is received or deemed to be received in India during the previous year but it accrues outside India during the previous year. • If income is received outside India during the previous year but it accrues or is deemed to accrue in India during the previous year.
  30. 30. Foreign Income If the following two conditions are satisfied, then such income is ‘foreign income’- • Income is not received or not deemed to be received in India; and • Income does not accrue or does not deemed to accrue in India.
  31. 31. •Thank You

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