Taxation Overview
- Key Distinctions:
- Not everyone who pays tax files a return:
- Example: TDS (Withholding Tax) deducted at source.
- Not everyone who files a return pays tax:
- Example: Filing a return without having taxable income.
- Taxes vs. Duties:
- Tax: Levied on individuals, wealth, or sales, primarily based on value.
- Duty: Levied on goods, primarily based on volume.
- Cess and Surcharge:
- Cess:
- Additional tax levied as a percentage of an existing tax amount.
- Collected for a specific purpose (e.g., education cess, health cess).
- Imposed by both Centre and States.
- Governed by Article 271 of the Indian Constitution for Union purposes.
- Surcharge:
- Additional tax levied as a percentage of an existing tax amount.
- Collected without a specific purpose (e.g., surcharge on high-income individuals).
Personal Income Tax:
- Levied on individuals, Hindu Undivided Families (HUFs), and partnership firms based on their income.
Corporate Tax:
- Levied on a company’s profit income.
Minimum Alternative Tax (MAT):
- Introduced in 1996 to ensure companies with significant book profits pay a minimum tax.
- Rate: 18.5% of book profits.
- Applicable when the total income of a company, after all tax deductions, is less than 30% of book profits.
Alternative Minimum Tax (AMT):
- Similar to MAT but applicable to commercial entities other than companies (e.g., LLPs, partnership firms).
Tax Elasticity
- Proportionate change in tax revenue without any discretionary change relative to GDP.
Tax Buoyancy
- Actual/observed change in tax revenue related to GDP.
Tax Expenditure
- Revenue forgone as a result of exemptions and concessions.
Tax Shelter
- Legal method to reduce tax liability by investing income in specific types of investments.
Impact and Incidence of Tax
- Impact of Tax: The first point of contact on whom the tax is imposed.
- Incidence of Tax: The ultimate burden of the tax.
Inverted Duty Structure
- Higher import duty on raw materials and intermediate goods than on final products.
- Probable reason: FTAs result in lower duty on final goods from FTA partners compared to raw materials from non-FTA partners.
Goods and Services Tax (GST)
- Exports: Not subjected to GST.
- Revenue Neutral Rate (RNR): The GST rate at which tax revenue collected before and after GST implementation remains the same.
- Rate Fitment Process: Done by the GST Council to assign specific goods or services to particular tax slabs.
- Article 246A: Grants parallel powers to the Centre and State to make laws on taxation of goods and services.
- Exemptions: Petroleum crude, high-speed diesel, motor spirit (petrol), natural gas, and aviation turbine fuel (ATF).
- Cross Empowerment: Enables taxpayers to interact with a single tax authority for CGST, SGST, and IGST.
- Anti-Profiteering Clause: Section 171 of the CGST Act (and its corresponding SGST provisions) ensures GST benefits are passed to consumers.
Composition Scheme:
- For small businesses with turnover up to ₹1.5 crores (now extended to small service providers with turnover up to ₹50 lakhs in the preceding year).
- Quarterly tax payments.
- Not Eligible: Businesses dealing in ice cream, tobacco, pan masala, inter-state trade, or supply through e-commerce operators.
HSN Code (Harmonized System of Nomenclature):
- A six-digit code developed by the World Customs Organisation to classify products for taxation purposes and identify applicable tax rates.
Tax Amnesty Schemes
Income Disclosure Scheme 2016
- Introduced as part of Union Budget 2016.
- Penalty: 45%.
PM Garib Kalyan Yojana
- Introduced under the Taxation Laws (Second Amendment), 2016.
- Tax: 50% of undisclosed income.
- Additional 25% of the income to be invested in the scheme, refundable after four years without interest.
- Applicable only for undisclosed income in cash or bank deposits, not in other forms.
Base Erosion and Profit Shifting (BEPS)
- Tax planning strategies that exploit gaps and mismatches in tax rules to artificially shift profits to tax havens where corporations have no economic activities.
- Reduces competitiveness of domestic firms, giving MNCs an advantage.
- OECD BEPS Project (2015): Initiated during the G20 Antalya Summit with participation from 78 countries, including India.
- Country-by-Country Report: MNCs must report revenue and profits earned in each country.
Transfer Pricing and APA
Transfer Pricing
- Pricing of goods and services sold between related legal entities within an enterprise.
- Indian Transfer Pricing Code requires transactions to comply with the Arm’s Length Price (the price the transaction would have in an open market).
Advanced Pricing Agreement (APA)
- An agreement between a taxpayer and the tax authority on the pricing of existing or proposed transactions between related parties.
- Valid for five years.
Double Taxation Avoidance Agreement (DTAA)
- A tax treaty between two or more countries to prevent double taxation on the same income.
- Typically applies when a taxpayer resides in one country but earns income in another.
- Issues: Encourages investment but may lead to Round Tripping and Treaty Shopping.
Round Tripping
- Indian money flows out and returns through DTAA countries to avoid taxes.
- Mailbox Company: A company that is neither Indian nor from a DTAA country but uses DTAA countries as intermediaries to invest back into India.
Treaty Shopping
- Inappropriate use of tax treaties by residents of a third country to gain tax benefits.
India-Mauritius Protocol 2016
- Amended the DTAA between India and Mauritius (1982).
- Also impacts the DTAA between India and Singapore.
- India allowed to tax capital gains on investments from Mauritius:
- Investments before 2017: Grandfathered (exempt).
- 2017-2019: 50% of applicable tax (subject to LoB).
- Post-2019: Full tax applicable.
Limitation of Benefit (LoB)
- Limits treaty benefits to entities meeting specific conditions to exclude treaty shopping, round tripping, and shell companies.
Place of Effective Management (POEM)
- Introduced by the Finance Act, 2015.
- A company with POEM in India will be treated as an Indian resident, and its global income will be taxed under Indian law.
- Targets shell companies retaining income outside India despite effective control in India.
General Anti-Avoidance Rules (GAAR)
- Allows tax authorities to deny tax benefits if transactions lack any commercial purpose other than tax avoidance.
- Indian Rule: Based on “look through” rather than “look at.”
- Applicable for investments made after March 2017 and claiming tax benefits exceeding ₹3 crores.
- Approval process involves vetting by the Principal Commissioner of IT and an approving panel headed by a High Court judge.
Tax Information Exchange Agreement (TIEA)
- Promotes international cooperation in tax matters through information sharing.
Convention on Mutual Administrative Assistance in Tax Matters (MAC)
- Facilitates bilateral tax information exchange agreements between participating states.
- Developed by OECD and the Council of Europe; came into force in 1995.
- India joined in 2012.
