Capital Gains |Direct Tax Consultancy | Indirect Tax Consultancy

TAXATION

General taxation

International tax treaties
India has entered into double taxation avoidance agreements (DTAs) with the following countries:

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Armenia
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Australia
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Austria
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Bangladesh
• Belarus
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Belgium
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Nepal
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Brazil
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Zealand
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Bulgaria
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Norway
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Canada
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Oman
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China
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Philippines
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Cyprus
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Poland
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Czech Republic
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Portuguese Republic
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Denmark
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Qatar
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Egypt
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Romania
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Finland
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Russia
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France
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Saudi Arabia
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Germany
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Singapore
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Hashemite Kingdom of Jordan
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Slovenia
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Greece
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South Africa
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Hungary
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Spain
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Indonesia
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Sri Lanka
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Ireland
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Sudan
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Indonesia
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Sweden
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Israel
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Swiss Confederation
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Italy
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Syria
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Japan
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Tanzania
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Kazakhstan
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Thailand
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Kenya
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Trinidad and Tobago
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Korea
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Turkey
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Kuwait
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Turkmenistan
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Kyrgyz Republic
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Uganda
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Libya
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United Arab Emirates
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Malaysia
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United Arab Republic
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Malta
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United Kingdom
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Mauritius
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Ukraine
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Mongolia
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United States of America
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Morocco
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Uzbekistan
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Namibia
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Vietnam
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Netherlands
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Zambia

India has limited agreements with the following countries in respect of the income of airlines/merchant shipping:

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Afghanistan
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Pakistan
• Bulgaria
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People’s Democratic Republic of Yemen
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Czechoslovakia
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Russian Federation
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Ethiopia
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Saudi Arabia
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Iran
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Switzerland
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Kuwait
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United Arab Emirates
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Lebanon
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Yemen Arab Republic
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Oman

Existence of Tax credits
Indian tax law authorizes the Indian Government to enter into an agreement with the government of any other country to grant relief in respect of income on which taxes have been paid in both countries, to avoid double taxation of income, to exchange information for the prevention of evasion or avoidance of income tax and to recover income tax.

The Finance Act 2006 introduced a new sec 90A, whereby any specified association in India may enter into agreement with their counterparts in the specified territory outside India and the Central Government may, by notification in the Official Gazette make such provision as may be necessary for adopting and implementing such agreement to grant relied in respect of income on which taxes have been paid in both countries, to avoid double taxation of Income, to exchange information for the prevention of evasion or avoidance of income tax and to recover income tax.

Unilateral relief is also available, mainly to persons who are resident in India. The relied is allowed in respect of income which has accrued outside India where tax is payable both in the foreign country and in India. The foreign country must be one with which India has no tax treaty and the tax must actually have been paid in that country.

Indian tax laws do not contain any provision for tax sparing. Double tax relief is granted but only with reference to tax actually paid. Likewise, tax treaties entered into by India usually do not provide for tax sparing.

Procedures for resolving tax disputes
A taxpayer aggrieved by an order of the assessing officer can appeal against the order to the Commissioner (Appeals). If not satisfied, the taxpayer can take the dispute to the Income Tax Appellate Tribunal and thereafter, to the High Court and Supreme Court. Taxpayers may also file a petition for revision before the Commissioner.

The Income Tax Act 1961 (the “Act”) gives the Commissioner (Appeals) and the Appellate Tribunal considerable autonomy and powers to determine the procedure to be followed in appeals.

An Income Tax Settlement Commission has been established to settle cases relating to assessment and reassessment. The Income Tax Settlement Commission is constituted by the Central Government and it consists of a Chairman and as many Vice Chairman and other members as the Central Government may think fit for settling a particular case. The Chairman and the Vice Chairman function within the Department of the Central Government dealing with direct taxes.

The Appellate Tribunal, consisting of judicial and accountant members, is constituted by the Central Government to hear appeals from the orders of the assessing officer, Deputy Commissioner (Appeals) and Commissioner (Appeals).

A reference on a question of law may be made to the High Court and, in certain cases, directly to the Supreme Court.

Advance Tax Ruling Scheme
The Advance Tax Ruling Scheme has been introduced to facilitate the inflow of foreign investment. The scheme is applicable to non-residents. Under the scheme, advance tax ruling can be given on questions of law or fact or both in relation to a proposed or concluded transaction. In addition to non-residents, residents notified in the Official Gazette by the Central Government will also be allowed to seek advance tax ruling. Ruling are to be given within a period of six months.

Fiscal Year
The Indian assessment year runs from 1 April of every year to 31 March of the next year. Income earned in The “previous year” (the accounting year of the assessee) is taxed in each assessment year.

Method of payment of tax liabilities
Income tax returns, in the prescribed form and verified, are to be submitted to the assessing officer by the due date (sec 139 of the Income Tax Act):

“Due date” means:

(a) where the assessee is-
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a company;
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a person (other than a company) whose accounts are required to be audited under the Act or under any other law for the time being in force; or
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a working partner of a firm whose accounts are required to be audited under the Act or under any other law for the time being in force.

“The 30th day of September of the assessment year”:

(b) In case of any other assessee, the 31st day of July of the assessment year.

Permanent Establishment (PE)
The permanent establishment concept transaction is executed through the internet for years. The concept of PE has formed the basis of application of rules relating to sharing of revenues by various tax jurisdiction in cross-border transactions. One of the conditions for PE is to have a fixed place of or business in any foreign jurisdiction. The concept of PE assumes great importance with regard to Double Taxation Avoidance Agreements (DTAs). Sections 92, 92A, 92B, 92C, 92D and 92E which provide for the computation of income from international transactions as envisaged under the DTA, must be construed to include a PE. Sub-section (iiia) of sec 92F defines a PE to include “a fixed place of business through which the business of the enterprise is wholly or partially carried out”. In addition, sub-section (iii) defines an enterprise to include a person or a PE of such person and includes even those cases where the activity or the business is carried on, directly or through one or more of its units or divisions or subsidiaries, whether such unit or division or subsidiary is located at the same place where the enterprise is located or at a different place or places. Taxation of business income under the DTA would be applicable only if there is a PE or a “fixed place of business” in the source country. Similarly gains arising from the transfer of movable property forming part of the business properly of a PE is taxed in the country where such PE or fixed base is located.

Some examples of permanent establishments are as follows:
a
a place of management;
b
a branch;
c
an office;
d a factory;
e a workshop;
f a mine, oil well or other place of extraction of natural resources.
g a building site or construction or assembly project which exists for an agreed period; and
h provision of supervisory activities for a minimum agreed period on a building site or construction site or construction or assembly project.

The term “permanent establishment” in generality of such agreements does not include:
a
The use of facility solely for the purpose of storage or display of goods or merchandise belonging to the enterprise;
b
The maintenance of stock of goods or merchandise solely for the purpose of storage or display;
c
The maintenance of stock of goods or merchandise solely for the purpose of processing by another enterprise;
d The maintenance of a fixed place of business solely for the purpose of advertising of similar activities which have a preparatory or auxiliary character for the enterprise.

The Supreme Court has started in one of the latest case that circulars or instructions issued by the Central Board of Direct Taxes are binding on the revenue authorities.

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Direct Tax Consultancy

Direct tax consultancy together with innovative tax efficient strategies, provided by us form an integral part of viable business decisions. These help our clients attain the desired goals. We adopt a “result oriented approach” which is flexible and emphasizes delivery and value. It enhances the effect of commercially viable decisions and minimizes the tax burden.
Assessment (audit by tax authorities) and appeals
The assessment and appeals procedure under the Act involves the following:
Self-assessment
Every assessee, before submitting a tax return, is required to make a self-assessment of income and after taking into account the amount of tax already paid by way of TDS and advance tax, pays the balance tax (self-assessment tax) due on the income. Further, along with the tax, any interest arising on account of delay in furnishing of tax return or any default /deferment in payment of advance tax, is also required to be paid. The procedure for self-assessment and determination of tax liability has been depicted below by way of a flowchart.
WITHHOLDING TAX
Withholding taxes on payments other than salaries
Under the Act, a person making certain specified payments such as salary, contractual payments, rent, interest, professional or technical fees, commission, payments to non-residents, etc. is required to withhold tax at source from such payments and comply with the associated requirements in respect of deposit of taxes in the Government treasury in the prescribed manner, issue of tax credit cerficates and filing withholding tax returns. The rationale of withholding tax is to provide a mechanism for tax authorities to collect tax at the source of income, and also to expand the tax base.

Failure to comply with the prescribed withholding requirements could result in the levy of penal interest, penalty and prosecution under the Act, in addition to the liability to make up for the taxes not withheld/deposited.

The following chart depicts the withholding tax provisions prescribed under the act:
Some of the direct tax services provided by us include :
INCOME TAX & WITHHOLDING TAXES
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Advising on Income Tax Planning of Corporates.
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Advising & reviewing of all necessary tax withholding responsibilities.
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Advising all financial subjects which are of your interest and keeping you updated on the new amendments, circulars, notifications & judgments.
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Verification of all payments to vendors for the purposes of determination of correct application of rates and category for deduction of withholding taxes.
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Computation of monthly TDS on the basis of above.
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Monthly tax reconciliation of the TDS due and deducted.
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Preparation and deposit of Monthly challans on or before the statutory due dates.
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Filing of quarterly E-TDS Returns.
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Filing annual Income Tax return.
   
CERTIFICATION WORK
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Issuance of Chartered Accountant certificates u/s 195 required for the Overseas Remittances purposes from time to time.
   
FRINGE BENEFIT TAX
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Compiling the details of Fringe Benefit Tax (FBT) after every quarter.
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Auditing of amounts to be covered under FBT pertaining to organisation.
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Classification of all the expenses from Voucher level (Payroll related and other General Profit and Loss account heads) covered under the FBT and work out the financial deposits to be made to Government on quarterly basis.
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Advising organisation on regular basis on the legal updates pertaining to this.
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Applying of latest tax provisions in this regard.
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Work out the Exclusions allowed in the specific heads and advise the company for the re-classification of the Expense Heads, if any.
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Annual filing of the return for the same.

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Indirect Tax Consultancy

SERVICE TAX
Service tax is a central tax, which has been imposed on certain services and is the latest addition to the genus of indirect taxes like customs and central excise duty. India, a developing country, was somewhat slow in discovering the potential of this kind of indirect taxation for enhancement of revenue collection and it was the Finance Act 1994 that first introduced the service tax provisions through its Chapter V. Service Tax is collected by Central Excise Department.

Some of our services include :
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Compiling and calculating the net service tax on output services after taking benefit of Cenvat Credits.
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Compiling the data of Cenvat Credits for service tax.
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Preparing & Filing of Service tax Returns.
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Advising on the issues relating to Service tax.
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Consultancy on the maintenance of prescribed records.
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Tax Planning as regards the minimization of Service Tax Liabilit
   
VALUE ADDED TAX (VAT)
“Value Added Tax” (VAT) is a tax on value addition and a multi point tax, which is levied at every stage of sale. It is collected at the stage of manufacture/resale and contemplates rebating of tax paid on inputs and purchases.

Some of our VAT related services include :
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Rendering assistance in registration under VAT
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Assistance in claiming input tax credit
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Assistance in furnishing tax returns and claiming refunds
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Advice on the legal aspects of VAT
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Rendering advice on the wide range of issues in relation to tax invoices and retails invoices
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Internal Audit and Compliance Reviews
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Helping with audit of accounts necessary for a registered dealer

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Capital Gains

Capital asset
Any profit or gain arising from the sale or transfer of a capital asset is computed under this head. Capital asset refers to property of any kind held by an assessee, whether or not connected with his business or professional, excluding the following:

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Any stock-in-trade, consumable stores or raw materials held for the purposes of business or profession;
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Personal effects, namely, movable property (including apparel and furniture held for personal use by assessee or any other member of his/her family dependent on him/her, but excludes jewellery, archaeological collections, drawings, paintings, sculptures or any work of art;
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Agricultural land in India, subject to certain conditions;
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Certain specified government bonds.
VShort-term and long term capital assets
For the purposes or taxation, capital assets are classified as long-term or short-term, depending upon the period of holding of such assets.

A long-term capital asset means a capital asset held by an individual for more than 36 months immediately preceding its date of transfer. However, the following are treated as long-term capital assets, if held for more than 12 months:
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Shares held in a company;
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Other securities listed in a recognized stock exchange in India ;
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Units of the Unit Trust of India or specified mutual funds.
(Sec 2(29A) and 2(42A) of the Income-tax Act, 1961)
Short-term and long-term capital gains
The distinction between short-term and long-term capital assets is important, since this distinction determines whether the capital gain should be taxed as short-term capital gain or as long-term capital gain and consequently the tax rate that applies to such type of capital gains.

Short-term capital gains are included within normal income, and taxed in accordance, with the progressive slab rates of tax for individuals. Long-term capital gains are generally taxable at the rate of 20%, though this rate could be reduced to 15% in case of capital gains arising from transfer to certain long-term capital assests (sec 2(29B), 2(42B) and 112 of the Income-tax Act, 1961).

However, short term capital gains arising on transfer of equity shares in a company or a unit of an equity oriented fund (on satisfaction of prescribed conditions) are taxable at the rate of 15%.

Further, any income arising from the transfer of a long term capital asset, being an equity share in a company or a unit of an equity oriented fund (subject to conditions being satisfied) is exempt.
Computation of capital gains
In order to compute capital gains, expenditure incurred in relation to the sale or transfer as well as the cost of acquisition and improvement of the capital asset are reduced from the full value of the consideration arising on the transfer of the capital asset.

No deduction is allowed in computing the capital gain in respect of any sum paid on account of securities transaction tax.

In case an employee transfers shares, warrants or debentures under a gift, or an irrevocable trust, which were allotted to him under an Employee Stock Option Plan ("ESOP"), that meets certain guidelines laid down by the Government, the fair market value on the date of transfer is regarded as the full value of consideration.

Where the sale consideration for transfer of land or building (or both) is less than the value adopted or assessed for levy of stamp duty in respect of such transfer, then the value so adopted as assessed for stamp duty purposes shall be deemed to be the sale consideration for computing the capital gains. However, if the taxpayer disputes the value so adopted, the Revenue Officer may refer the matter to the valuation officer under the Act. If the valuation officer revises the stamp duty value, the capital gains shall be computed with reference to the revised value provided such revised value is lower than the stamp duty value.

The cost of acquisition for certain modes of acquisition (gifts, inheritance, etc) is generally the cost of acquisition to the previous owner(s).

Cost of acquisition of bonus shares is considered as nil.

In the case of the long-term capital assets, if the capital asset was acquired prior to 1 April 1981, cost of acquisition would be substituted by the fair market value as on 1 April 1981 and the indexation would be available with reference to the value as on 1 April 1981.

In case of long-term capital assests, the costs of acquisition and improvement can be adjusted upwards by applying an inflation index number, which has been specified for every year, since 1981 (sec 48 and 50C of the Income-tax Act, 1961).

Consequent to ESOP being brought within the purview of fringe benefit tax, the value of the specified securities or sweat equity taken into account to compute fringe benefits will be the acquisition cost of the specified securities or shares to derive the capital gains on the transfer of such securities or shares.
Special provision for non-residents
Capital gain arising to a non-resident on transfer of shares and debentures of an Indian company acquired for foreign currency is computed in the following manner:
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Convert the full value of consideration, in the original currency of acquisition of shares or debentures, using the exchange rate on the date of transfer.
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Convert the cost of acquisition in the original currency of acquisition of the shares or debentures at the exchange rate on the date of acquisition of shares.
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Convert the expense incurred in connection with the transfer, in the original currency of acquisition of the shares or debentures at the exchange rate on the date of incurring the expense.
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Reduce the cost of acquisition and expense incurred in connection with the transfer, as computed above, from the full value of consideration, to arrive at the capital gains in foreign currency.
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Convert such capital gain calculated in foreign currency, into Indian rupees, using the exchange rate on the date of transfer.
When the above conversion option is applicable to a non-resident in the case of transfer of shares and debentures of an Indian company qualifying as long-term capital assets, indexation provisions do not apply (sec 48 of the Income-tax Act, 1961).
Exemptions
Long-term capital gains are exempt, if such gains or the sale proceeds of long-term capital assests are invested in certain specified assets, subject to satisfaction of certain conditions. The relevant exemptions are discussed in detail below.

Sale proceeds of residential property reinvested in residential property
Capital gains arising from transfer of a residential property, being buildings or land appurtenant thereto, the income of which is chargeable under the head income from house property, are eligible for an exemption subject to fulfilment of the following conditions:
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The residential property is a long-term capital asset.
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The individual either:
 
a)
Purchases a residential property within a period of one year before or two years after the date of transfer;
b)
constructs a residential property within a period of three years after the date of transfer.
The extent of exemption available from capital gains is the lower of the following:
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The cost of new residential property purchased or constructed ;
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The amount of consideration.
If the new residential property is sold/transferred within a period of three years from the date of purchase or construction, the amount of capital gains arising therefrom, together with the amount of capital gain in the year of subsequent sale/transfer is taxed in the year in which property is sold.

If the net consideration is not appropriated towards purchase or construction or the new residential house, it should be deposited in any branch of a public sector bank or institutions in accordance with the Capital Gains Account Scheme, before the due date of filing the personal income tax return.

The amount so invested should be utilized within two years from date of transfer of the original capital asset for purchasing, or within three years of such date of transfer, for construction of a new residential house. The amount invested if not utilized for the purchase of construction, within three years from the date of transfer of the original capital asset, is taxed as long-term capital gain (sec 54 of the Income Tax Act, 1961)

Sale proceeds of long-term capital assets reinvested in specified bonds

Capital gains arising from the transfer of any long-term capital asset, are eligible for an exemption subject to fulfillment of the following conditions:
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The individual has, within six months from the date of transfer of the asset, invested whole or any part of the capital gains in specified long-term assets. These assets are defined to include any bond redeemable after three years issued on or after 1 April 2006 by the National Highways Authority of India and by the Rural Electrification Corporation Limited. Further, from 1 April 2007, a ceiling of INR 5,000,000 has been stipulated for investments in “long-term specified bonds” made during any financial year and the requirement of notifying such bonds in the Official Gazette has been dispensed with.
The Exemption available from capital gains is:
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The amount of capital gain, if the cost of the specified long-term asset is not less than the amount of capital gain;
• If the cost of the specified long-term asset is less than the amount of capital gain, then the amount of exemption is equal to the amount invested in the specified asset.
There is a restriction on transferring or converting the specified asset into money (including in the form of any loan/advance against the security of the specified asset) within a period of three years from the date of its acquisition. If so transferred or converted, capital gains arising from transfer of original asset that had not been charged to tax shall be taxed as long-term capital gains in the year in which such specified asset is transferred or converted (sec 54EC of the Income Tax Act, 1961).

Sale proceeds of long-term capital assets reinvested in residential property

Capital gains arising from transfer of long-term capital asset, not being a residential house, are eligible for an exemption, subject to fulfillment of the following conditions:
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The individual either:
 
a)
Purchases a residential property within a period of one year before or two years after the due date of transfer;
b)
Constructs a residential property within a period of three years after the date of transfer.
The exemption available from capital gains is :
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The amount of net consideration, if the cost of new residential house purchased or constructed, is not less than the amount of net consideration;
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If the cost of new residential house purchased or constructed is less than the amount of net consideration, the amount of net consideration pro-rated against the cost of the new residential house purchased or constructed out of the net consideration.
Net consideration means full value of the consideration arising or transfer of capital asset after deduction of any expenditure incurred in connection with the transfer.

However, the above exemption may be withdrawn in the following circumstances and taxed accordingly:
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If the individual sells or transfers the new residential house within three years of its purchase or construction;
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If the individual purchases, within a period of two years of the transfer of the original asset, or constructs within a period of three years of transfer of such asset, a residential house (whose income is taxable under Income from house property) other than the new residential house.
In the aforesaid two cases, the amount of capital gains arising from transfer of original asset, which was not taxed, will be deemed to be long-term capital gains and taxed in the year in which such new residential house is transferred, or another residential house (other than the new house) is purchased or constructed.

If the net consideration is not appropriated towards purchase or construction of the new residential house, it should be invested in a deposit account in any branch of a public sector bank or institution in accordance with the Capital Gains Account Scheme before the due date of filing the personal income tax return.

The amount so invested should be utilized within two years from date of transfer of the original capital asset for purchasing, or within three years of such date of transfer, for construction of a residential house. The amount invested, if not utilized within three years from the date of transfer of the original capital asset, is taxed as long-term capital gain (sec 45 to 55 of the Income-tax Act, 1961).

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