In this blog post, Somanka Ghosh, a fourth-year BA LLB student from Calcutta University and pursuing a Diploma in Entrepreneurship Administration and Business Laws by NUJS, analyses the five categories under which income tax is calculated.  

“Income Tax is levied on the total income of the previous year of every person.”

To levy income tax , one must have understanding of the various concepts related to the charge of tax like previous year, assessment year, income , total income , person etc.

Income is classified under five categories in the Indian Income Tax Act –

• Income from Salary
• Income from House Property
• Income from Business or Profession
• Income from Capital Gains
• Income from Other Sources

PART I: INCOME FROM SALARY

As per Section 15, the income chargeable to income tax under the head salaries would include:

Any salary due to an employee from an employer or a former employer to an assessee during the previous year irrespective of the fact whether it is paid or not.

Any salary paid or allowed to the employee during the previous year by or on behalf of an employer , or former employer , would be taxable under this head even though such amounts are not due to him during the accounting year.

Arrears of salary paid or allowed to the employee during the previous year by or on behalf of an employer or a former employer would be chargeable to tax during the previous year in cases where such arrears were not charged to tax in any earlier year.

Illustration

Meera is an employee of Tara Pvt Ltd. getting a salary of Rs 40,000 per month which becomes due on the last day of the month but is paid on the 7th of next month. Salary for which months will be taxable for AY 2015-16?

Solution : the salary for the months of April 2014 to March 2015 will be taxable for the Assessment Year 2015-16 because salary for April 2014 will be due on 30th April ,2014 (i.e. within the same month)

Salary (SECTION 17(1))

“Salary” includes:

• Wages or Salary :salary is generally used in respect of payment for services of a higher class ,whereas ‘wages’ is confined to the earnings of labourers.
• Annuity is annual grant made by the employer to the employee.
• Pension – periodical payment for past services
• Gratuity- lump sum payment for past services
• Fees and Commission- remuneration to encourage employees
• Perquisites- include all benefits by the employer to the employee
• Profit in lieu
• Advance of salary

PART II: INCOME FROM HOUSE PROPERTY

SECTION 22 of the Act provides as follows:

“The annual value of property consisting of any buildings or lands appurtenant thereto of which the assessee is the owner other than such portions of such property as he may occupy for the purposes of any business or Profession carried on by him, the profits of which are chargeable to income tax , shall be chargeable to income tax under the head from House Property.”

• Tax is charged on income from the buildings or lands appurtenant thereto : the buildings include residential buildings , buildings let out for business or profession or auditoriums for entertainment purposes.
• Tax is charged on income from lands appurtenant to buildings: the lands appurtenant to buildings include approach roads to and from public streets , courtyards, compound, playground ,motor garage. In case of non residential buildings, car parking spaces , drying grounds shall be the lands appurtenant to buildings.
• Tax is charged from the owner of the buildings and lands appurtenant thereto : where the recipient of the Income from House Property is not the owner of the building, the income is not chargeable under this head but under the head ‘Income from Business or Other Sources.’

PART III: INCOME FROM BUSINESS OR PROFESSION

 The provisions of Sections 28 to 44D deal with the method of computing income under head “ Profits and Gains of Business or Profession.”

  The meaning of the expression ‘Business’ has been defined in Section 2(13) of the Income Tax Act. According to this definition, business includes any trade, commerce or manufacture or any adventure or concern in the nature of trade commerce or manufacture.

The concept of business presupposes the carrying on of any activity for profit, the definition of business given in the Act does not make it essential for any taxpayer to carry on his activities constituting business for a considerable length of time.

The expression ‘profession’ has been defined in Section 2 (36) of the Act to include any vocation. The term profession includes the concept of an occupation requiring either intellectual skill or manual skill controlled and directed by the intellectual skill of the creator. For instance an auditor, a lawyer or a doctor carrying on their profession and not business.

The common feature in the case of both profession as well as business is that the object of carrying them out is to derive income or to make profit.

PART IV: INCOME FROM CAPITAL GAINS

Sections 45 of the Act provides that any profits or gains arising from the transfer of a capital asset effected in the previous year shall, save as otherwise provided in Sections 54, 54B, 54D, 54EC, 54ED, 54F, 54G, 54GA and 54H be chargeable to income tax under the head “Capital Gains” and shall be deemed to be the income of the previous year in which the transfer took place.

The requisites of a charge to income tax, of capital gains under Section 45 (1) are :

• There must be a capital asset
• The capital asset must have been transferred
• The transfer must have been effected in the previous year
• There must be a gain arising on such transfer of a capital asset
• Such capital gain should not be exempt under Sections 54, 54B, 54D, 54EC, 54ED, 54F, 54G or 54GA.

PART V: INCOME FROM OTHER SOURCES

Income chargeable under Income Tax Act which does not specifically fall for assessment under any of the heads discussed earlier , must be charged to tax as “Income from Other Sources.”

Sections 56 (2) specifically provides for the certain items of incomes as being chargeable to Tax under the head as Dividend , Keyman Insurance Policy , winnings from lotteries, contribution to provident fund , money gifts, share premiums in excess of the fair market value to be treated as income, income by way of interest received on compensation.

The entire income of winnings, without any expenditure or allowance or deductions under Sections 80C will be taxable. However, expenses relating to the activity of owning and maintaining race horses are allowable. Further, such income is taxable at a special rate of income tax i.e. 30% + surcharge + cess @ 3%

The income chargeable under the head “Income from Other Sources” is the income after making the deductions such as sum paid by way of commission or remuneration to a banker or any other person for the purpose of realising such interest or a deduction of a sum equal to 50% of from interest on compensation or enhanced compensation and any other expenditure laid out or expended wholly.

In this blog post, Somanka Ghosh, a fourth-year B.A. LLB student at Calcutta University and pursuing a Diploma in Entrepreneurship Administration and Business Laws from NUJS, Kolkata, describes the legislative and regulatory initiatives that fall under corporate governance.

Corporate governance is mainly referred to the way of how a corporation can be governed. It borders all the rules and regulations by which companies are directed and managed.

A good corporate governance ensures corporate success and economic growth but it cannot be achieved without the Board of Directors and the committees for the company’s stakeholders benefit. Corporate governance is all about maintaining the harmony between the individual and societal goals, as well as economic and social goals. Corporate governance has a broad scope. It includes both social and institutional aspects. Corporate governance binds more trust, morality and an ethical environment.

Corporate governance also minimises wastages, corruption, risks and mismanagement. It helps in brand formation and development.

The Companies Act 2013 is the main feature of development in India’s history of corporate legislation. Corporate governance requirements in India were wholly in the legislative domain until the early nineties when an independent capital markets regulator, Securities and Exchange Board of India (SEBI) was set up by an Act of Parliament. Until SEBI, came, matters uniquely concerning publicly traded companies were dealt with under the Companies Act and the Securities ( Contracts) Act and Capital Issues Control Regulations, administered under the government.

THE COMPANIES ACT 2013

 The Companies Act 2013 is an Act of the Parliament of India which regulates incorporation of a company, responsibilities of a company , directors , dissolution of a company.

 Company is referred to an association of persons who work for a common goal together. A company may be an incorporated company or a “corporation” or an unincorporated company. It is called a body corporate because the persons composing it are made into one body by incorporating it according to the law , and covering it with legal image, and, so turn into a corporation.

There have been new concepts introduced in this Company Act, 2013 –

• One Person Company – The first step of the Companies Act 2013 is one person company where it includes only sole proprietorship and entrepreneurs who can enjoy the benefits of both the limited liability and that of separate legal entity. The concept of OPC was mooted in the report of Dr J.J Irani Committee. Regarding OPC the suggestions of the Committee were thus –

With increasing use of information technology and computers, emergence of the service sector, it is  time that entrepreneurial capabilities of the people are given an outlet for participation in economic activity. Such economic activity may take place through the creation of an economic person in the form of a company. Yet it would not be reasonable to expect that every entrepreneur who is capable of developing his ideas and participating in the market place should do it through an association of persons. We feel it is possible for individuals to operate in the economic domain and contribute effectively.

• Woman Director – Every company whether  it is public or a listed company with paid up capital of Rs 300 crores or 100 crore or more should have atleast one woman director .
• Corporate social responsibility – This clause was added in this new Act. Every company which has a network worth of Rs 500 crores or more at the end of financial year should constitute a Corporate Social Responsibility Committee of the Board consisting of three or more directors out of which one shall be an independent director.
• Class Action Suits( clause 245 ) – If certain members or depositors of the Company are of the opinion that the affairs that are conducted in the company is against the interests of the company, then the members or the depositors, file an application before the Tribunal. The order passed by the Tribunal shall be binding on the Company and all its members and depositors or any other person associated with the Company.
• Dormant company – When a company is formed and registered for a particular work but it has stayed inactive for a long time then such a company may make an application to the Registrar for obtaining the status.
• Serious Fraud Investigation Office ( Clause 211) – It has the power to arrest in respect of certain offences of the Bill which attract the punishment for fraud. The offences committed should be cognizance and should be released on bail on certain conditions.
• Fast Track Merger – The Companies Act 2013 , has separate provisions of fast track merger under Section 233 of Companies Act 2013. It gives Central Government the power to sanction all such scheme and there be no requirement to approach National Company Law Tribunal.

SECURITIES AND EXCHANGE BOARD OF INDIA (SEBI)

The Securities and Exchange Board Of India (SEBI) regulates the security markets in India. It was established in 1988 and it came into power on 12 April 1992 through the Securities and Exchange Board of India Act , 1992.

Key Role – It’s key role in India is to attract foreign investors and protecting the Indian investors.

SEBI headquarters is located at the Bandra Kurla Complex Business District in Mumbai.

FUNCTIONS AND RESPONSIBILITIES OF SEBI

        The Preamble of SEBI clearly states that SEBI must “protect the interests of investors in Securities and to promote the development of, and to regulate the Securities market and for matters connected therewith or incidental thereto.

SEBI also keeps the account books in check which deals with finance and asks for regular returns from recognised stock exchanges. SEBI also manages the registration of brokers. It also inspects the books of financial intermediaries. It also handles the registration of brokers. It compel certain companies to get listed on one or more stock exchanges.

PURPOSE

SEBI was set up with the purpose of keeping a check on malpractice and protect the interests of investors. It was set up to meet the needs of 3 groups :

• Issuers of Securities – it provides a marketplace in which they can raise finance fairly and easily.
• Investors – it provides protection and supply of accurate and correct information.
• Market intermediaries – it provides a competitive professional market.

SEBI is also managed by following members of the Board :

• The Chairman who is nominated by the Government of India.
• Two members from the Union Finance Ministry
• One member from the Reserve Bank of India
• The remaining five members are nominated from the Union Government of India, out of them.

Corporate governance requirements in India were wholly in the legislative domain until the early nineties when an independent capital markets regulator, Securities and Exchange Board of India (SEBI) was set up by an Act of Parliament. The earliest piece of corporate legislation was the Joint Stock Companies Act of 1886 by several impediments and replacement legislations, largely following the developments in UK. The first comprehensive overhaul of corporation law was undertaken in the years immediately following political independence of the country which led to the enactment of the Companies Act of 1956, this was the ‘guardian act’ that was in force until the 2013 legislation came into the scenario.

KEY INITIATIVES OF 2013 – 14

        Although the Act has brought many changes impacting corporations in all their stages commencing from the incorporation through their span of operation to the last stage, the scope is limited to their board centric governance aspects, other improvements may be mentioned only to the extent they help clarify or set the context in perspective. These initiatives are broadly classified into five categories :

• Corporations and society
• Absentee shareholder primacy and protection
• Boards and their processes
• Disclosure and transparency in reporting
• Unlisted company governance.

In this blog post, Siddheshwari Ranawat, a student from studying at the University of Petroleum and Energy Studies and pursuing a Diploma in Entrepreneurship Administration and Business Laws by NUJS, discusses the restriction on tax inversions.  

Introduction:

Tax inversion is also known as corporate inversion. Corporate inversion occurs when a U.S based company buys or combines with a foreign company in a country with a lower corporate tax rate as compared to the U.S. The U.S taxes the worldwide earnings of its legal entities companies that receive income from foreign resources often use the corporate inversion strategy to lower their income earned abroad and this is not considered as tax evasion because it does not involve misrepresentation information or hiding profits earned through illegal business activities. Suppose a U.S manufacturing company begins selling more products abroad the income it earns from foreign sales is taxed in the U.S and U.S tax credits do not cover all taxes the company must pay abroad so it is a loss from the side of company as they have to pay more taxes in their residence country as well as abroad. The company pays more U.S taxes for its foreign sales grown. It could avoid paying higher U.S taxes if it incorporates abroad by moving or merging with a foreign company this way its resident country will change resulting into it not paying taxes in the U.S for that matter. Corporate inversion has become a popular strategy as it rarely lives to job loss or other substantial business changes and some companies use it to remain competitive. However, the lost U.S tax revenue cost billions of dollars that the nation could have used in its domestic economy for growth and development.

The official U.S treasury on its press centre defines corporate inversion as “A corporate inversion is a transaction in which a U.S.-parented multinational group changes its tax residence to reduce or avoid paying U.S. taxes. More specifically, a U.S.-parented group engages in an inversion when it acquires a smaller foreign company and then locates the tax residence of the merged group outside the United States, typically in a low-tax country.” In September 2014 and November 2015, the U.S Treasury announced certain guidelines that made it hard for companies to undertake an inversion and reduced the economic benefits related to the inversion. On April 4, 2016 they took additional action to address this problem by issuing temporary regulations on inversions and proposed regulations related to companies’ earnings which resulted into cancellation of the biggest merger between U.S and Ireland based company.

A corporate inversion is a process by which an existing U.S. corporation changes its country of residence. Post-inversion the original U.S. Corporation becomes a subsidiary of a foreign parent corporation. Corporate inversions occur through three different paths: the substantial activity test, merger with a larger foreign firm, and merger with a smaller foreign firm. Regardless of the form of the inversion, the typical result is that the new foreign parent company faces a lower home country tax rate and no tax on the company’s foreign-source income.

The Statistics:  How does the strategy of tax inversion work? Let’s start by answering the simple questions related to the complicated U.S federal tax system. We have already understood in brief what tax inversions are and how being a foreign resident company helps the company to reduce taxes without much effort.

One of the reasons why corporate inversions are becoming so popular is because the corporate income tax rate in the U.S. is the highest rate in the industrialized world which is 40%. While Canada’s corporate tax rate is 26.5%, the United Kingdom’s is 20% and Ireland’s is only 12.5%, which is why Ireland is a popular choice for companies that engineer corporate inversions.Let’s look into the statistics provided seventy-six U.S. multinational corporations have reincorporated in lower tax countries since 1982, and the clearly due to the benefits which the company receives the trend seems to be increasing. From 1983 to 2003, there were a total of 29 corporate inversions and then between 2004 and 2014, 47 more companies joined the ranks.

Among the revisions of the previous provided regulations are hopscotch loans. These are loans that companies make to a new foreign parent company to avoid U.S. taxes on repatriated foreign earnings. The Treasury has also moved to stop companies from restructuring foreign units to access deferred earnings without paying taxes which means nonpayment of those taxes and companies profit.  These are two among several tax changes that the Treasury hopes to curb all the hype about corporate inversions. But the hype has been created due to a reason and its solution would be for the U.S. to lower its corporate income tax rate to levels consistent with those in other developed countries at least to an extent. Because the current tax rates are too high.

A special focus on the Pfizer-Allergan deal:

Pfizer (U.S based) and Allergan ( Dublin based) companies terminated their $150 billion proposed merger after the Obama Administration took aim at corporate inversion deals which can be considered as one of the biggest losses in the merger history. Its not that big considering the market value of Pfizer being $200 billion and Pfizer had to pay the merger price to Allergan as a breakup fee. The merger’s failure will certainly affect both the companies but also future merger transactions as well.

Both the companies decided to not go ahead with the deal because of the Obama administration’s aim at them. The deal was to move the biggest drug company from America to Ireland which would result into low tax rates for the U.S based company. The involved strategy was the tax inversion strategy and we will further see how the biggest merger of the U.S got cancelled due to the restrictions imposed on the tax or corporate inversion strategy.

Let’s take another example: Firstly Eaton Corporation PLC (ETN). In 2012, Eaton Corporation moved its corporate headquarters from Cleveland, Ohio, where it had been since 1911, to Dublin, Ireland. The move was the result of Eaton’s purchase of Ireland-based Cooper Industries for nearly $13 billion.

Medtronic (MDT), the world’s third-largest medical device company, moved its international headquarters to Dublin, Ireland, in January 2015. Though the company operated out of Minneapolis, Minnesota since its establishment in 1949 and continues to maintain its operational headquarters there, it is now legally considered to be an Irish corporation. Medtronic applied the corporate inversion strategy of Irish device maker Covidien, PLC for nearly $49 billion which is a huge deal as well.

Recent Changes made by the U.S Treasury:  

On April 4, 2016, the Treasury Department and IRS released proposed regulations under section 385 addressing related-party debt. The regulations would significantly change the taxation of many common cash management transactions for U.S. and non-U.S. multinational groups. The regulations would

1) Allow the IRS to bifurcate related-party debt into part equity and part debt;

2) Create extensive documentation requirements necessary for related-party instruments to be respected as debt; and

3) Recast debt as equity if it issued as part of a perceived base erosion transaction. Although proposed, if finalized the recast rules would phase in for debt issued on or after April 4, 2016. Upon finalization, the documentation requirements would need to be met as soon as 30 days after the issuance of related-party debt.

The U.S Treasury Department has issued formal temporary regulations implementing the previous two actions released in 2014 and 2015.

• The temporary regulations also set forth certain new rules, in addition to the rule described above that disregards foreign parent stock attributable to certain prior acquisitions of U.S. companies.  The new rules include:

1. A rule that addresses a technique by which U.S. companies may seek to avoid section 7874 by structuring an inversion as a multi-step transaction using back-to-back foreign acquisitions; and
2. A rule that requires a foreign subsidiary of the inverted U.S. group to recognize all realized gain upon certain post-inversion transfers of assets that dilute the inverted U.S. group’s ownership of those assets.

Conclusion:

If the current trend goes on with the types of policy that are applicable, we should expect more companies to enter into corporate inversions for all the same reasons: lower corporate tax rates, bypassing marginal tax rates and no taxes on overseas assets. So, we know what the term means and what are the policies related to it and how it works what were the different deals related to it and its future prospects because of its benefits it will work and reach newer heights but it will definitely affect the American economy domestically, as those taxes can be used for the growth and development of the country.

In this blog post, Siddheshwari Ranawat, a student at University of Petroleum and Energy Studies and pursuing a Diploma in Entrepreneurship Administration and Business Laws from NUJS, Kolkata, describes the process of delisting of securities.

DESCRIBE THE PROCESS OF DELISTING OF EQUITY SHARES

• There are certain regulatory framework related to delisting of shares like SEBI (Delisting of Equity Shares Regulations, 2009) SCRA which stands for securities contract regulation act, 1956, the listing agreement also the companies Act, 2013 and the previous legislation also the SEBI Substantial acquisition of shares and takeover) regulation, 1997. Firstly let us understand what is delisting of shares, we can say that to understand the meaning of delisting, one has to understand the meaning of listing of shares. Listing means admission of a Company’s securities to the trading platform of a Stock Exchange, so as to provide marketability and liquidity to the security holders. While on the other hand delisting is the total opposite of listing, it means that a permanent removal of securities of a listed company from stock exchange. As a result of the delisting the company will no longer be able to trade its securities in the market through the platform of stock exchange.
• Let’s first understand the transformation of guidelines to regulations related to the delisting of securities. SEBI delisting guidelines, 1998 which later turned into the SEBI delisting Guidelines, 2003 with certain amendments and then the final SEBI delisting of equity shares regulations, 2009. So before understanding the process of delisting we shall look into the salient features of the regulations which we have. Public shareholders have been defined  as the holders of equity shares other than the

1. a) Promoters and
2. b) Holders of depository receipts issued overseas against underlying shares.

This provision on the other hand is not applicable to sick companies.

The companies cannot delist their securities from the Exchanges pursuant to buyback and preferential allotment. There is no shareholders approval, in case the company continues to remain listed at any of the exchanges having nationwide trading terminal i.e. BSE or NSE or any other Exchange specified in this behalf. The concept of Specified Date has been introduced, which shall not be later than 30 working days from the date of the Public Announcement. The special resolution passed for the delisting giving exit option to the shareholders will be valid for a period of 1 year within which the final application will be required to be made to the exchange for delisting. There has to be a special Resolution by way of Postal Ballot. These were certain rules given under the regulation act.

Now moving on to the topic of delisting of shares there are mainly two types of delisting:

1. Compulsory delisting
2. Voluntary delisting

Firstly let’s look into the compulsory delisting of securities. A  recognized  stock  exchange  may,  by  order,  delist  any equity shares of a company on any ground prescribed in the  rules  made  under  section  21A  of  the  Securities  Contracts (Regulation) Act, 1956. There has to be a decision by panel of experts after considering the various parameters given in the regulations.

A Public notice is to be given by the exchange for inviting the representation by the aggrieved persons. There has to be determination of exit price by the independent valuer appointed by the concerned stock exchange. There is also no requirement of going through the reverse book building process. Where a company has been compulsorily delisted, the company itself, with its whole time directors, its promoters and the companies which are promoted by any of them shall not directly or indirectly access the securities market or seek listing for any equity shares for a period of ten years from the date of such delisting, this is provision which is to be followed.

There are certain powers which are given to the stock exchange under the Schedule III: The recognized stock exchange can file prosecutions under relevant provisions of the Securities Contracts (Regulation) Act, 1956 or any other law for the time being in force against identifiable promoters and directors of the company for the alleged non-compliances. The recognized stock exchange can also file a petition for winding up the company under section 433 of the Companies Act, 1956 (1 of 1956) or make a request to the Registrar of Companies to strike off the name of the company from the register under section 560 of the said Act.

Further we shall discuss the other kind of delisting which is voluntary delisting of securities. There are three categories under which we can understand this delisting:

Firstly Voluntary delisting from all the exchanges secondly, voluntary delisting from few exchanges except but remains listed on at least on stock exchange which has a nationwide terminal and thirdly voluntary delisting by small companies.

Discussing about the first instance where if after the proposed delisting, the equity shares would not remain listed on any recognized stock exchange having nationwide trading terminals, Exit Opportunity shall be given to all the public shareholders holding the equity shares sought to be delisted (Regulation 6(b)). There are certain highlights under the regulations which are to be considered during the delisting of securities. Like a special resolution has to be passed by postal ballot which will be acted upon if and only if the votes cast by public shareholders in favor of the proposal amount to at least two times the number of votes cast by public shareholders against it.

The company shall obtain in principle approval from the concerned stock exchange for the proposed delisting of its equity shares. The process could go like the promoter has to appoint a merchant banker. Then a Public announcement is to be made by the promoters. After that an invitation of bids from the public shareholders through letter of offer for determination of final price which the reverse book building method. Then the final offer price shall be determined as the price at which the maximum number of equity shares is tendered by the public shareholders. The offer shall remain open for a minimum period of three working days and a maximum period of five working days during which the public shareholders may tender their bids respectively. The post offer promoters shareholding should reach to either 90% of total paid up capital or minimum 50% of the public shareholding tendered through offer whichever of them is high. While there is no condition related to the final price which is to be accepted by the promoters. Remaining  public  shareholder  may  tender  their  shares  to  the  promoter  up to  a  period  of  one year from the date of delisting.

While on the second instance where if after the proposed delisting from any one or more recognized stock exchanges, the equity shares would remain listed on any recognized stock exchange which has nationwide trading terminals, No Exit Opportunity needs to be given to the public shareholders (Section 6 (a)). There is no need to pass Special resolution by members in this case. The company has to give a public notice of the proposed delisting and the company shall disclose the fact of the delisting in the first annual report after delisting. While under the third instance of small companies the definition could be that a company having paid-up capital of up to one Crore rupees and its equity shares were not traded on any exchange in the one year immediately preceding the date of decision of delisting which is (Regulation 27 (1)). A company having up to 300 public shareholders and the paid-up value of the shares held by such shareholders is up to one Crore rupees (Regulation 27 (2)). While the provisions remain a little same as the previous ones we shall look into them. The special resolution can be passed through postal ballot and be acted upon if and only if the votes cast by public shareholders in favor of the proposal amount to at least two times the number of votes cast by public shareholders against it. Also the promoters shall determine the exit price in consultation with the Merchant Banker. And the company shall obtain in principle approval from the concerned stock exchange for the proposed delisting of its equity shares. The shareholders are given an option to remain as shareholders even after delisting of the small company.

There are certain points related to relisting of securities: there is a period called as a Cooling period in which the company that has voluntarily delisted its securities can relist its securities only after a period of 5 years. The company that has been compulsory delisted by the exchange can relist its securities only after a period of 10 years. There are also certain points related to the relisting of sick companies. In case of Delisted companies who were sick in the past, can be given opportunity of listing through restructuring scheme passed by BIFR. The sick companies are exempted from the provision of cooling period.

So in conclusion, these were the provisions related to the delisting of securities. The criteria to remain listed on a stock exchange differs like for instance if the security’s price closes below $1 for 30 consecutive trading days then the New York Stock exchange would start the delisting process for that company. While criteria like the price and annual listing fees along with market capitalization, shareholders equity and revenue are also considered. So the process differs on the regional and national based stock exchanges but the provisions mentioned above remain the same.

In this blog post, Shubhanan Chaturvedi, a student at University of Petroleum and Energy Studies and pursuing a Diploma in Entrepreneurship Administration and Business Laws from NUJS, Kolkata, describes the different methods of restructuring corporate bonds.  

In this blog post, Shreetama Ghosh, a student pursuing a Diploma in Entrepreneurship Administration and Business Laws from NUJS, Kolkata, describes what is tax avoidance.  

INTRODUCTION

It is said that nothing in this world is certain except for death and taxes. While the former is out of one’s control, the latter can be minimised through a technique called tax avoidance. Although tax avoidance and tax evasion are terms often used synonymously, they are radically different concepts. Whereas tax avoidance is the use of legal procedure to reduce the amount of tax owed, usually by claiming the permissible deductions and benefits, tax evasion is a criminal act punishable under law in which illegal methods, such as understating or underreporting income, etc. are used to avoid paying the taxes which are legally due. Tax avoidance is the legitimate minimizing of taxes, using methods approved by taxation laws. It is the legal usage of the tax regime to one’s own advantage. 

Most taxpayers use some method of tax avoidance to tax bills by structuring transactions in such a way that one can reap the maximum tax benefits. Tax avoidance is a tool which is used by the governments to satisfy the tax-paying citizens of their country. It is encouraged in the sense that the governments intend to allow the taxpayers to save up on taxes owed through tax planning, but this is often taken advantage of by the citizens who use these legal measures for purposes not intended by the government.

TECHNIQUES OF TAX AVOIDANCE IN INDIA

Tax avoidance can be legally ensured through the following:

• Income Tax Act, 1961

The Chapter VIA of the IT Act provides that after computing the total income of an individual or a corporation, certain deductions can be allowed on the total amount of tax on the basis of certain provisions. The following are the provisions dealing with all tax deductions under the Act, providing a leeway for tax avoidance for the taxpayers:

1. Section 10(5)

A Leave Travel Allowance (LTA) is the remuneration paid by an employer for his employees’ travel in the country when he is on leave alone or with family. This Section provides for the exemption of LTA from tax up to the limit of Rs. 25,000 and outlines the conditions to which this provision is subject. This allowance is provided for two trips in a block of 4 years, with the Air Economy or Rail 1st AC fare payable for the shortest distance and only one destination. In case the assessee has not availed this benefit in one block, the benefit can be transferred to the next block, i.e. he/she is allowed LTA for three trips in that block.

1. Section 17(2)

The proviso to this Section covers the tax exemption provided for medical reimbursement by the employer to an employee up to the limit of Rs. 15,000 in aggregate annually.

1. Sections 44AD & 44AE

This Section provides a Presumptive Tax Scheme if the assessee is engaged in business or freelancing or providing professional services, provided that the annual turnover does not exceed 2 crore rupees. Resident citizens, HUFs and partnership firms, but not LLPs, are covered under this Section. The income calculated at the rate of 8% is the final taxable income of the enterprise covered under this Scheme and no further expenses will be allowed or disallowed. For professionals, their annual income must not exceed 50 lakh rupees and taxes have to be paid only on 50% of the receipts (which are shown as profits). Those availing the benefit under these Sections do not have to maintain any books of accounts or get audit done and are exempt from advance tax.

1. Section 44DA

Under this Section, small professionals whose professions are covered in Section 44AA(1) and whose annual income does not exceed 50 lakh rupees will have to pay taxes on only 50% of the total receipts (which are shown as profits). This also applies to the same conditions as Sections 44AD and 44AE, with the professional only being allowed exemptions under the Sections 30 to 38.

1. Section 80C

This Section deals with the deduction from the total income with regards to certain investments or expenditures or payments to the extent of 1.5 lakh rupees. This provision was enumerated under Section 88 before the Act of 2005. The investments or expenditures or payments covered under this Section include –

1. Life insurance premium
2. Deferred annuity payment under a contract
3. Contribution under the Employees’ Provident Fund (EPF)
4. Contribution to a Public Provident Fund (PPF)
5. Contribution by an employee to a recognised provident fund or an approved superannuation fund
6. Sums deducted from the salary payable to the Government servants to secure deferred annuity for one’s self, spouse or child
7. Subscription to any notified securities or deposit schemes
8. Subscription to any notified savings certificates
9. Contribution to a unit linked insurance plan of LIC Mutual Fund
10. Contribution to notified deposit schemes or pension fund set up by the National Housing Bank
11. Certain payment made by way of instalment or part-payment of loan taken for purchase/construction of residential house property
12. Subscription of units of a mutual fund notified under Section 10(23D)
13. Subscription to any deposit scheme of a public sector company engaged in providing housing finance
14. Any subscription to equity shares/debentures forming part of any eligible issue of capital by a public company or public financial institution
15. Tuition fees paid at the time of admission or otherwise to any school, college, university or other educational institution situated within India for the purpose of full time education
16. Any Term Deposit (TD) for a fixed period of not less than five years with the scheduled bank
17. Subscription to notified bonds issued by NABARD
18. Payment made into an account under the Senior Citizens Savings Scheme Rules, 2004
19. Payment made as five year TD in an account under the Post Office Time Deposit Rules, 1981
20. Contribution to Sukanya Samriddhi Account opened in the name of daughters
21. Stamp duty and registration fees at the time of purchase of a house on acquiring its possession

1. Section 80CCC

Under this Section, the premium paid for an annuity plan of LIC or any other such insurer can be deducted to the ceiling of 1.5 lakh rupees (from the A.Y. 2016-17). For this deduction to take effect, the premium under the annuity plan contract must be deposited with the insurer.

1. Section 80CCD

Under this Section, the amount to the extent of 10% of an employee’s salary can be deposited by him in his pension account and this amount will be exempt from taxation. But if any amount is received from this account in any year, the amount will be taxed as a part of the income of the previous year. This provision was previously restricted to Government employees, but has now been extended to any individual employee. An additional deduction upto Rs. 50,000 for contribution to the New Pension Scheme (NPS) raises the limit of deductions under Sections 80C, 80CCC and 80CCD to 2 lakh rupees. In addition to this, withdrawals from the scheme will be tax exempt upto 40% of the total accumulated corpus.

1. Section 80CCG

This Section provides for deduction of 50% of the amount or Rs. 25,000, whichever is lower, on investment under the Rajiv Gandhi Equity Savings Scheme and the maximum amount of such investment which is permissible for this deduction is 50,000 rupees. While the aggregate of deductions under Section 80C, Section 80CCC and Section CCD cannot exceed 2 lakh rupees, this deduction is available additionally over the total deduction under the aforementioned Sections.

1. Section 80D

This Section deals with deductions for payment of premiums of medical insurance in the following situations –

1. To the extent of Rs. 15,000 if the medical insurance in the name of the assessee or his/her spouse, and to the extent of Rs. 20,000 if the assessee is a senior citizen.
2. To the extent of Rs. 15,000 if the medical insurance in the name of the assessee’s parents and to the enhanced extent of Rs. 20,000 if his/her parents are senior citizens.

To avail this deduction, the premium must be paid by any mode of payment but cash, and the insurance scheme must be either framed by the General Insurance Corporation of India and approved by the Central Government, or framed by any other insurer and approved by the Insurance Regulatory and Development Authority. Any contribution made to the Central Government Health Scheme is also covered under this Section.

1. Section 80DD

This Section provides for deductions to the extent of Rs. 50,000 for

1. The expenditure incurred on the medical treatment (inclusive of nursing), training and rehabilitation of any dependent disabled relative.
2. Payment or deposit to any specified scheme for the maintenance of the dependent disabled relative.

The disabled dependent should be a dependent relative suffering from a permanent disability, which includes blindness as well as mental imbalance, as certified by a specified doctor. The deduction amount is enhanced to 1 lakh rupees in case of a dependent with a severe disability, defined as a person with 80% or more of one or multiple disabilities as given in Section 56(4) of the Persons with Disabilities (Equal Opportunity, Protection of Rights and Full Participation) Act, 1995.

1. Section 80DDB

This Section covers the deductions that accrue in respect of the medical expenditure of the assessee to the maximum amount of Rs. 40,000 or the actual expenditure incurred, whichever is least. For a senior citizen, the deduction extent enhances to a maximum of Rs. 60,000. For this Section to be applicable, the expenditure has to be incurred on the assessee himself or on any dependent relative for the treatment of any disease specified in Rule 11DD, in respect of which a certificate in Form 10I is to be furnished from a specialist working in a Government hospital.

1. Section 80E

This Section relates to deductions due to the payment of interest in the previous year on a loan for higher studies taken from a financial institution or approved charitable institution for a period of 8 years. This deduction is available for any such loan under the name of the assessee, his/her spouse or children.

1. Section 80EE

Under this Section, a deduction can be availed for the interest payment on any loan taken for residential house property. This deduction is available to the limit of 2.5 lakh rupees for any such loan, not exceeding 35 lakh rupees for the acquisition of a residential house whose value does not exceed 50 lakh rupees, provided that the assessee is a first time home buyer on the date of sanction of the loan.

1. Section 80G

Deductions are available under this Section for donations specified under it to certain funds, charitable institutions, etc. upto either 50% or 100%, with or without certain restrictions, as specified therein. This provision exists to encourage such donations which provide an incentive to the charitable institutions to continue their noble work.

1. Section 80GG

The deduction referred to in this Section relates to the payment of rent by an assessee who or whose spouse or minor child do not own a residential place at the place of employment, who does not own residential premises elsewhere and who is not in receipt of House Rent Allowance (HRA). In such situations, the assessee is entitled to deductions to the extent of the least of the following:

1. Excess of rent paid over 10% of the monthly income;
2. Rs. 5000 per month;
3. 25% of total monthly income,

In case the assessee recieves an HRA, the least of the following are available for exemption from taxation –

1. The actual HRA received from the employer;
2. Excess of rent paid over 10% of the monthly income;
3. 50% (for a metro) or 40% (for a non-metro) of the basic salary.

1. Section 80QQB

This Section provides that the assessee is entitled to deductions on any income received through royalty or copyright for authoring a book (except a textbook) of literary, artistic or scientific nature to the extent of 3 lakh rupees or the total income received, whichever is lesser, subject to the following conditions :

1. The assessee is an individual citizen of India;
2. The assessee receives the income in exercise of his profession;
3. The assessee can furnish a certificate of holding the copyright in the prescribed form along with his income returns.

1. Section 80RRB

The assessee is entitled to deductions under this Section on any income by way of royalty in respect of a patent registered in or after the financial year of 2003-04 under the Patents Act, 1970 to the extent of 3 lakh rupees or the income received, whichever is lesser, provided that the patentee is an individual resident of India and can furnish a certificate for holding the patent in the prescribed form authenticated by the prescribed authority and his income returns.

1. Section 80TTA

Under this Section, the assessee is entitled to deductions for the interest accrued on deposits (other than TDs) in savings accounts held with banks, cooperative banks or post office limited to the amount of Rs. 10,000 or the actual interest accrued, whichever is lesser.

1. Section 80U

This Section covers any deductions to the limit of Rs. 50,000 accruing to an individual suffering from a physical or mental disability on the basis of certificate obtained in the prescribed format from a notified medical authority. This limit is enhanced to 1 lakh rupees for persons suffering from severe disabilities.

1. Section 87A

This Section provides for a rebate of Rs. 5000 or the amount of tax owed, whichever is lower, for individuals in the lower income bracket, i.e. having a total annual income not exceeding 5 lakh rupees.

• HUF

A Hindu Undivided Family (HUF) is treated as a separate entity from its members, having its own PAN No. and thus, taxed separately. This helps to segregate the tax obligations of the HUF and its members. Its tax slabs are the same as that of its members, and it qualifies for all the tax benefits that its members can avail under the Income Tax Act, 1861. It can additionally avail exemptions under Sections 54 and 54F with respect to capital gains and is entitled to deductions for interest on self-occupied house property upto 2 lakh rupees annually under Section 24.

• Salary Restructuring

Salary restructuring may not always be a feasible option, but if the assessee is allowed to do so, he may restructure his salary in the following ways to save on taxes –

1. Opt for food coupons instead of lunch allowances since they are tax exempt to the extent of Rs. 50 per meal.
2. Include medical allowances, transport allowances (Rs. 1600 per month), education allowances, leave travel allowances, uniform expenses and telephone expenses as part of the salary along with producing the actual expense bills for availing the reduction in the taxes.
3. Opt for the company car instead of using one’s own to avoid prerequisite taxation.

• Investment of Gifted Money in Tax-Free Instruments

The gift tax provisions do not apply on transfers to one’s non-working spouse, minor child, parents or the lineal ascendants and descendants of one’s spouse and such money can be invested in a tax-free instrument such as a PPF, tax-free bonds, etc., in which case the assessee will not incur any tax liability even on the clubbing of incomes.

• Investment in Minor Children

A deduction upto Rs. 1500 can be claimed per child upto two children in the event of making any investment in the name of the said minors.

• Investments leading to Long-Term Gains

The assessee will be exempt from capital gains tax in case he invests in stocks and equity mutual funds and holds them for a more than a year. In case of investment in gold and property and debt-related mutual funds for the same purpose, the holding period is 3 years.

• Reinvestment of Income

If the assessee re-invests his income in the relative’s name who is not earning or falls under a lower income bracket, the money will be treated as part of the relative’s income and the assessee will incur no further tax liability on that amount from the second year onwards.

• Transfer of Income to Adult Children

There is no clubbing of income after the child of the assessee becomes an adult, and he/she will be entitled to a tax-free income of 2.5 lakh rupees along with all the tax benefits and deductions available to any other taxpayer, which can be transferred to his name by the assessee legally before he/she turns 18.

• HRA Benefits

The assessee can incur tax benefits if he/she is living with his/her parents in a house registered in their name. The assessee can pay rent to them and claim HRA benefits and the parents can claim deduction of 30% of the annual rent collected as maintenance charges and will only be taxed for the income above the basic tax exemption limit (2.5 lakh rupees generally, 3 lakh rupees above the age of 60 and 5 lakh rupees above the age of 80) and if the House is co-owned by them, they can split the rent earning and separate their tax liability.

• Investment in the name of Parents

The assessee can invest in the name of his/her parents, the clubbing rules and gift tax not being applicable on the same, so as to benefit from their basic tax exemption limit and tax benefits that can be availed by them.

• Loans

The income clubbing rules apply on earnings from gifted money, but if the assessee can show it as a loan wherein the relative pays him/her a nominal interest, the income from the gift will be exempt from taxes.

• Declaration of Losses

The assessee can set off the losses incurred in one business against the gains in another one, depending upon several criteria. If the assessee incurs only losses in a year, he/she can show this loss in the tax returns and carry it forward and set it off against any future profits upto a period of 8 years.

CONCLUSION

It is indeed an irony that the taxes which are imposed by the Government to promote the welfare of the poorer section of the society by taxing the richer section can be legally avoided in such a variety of ways under the Income Tax Act itself. Although it is undeniable that the Government implements the tax avoidance schemes so as to throw a positive light on the tax regime being imposed by it. Therefore, such schemes are encouraged by almost every government in their tax legislation. But in a developing country like India, such a scheme has a very detrimental effect on economic progress and development. The main principle behind the imposition of taxes is to cause equitable distribution of wealth by procuring taxes from the rich and using the same for providing the poor with a better condition of living, but legal means of tax avoidance prove to be a hurdle in the path of achieving this objective. Since the rich almost always have legal and tax advisors, they are made aware of the legally allowed methods of avoiding taxation and they are able to prevent their income from getting taxed as much as intended by the Government. This results in reduction in the funds that can be utilised for the welfare and development of the poorer section of the society, which forms a major part of the population in a developing country, thereby impeding economic development. Moreover, the poorer are ignorant about the tax benefits and exemptions they are entitled to due to illiteracy and other factors resulting from their underdeveloped state. Thus, the tax avoidance provisions only result in the rich becoming richer and the poor, poorer. This goes completely against the spirit of the scheme of taxation in any country, thereby negating the intended effect of any such scheme. It is, therefore, important to scrutinise the claims of tax benefits, deductions and exemptions carefully and prevent frivolous claims from atrophying the economic growth of a nation.

In this blog post, Shambhavi Bundela, a student at New Law College Bharati Vidyaneeth, Pune and pursuing a Diploma in Entrepreneurship Administration and Business Laws from NUJS, Kolkata, describes corporate governance issues involved in the issuance of securities through the book-building process.

In this blog post, Ravi Prakash Shukla, a student at Amity Law School and pursuing a Diploma in Entrepreneurship Administration and Business Laws from NUJS, Kolkata, analyses the taxation system in India.

Introduction

Taxes are the government’s way of earning an income and that income later on used for various public projects that is important for the country’s economy .In India taxes are decided by the central and state government with local governments like municipalities and also decides very minute taxes that can be levied within their limits. Government cannot impose any tax on the basis of their wishes all the taxes which is imposed by the government must be laws.

Types of Taxes:

There are two types of taxes, direct one and indirect taxes. The only difference between these two taxes is in the way of their implementation. Some taxes are paid directly by you like income tax, wealth tax, corporate tax etc. while some are indirect taxes ex. VAT, service tax, sales tax etc.

1. Direct Tax:  As the name suggests direct tax are those taxes that are paid directly by you. These taxes are levied directly on individual entity or person and cannot be transferred on someone else the bodies who overlooks these direct taxes is the CBDT( Central Board of Direct taxes) which comes under the department of revenue. This board perform their duty with the help of various acts those acts dealt with various norms of direct tax. Some of these act are:

• Income Tax Act:

This is commonly known as the IT Act of 1961 and makes the guidelines that govern tax on Income in India, Income can comes from different sources like business, owning a house or property, capital gains received through investment or salaries etc. this act also defines how much the tax benefit will be on fixed deposit or on life insurance policy. This also decides how much of your income can you save through investments and what the slab for the income tax will be.

• Wealth tax Act:

This act was implemented in 1951 and it is whole and sole responsible for the taxation related to someone net wealth like any individual person or any company or a HUF and the simplest calculation of wealth tax was that if the whole wealth crossed Rs. 30 lakhs, then 1%

Of that amount which exceeded 30 lakhs was payable as tax later on it is replaced with a surcharge of 12% on any individual that earn more than Rs. 1Cr per annum in 2015 budget. It is also applicable on those companies that have a income of 10Cr per year.

• Gift Tax Act

• Expenditure Tax Act

• Interest Tax Act
• Indirect Tax:

As the name suggest, Indirect taxes are those taxes that are levied goods or services. This is totally different from direct taxes because they are not charged on those people who pay them directly to the government. Taxes are levied on products and are collected by an intermediary, person who is selling the product. Mostly known example of indirect tax can be VAT, taxes on imported goods, sales tax etc. These taxes are levied by adding them to the price of the service which tends to push the cost of the product or service up.

• Income Tax:

This is the most common and least understood tax by so many people. It is the tax which is levied on your income in a financial year. There are so many facets that are available to income tax, such as the tax slabs, taxable income, tax deducted at source (TDS), this tax is applicable for both individual person and a company. For individuals, the tax depends on which tax bracket they fall in.

• Capital Gain Tax:

This tax is paid when someone receives a considerable amount of money. That money could be related from any investment or from the sale of any property. Basically it is usually of two types: first one is short term capital gain from those investments which is held for longer than 36 months and the other one is long term capital gain from that investment which is held for longer than 36 month taxes are different for both of them short term gain is calculated based in the income bracket in which someone falls and the tax on long term gains is 20%.

• Corporate Tax:

This type of tax is the income tax that is paid by companies from their earnings. This tax comes with its own slabs which tell how much tax the company has to pay ex. A domestic category company which has revenue of less than Rs. 1 Cr per year no need to pay tax but other has revenue above 1 Cr per entitled to pay tax. There is also a surcharge which is different for every revenue brackets and it is also different for international companies corporate tax are differ from domestic one because for international companies there are various other state and central taxes which also add certain other extra tax burden on these companies for international companies where corporate tax may be 41.2% if that international company has a revenue of less than Rs. 10 million and so on.

• Securities Transaction Tax

• Prerequisite Tax

• Wealth Tax

The Concept of Advanced Tax Ruling

An Advanced tax ruling is an instrument for corporations that operate on a multinational level and also for individual taxpayers for clarifying certain tax agreements. As per tax ruling, the tax authorities are bound by whatever is mentioned in the ruling.

Advanced tax is part payment of income tax liability in advance. Most investors have the myth that they have to pay the income tax in the end of the year, which is not true.  There are two conditions that have to be met for paying advance tax, there should exist some other income source apart from income, example rental income, interest on fixed deposit, shares etc.

The other criterion is that the income tax should exceed INR 1000. Hence, the salaried employee who does not have additional income, he does not have to pay the advance tax. The reason for that is because the employer deduct the TDS on his income

The advance tax is paid three times in a year, the first installment is on or before 15th September in which at least 30% of the tax is to be paid, the second installment is on or before 15th December, and 60% of tax should be paid by this date. The last date is 15th march by which the entire income tax is paid. The penalty for not paying advance tax is as per section 234(c ) , which is applicable if the required advanced tax is not paid on due dates, the penalty will be 1% per month for the outstanding balance till it is paid. And as per section 234 (b ), if the advance tax paid till march is less than 90% of the required amount of advance tax, In such a case, the penalty will be 1% per month for outstanding balance until it is paid.

The chapter XIX B of the income tax act talks about advance rulings. As per section 245 O, the authority for advance rulings is constituted; the authority consists of chairman and two members. The section also states that the authority shall be situated in Delhi. The applicant for advanced rulings shall be a non resident seeking clarifications about the tax implications or other related aspects in respect of transactions undertaken or to be undertaken in India. However, notified residents can also apply for advance rulings.

Notified Residents Eligible to Apply for Advance Ruling:
i) A public sector company as defined in section 2 (3A) of the Income Tax Act

ii).Person who have undertaken a transaction with a non resident seeking advance ruling in relation to tax.

Section 245Q also states that a person willing to obtain an advance ruling shall make an application in form 34C, 33D or form 34E whichever is applicable. The application is to be made with a fee consisting of two thousand and five hundred Indian Rupees.

The authority for advance ruling may also reject the application in the following cases :-

1. Where the question raised in the application is already in dispute and the decision is pending on it.
2. If it involves determining the fair market value of a property.
3. If it includes an issue that seeks avoidance of tax.

No application is rejected without it being heard, and in case of rejection of application, the reasons have to be given in the order. The advanced ruling may also be declared void if the authority discovers that the party has obtained advanced ruling though fraud or misconduct or other unscrupulous means. The authority also has all the powers of a civil court as per section 245U. It is as per the Code of civil procedure 1908. Hence, every proceeding by an advance ruling authority is a judicial proceeding within the purview of section 193, 228 and as per section 196 of the Indian Penal Code.

In this blog post, Prasham Shah, a student at Pravin Gandhi College of Law, Mumbai and pursuing a Diploma in Entrepreneurship Administration and Business Laws from NUJS, Kolkata, analyses the taxation  process of limited liability partnerships.

Introduction

The Finance Act, 2009 introduced the provisions relating to taxation of limited liability partnerships. ‘Limited Liability partnership’ (“LLP”) has been considered equivalent to a general ‘partnership firm’. In view of this, all the provisions relating to the general partnership firm apply mutatis mutandis to LLP.

Section 2 of the Income Tax Act, 1961 (“IT Act”) provides as under-

(23) (i) “firm” shall have the meaning assigned to it in the Indian Partnership Act, 1932 (9 of 1932), and shall include a limited liability partnership as defined in the Limited Liability Act, 2008 (6 of 2009)….

Residential Status of LLP

In India, the taxation of income is dependent upon the residential status of an assesse. According to section 6(2) of the Income Tax Act, a LLP shall be said to be a resident in India in any previous year in every case except where during that year the control and management of its affairs is situated wholly outside India.

Applicability of Income Computation and Disclosure Standard (ICDS) Issued by CBDT

The Central Board of Direct Taxes (CBDT) has vide Notification no. S.O. 892(E) dated 31st March 2015 issued the Income Computation and Disclosure Standard (ICDS), which is applicable for computation of income chargeable under the head ‘Profits and gains of business or profession’ or ‘Income from other sources.’ The ICDS is however not applicable for maintenance of books of accounts.

Conditions for Assessment as a Firm

Section 184 of the IT Act provides that a firm shall be assessed as a firm for the purposes of the IT Act, if –

1. The partnership is evidenced by an instrument (ie written LLP Agreement); and
2. The individual shares of the partners are specified in that instrument.

Steps for Computation of Taxable Income of LLP

Find out the income of the LLP under the following different heads of income, without considering the prescribed exemptions:

• Income from House Property
• Profits and Gains of Business or Profession
• Capital Gains
• Income from other sources including interest on securities, winnings from lotteries, races, puzzles, etc.

The payment of remuneration and interest to partners is deductible subject to fulfillment of conditions specified under sections 184 and 40(b) of the IT Act. Any salary, bonus, commission or remuneration, which is due to or received by partners, is allowed as a deduction from income of the partnership firm and the same is taxable in the hands of the partners.

Make deductions for brought forward losses, disallowances of interests, salary, etc paid by the LLP to its partners. The sum so obtained is the ‘gross total income’.

The ‘gross total income’, as reduced by the deductions under Chapter VIA to arrive at the ‘total income’ of the LLP on which income tax has to be computed and paid by the LLP at prescribed rate.

Tax Rate Applicable to LLP

The tax rate applicable to the LLP is same as firms. For the assessment year 2015-16, the tax rate for LLP is 30.90% (ie, 30% tax rate + 2% education cess + 1% secondary and higher secondary education cess). In case, the income of the LLP exceeds INR 1 crore in any financial year, surcharge @10% would also be payable.

Signing of Return of Income of LLP

The designated partner is required to sign the income tax return of LLP, or, where for any unavoidable reason such designated partner is not able to sign the return or where there is no designated partner as such, any partner shall sign the return.

Dividend Distribution Tax (DDT)

Unlike a company, there shall be no DDT payable by the LLP on the distribution of profits to its partners.

In this blog post, Nitsimar Guliani, a student at Symbiosis Law School, Noida and pursuing a Diploma in Entrepreneurship Administration and Business Laws from NUJS, Kolkata, details how a deemed associate enterprise is taxed.

Definition: Section 92A(2) of the Income Tax Act, 1961 (IT Act)

An “associate enterprise”[1], in relation to other enterprises are those which can be owned and controlled by the same or common interest.[2] The expression “associated enterprises” as per Section 65B (13) of the Finance Act, 2001 (Finance Act) shall have the meaning assigned in Section 92A of the IT Act.[3]

Clauses (a) to (m) of Section 92A (2) defines “deemed associate enterprise” as under:

“…a) one enterprise holds, directly or indirectly, shares carrying not less than twenty-six per cent of the voting power in the other enterprise; or

(b) any person or enterprise holds, directly or indirectly, shares carrying not less than twenty-six per cent of the voting power in each of such enterprises; or

(c) a loan advanced by one enterprise to the other enterprise constitutes not less than fifty-one per cent of the book value of the total assets of the other enterprise; or

(d) one enterprise guarantees not less than ten per cent of the total borrowings of the other enterprise; or

(e) more than half of the board of directors or members of the governing board, or one or more executive directors or executive members of the governing board of one enterprise, are appointed by the other enterprise; or

(f) more than half of the directors or members of the governing board, or one or more of the executive directors or members of the governing board, of each of the two enterprises are appointed by the same person or persons; or

(g) the manufacture or processing of goods or articles or business carried out by one enterprise is wholly dependent on the use of know-how, patents, copyrights, trade-marks, licenses, franchises or any other business or commercial rights of similar nature, or any data, documentation, drawing or specification relating to any patent, invention, model, design, secret formula or process, of which the other enterprise is the owner or in respect of which the other enterprise has exclusive rights; or

(h) ninety per cent or more of the raw materials and consumables required for the manufacture or processing of goods or articles carried out by one enterprise, are supplied by the other enterprise, or by persons specified by the other enterprise, and the prices and other conditions relating to the supply are influenced by such other enterprise; or

(i) the goods or articles manufactured or processed by one enterprise, are sold to the other enterprise or to persons specified by the other enterprise, and the prices and other conditions relating thereto are influenced by such other enterprise; or

(j) where one enterprise is controlled by an individual, the other enterprise is also controlled by such individual or his relative or jointly by such individual and relative of such individual; or

(k) where one enterprise is controlled by a Hindu undivided family, the other enterprise is controlled by a member of such Hindu undivided family or by a relative of a member of such Hindu undivided family or jointly by such member and his relative; or

(l) where one enterprise is a firm, association of persons or body of individuals, the other enterprise holds not less than ten per cent interest in such firm, association of persons or body of individuals; or

(m) there exists between the two enterprises, any relationship of mutual interest, as may be prescribed.”

Two enterprises shall be deemed to be associate enterprises if, at any time during the previous year one enterprise holds, directly or indirectly, shares carrying not less than twenty-six per cent of the voting power in the other enterprise/each of such enterprises.[4] However, Section 92A (1) does not prescribe any minimum or maximum limit for participation in management, control or capital. This can be noted as an apparent irregularity within the provision.

Two enterprises shall be deemed to be associate enterprises if, at any time during the previous year, more than half of the board of directors or members of the governing board, or one or more executive directors or executive members of the governing board of one enterprise, are appointed by the other enterprise.[5] The contemplation with regard to ‘appointment’ must be considered as “actual appointment” and not “a mere power to appoint.”

In the recent case of Kaybe Private Ltd.[6], it was held by the Mumbai Bench of the Income-Tax Appellate Tribunal that two enterprises would be treated as Associated Enterprises if the conditions of Section 92A (1) are satisfied irrespective of the deeming fiction set out under Section 92A (2) of the IT Act.

How Deemed Associate Enterprise Are Taxed:

In any fiscal laws, the idea of levy, collection and payment of tax to the Government are the principal perspectives. Duty of tax is straightforwardly connected with the taxable occasion. Once the occasion has ended up being taxable, then appears the subject of collection of tax.[7]

Note, deemed associate enterprise are taxed the same as associate enterprise.

Departmental clarification on Associated Enterprises[8] Vide Letter no. No.334/1/208-TRU  clarifies as follows :

2008. By virtue of Section 66, service tax at the rate of 12% is levied on the value of taxable services. Section 67, pertaining to valuation of such taxes, has however been omitted by the Finance Act, 2008. As per Rule 6 of the Service Tax Rules, 1994 – the service tax is only required to be paid only after receiving the payment.
2009. It has been conveyed that the provision requiring payment of service tax after receipt of payment are utilized for tax shirking particularly when the transaction is between associated enterprises. There have been occurrences where in service tax has not been paid on the ground of non-receipt of payment despite the fact that the transaction has been perceived as revenue/expenditure in the announcement of profit and loss account behind deciding corporate tax liability.
2010. Likewise an anti-avoidance measure, it may be suggested to elucidate that service tax will be leviable on taxable services, and duty to pay tax regardless of the measure will be not really received, yet the measure may be credited or debited in the books of service provider. In different words, service tax will be paid then afterward receipt of payment or crediting/debiting of the sum in the books of accounts, whichever is prior. However, this provision may be confined to transaction between associated enterprises. This provision would likewise apply to service tax payable under reverse charge method. (Section 66A) as taxable services received from associated enterprises. Notice amendment to Section 67 and rule 6(1) for this purpose.
2011. The term ‘associated enterprise’ has the same meaning as assigned to it in section 92A of the Income Tax Act, 1961. It is a relative concept i.e. an enterprise is an associated enterprise when it is viewed in relation to other enterprises. This concept is used in the Income Tax Act for applying transfer pricing provisions.
2012. Section 92A (2) of the Income Tax Act specifies various situations under which two enterprises shall be deemed to be associated enterprises. Enterprise means a person who is engaged in the provision of any services of any kind. For details, relevant provisions of Income Tax Act may be referred to.

As per Finance Act (as amended w.e.f. 10-05-2008)

[As per third proviso to Rule 7, in case of “associated enterprises”, where the person providing the service is located outside India, the point of taxation shall be –

o   the date of debit in the books of account of the person receiving the service;

o   the date of making the payment, whichever is earlier.][9]

Take into account, also, the first proviso of Rule 7 of Point of Taxation Rules, 2011 that lays down that if the payment for service is not made within six months from the date of invoice, the Point of Taxation would be determined as if rule was not made.

Provisions related to service tax liability, would apply.

Cenvat Credit Rules, 2004[10]:

As per Rule 4(7) of CCR, credit of Cenvat Credit is allowed only after payment is made to service provider. However in case of Associate Enterprise, service tax is payable when entry has been made in books of account. So for availing of CCR, it has been clarified that as per deeming fiction in section 67(4)(c) of Finance Act 1994, book adjustment is deemed payment. Further rule 4(7) does not indicate form of payment. Thus debit in books of account can also be payment made.[11]

Conclusion

It is common knowledge that the Point of Taxation Rules have brought about significant changes in the monetary practices, and provided a more sophisticated version of dealing with Associated Enterprise Transactions. The step of insertion of service tax on book adjustments is a reformative step to combat tax avoidance. The only change the present calls for is the amendment in Cenvat Rules, 2014 in respect of service tax paid by associate enterprises on book adjustments.

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[1] See Section 65B (13) to F of the Finance Act for the meaning of “associated enterprise.”

[2] http://saprtax.blogspot.in/2013/03/associate-enterprise-ae-under-indian-tp.html, retrieved on 30 September 2016 at 9:26 pm.

[3] For the purposes of this section and sections 92, 92B, 92C, 92D, 92E and 92F, “associated enterprise”, in relation to another enterprise, means an enterprise—

(a) which participates, directly or indirectly, or through one or more intermediaries, in the management or control or capital of the other enterprise; or

(b) in respect of which one or more persons who participate, directly or indirectly, or through one or more intermediaries, in its management or control or capital, are the same persons who participate, directly or indirectly, or through one or more intermediaries, in the management or control or capital of the other enterprise.

[4] Section 92A (2)(a) and (b) of the IT Act.

[5] Section 92A 2 (e)

[6] Kaybee Pvt. Ltd. V. ITO (ITA No. 3749/Mum/2014)

[7] Balasubramanium, C.A.J., Point of Taxation Rules, retrieved at https://www.sircoficai.org/downloads/cpe-materials/POT_SIRC_JB.pdf on 30 September 30, 2016 at 10:15 pm.

[8] CBE&C TRU letter F. No.334/1/208-TRU dated 29-02-2008

[9] Balasubramanium, C.A.J., Point of Taxation Rules, retrieved at https://www.sircoficai.org/downloads/cpe-materials/POT_SIRC_JB.pdf on 30 September 30, 2016 at 10:15 pm.

[10] CBE&C circular 122/03/2010-ST dated 30-4-2010

[11]Kaushik, Alok, Point of Taxation while dealing with Associated Enterprises, (2015) retrieved at http://www.simpletaxindia.net/2015/02/point-of-taxation-rules-while-dealing.html#axzz4LkqM9Fuk