Wednesday, September 15, 2010

COMPUTATION OF TOTAL INCOME

The DTC 2010 is giving a comprehensive definition of 'Income' so as to include all accruals to spending power. It classifies incomes into two categories viz. 'special sources' and 'ordinary sources'. The special sources (specified in a separate Schedule) shall include Royalty, Fees for Technical Services (FTS), investment income. All other sources of income (including 'Income from Residuary Sources') will be considered as income from ordinary sources. Special sources would be subject to tax on the gross amount.

Scope of total Income

DTC adopts residence based taxation for residents and source based for non-residents. Income arising
from indirect transfer of capital assets situated in India would also be taxable in India. Tax residence of foreign companies shall be in India if, 'place of effective management' is located in India.

TAX RATES FOR INDIVIDUALS

  • Threshold exemption limits for Individuals and HUF
  • For Men as well as for Women Rs. 2,00,000
  • For Resident Senior Citizens Rs. 2,50,000
Slab Rates

  • 10% on income level of INR 200,000 to INR 500,000
  • 20% on the next INR 500,000 to INR 1,000,000
  • 30% on income in excess of INR 1,000,000
TAX RATES FOR COMPANIES
  • Tax rate in case of companies is proposed at 30%.
  • DDT on dividend of domestic company - 15%.
  • A foreign company is required to pay an additional branch profits tax of 15%.
  • MAT rate - 20% of book profits. MAT Credit carry forward period would be allowed for 15 years. It would be applicable to SEZ undertakings also.
COMPUTATION OF INCOME FROM EMPLOYMENT AND HOUSE PROPERTY
  • HRA exemption restored.
  • Amount received by employee from NPS trust is tax-free. Thus, NPS which is taxed on EET basis is proposed to be made EEE (Exempt-Exempt- Exempt) for employees.
  • Only Actual Rent from house property to be taxed. Present system of taxing notional value called 'annual value' proposed to be done away with.
  • Deduction for interest on housing loan/loan taken for repair or renovation of house property up to limit of Rs. 1,50,000 in respect of one house property not let out. No deduction for re-payment of principal under the Code.
  • Rent received in arrears to be included in the year of receipt, whether person is owner of property or not, after allowing 20% deduction towards repairs & maintenance.
COMPUTATION OF INCOME FROM BUSINESS
  • All assets are classified into business assets and investment assets. The business assets are further classified into business trading assets and business capital assets.
  • Income from transactions in all business assets will be taxed under the head 'income from business' while income from transactions in all investment assets will be taxed under the head 'capital gains'.
  • The profits from business will be computed by deducting business expenditure from gross earnings of the business.
  • Gross earnings will ordinarily include all accruals and receipts derived from or connected with business assets, whether trading or capital.
  • Business expenditure will be classified into 3 mutually exclusive categories
  • Operating expenditure
  • Permitted financial charges
  • Capital allowances.
  • The benefit of weighted deduction at 150% proposed in the DTC 2009 has been enhanced to 200% for any expenditure (both revenue and capital except land and building) incurred on in house scientific research and development by a company is proposed for all industries (not restricted to manufacturing).
  • Consideration received from transfer of carbon credits to be taxed as business income.
  • Remission or cessation of any liability by way of loan/ deposit/advance/credit to be taxed as business income.
  • Scientific Research and Development in house facility expenses - weighted deduction proposed to be increased from 150% to 200%.
COMPUTATION OF CAPITAL GAINS

The concept of 'investment asset' is made applicable to any undertaking or division of a business. As a result, slump sale would now be capital gain income unlike the earlier proposal of DTC which sought to tax it as business income 
  • Transfer of land of a sick industrial company made under a scheme sanctioned under section 18 of SICA where such company is being managed by worker's co-operative not to attract capital gains tax.
  • Reverse mortgage under notified scheme to continue to be exempt from capital gains tax.
  • Exemption for long-term capital gains from equity shares/ units of equity oriented mutual funds retained. STT to be retained.
  • Short-term capital gains (where equity shares/units are held for 1 year or less) - deduction of 50% to be are allowed and balance 50% taxed. Likewise short-term capital loss to be scaled down by 50%.
OTHERS
  • Wealth tax - threshold increased from Rs. 30,00,000 to Rs. 1 crore. Tax rate will be 1% of net wealth in excess of Rs. 1 crore.
  • Profit linked incentives to continue under grandfathering provisions for SEZ units (Setup before 31st March 2014) and also for SEZ Developers (Notified before 31st March 2012)
  • GAAR (General Anti-Avoidance Rule) - proposed to introduce GAAR as a deterrent and a tool against tax avoidance, some safeguards are proposed without any specific threshold. Rules provide that any business arrangement may be declared impermissible by CIT, it in his opinion, it has been entered to take tax benefits. CBDT shall issue guidelines as to when GAAR can be invoked and shall also prescribe threshold limits. A Dispute Resolution Panel shall be available where GAAR is invoked.
International Taxation
  • A Company Incorporated Outside India to be resident in India if its "Place of Effective Management" (POEM) is situated in India
  • Exclude from Taxation - Income from transfer outside India, of any share or interest in a foreign company if the value of assets in India represents less than 50% of the value of assets held by the foreign company.
  • Include 2 More Criteria to the definition of Associate Enterprise re: Transfer Pricing
  • Introduces Advance Pricing Agreements (APAs)
  • Empowers Government to determine Arms' Length Price, subject to Safe Harbor Rules
  • Concept of Controlled Foreign Companies (CFCs) Introduced
Advance Ruling and Dispute Authority decisions to be binding.

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