Corporate Taxes - An Overview 5 th MSOP :ICSI-Hyderabad Chapter Ankem Sri Prasad Chief Tax Officer - Deloitte U.S. India Offices March 26, 2012
The best things in life are free, but soon, the government will find a way to tax them. 2
Index I. Corporate Taxes Introduction Some Facts, Business & Taxes, Your role with Taxes 4-7 A. Overview of taxes Compliance Management 8 B. Direct Taxes 9-15 C. Individual Taxation 16-18 D. International Taxation Evolution, Objective, Treaty & Transfer pricing 19-43 E. In-Direct Taxation 44-49 II. Practical Challenges A. Practical challenges and mitigating strategies 50-54 3 Copyright 2011 Deloitte Dev elopment LLC. All rights reserv ed.
A. Introduction
Introduction Some facts In Rs. Lakh Crores Revenue Actual 2010-11 Rev Estimate 2011-12 Budget 2012-13 Net Tax 5.74 6.46 7.76 Non Tax 3.59 2.77 3.35 Capital, Public Debt, Loans/Advances recovery, Misc cap receipts 32.29 41.14 43.98 Total Consolidated Revenue 41.62 50.37 55.09 Expenditure General, Social, Economic Services, Grants & Payments to Union Territories Capital Expense Gen, Social & Eco Services Government Public Debt, Loans/Advances 11.86 13.18 14.62 1.40 1.36 2.25 32.29 41.14 43.98 Total Consolidated Disbursements 44.15 54.32 58.59 DEFICIT 2.53 3.95 3.50 5
Business and Taxes - Nexus Competition Profits Affect Cost Management Business Decision making Cash flow Management Tax planning/ Management Tax Savings 6
Where you play a role Expatriate Transactions Tax Planning / Structuring / Due Diligence Share Capital Issue Investments YOUR ROLE Dividend Taxation Contracts / Agreements Mergers & Acquisitions Capital Gains 7
A. Overview - Corporate Taxes Compliance Management Corporate Taxes Direct Taxes (CBDT) Indirect Taxes (CBEC) Entity Level Taxes Individual Taxes International Taxes Customs duty on Imports Excise Duty on Domestic Manufacturing Advance Tax (210 & 211) / Minimum Alternate Tax Tax deduction at source Contractors (194 C) Rent (194 I) Professionals (194J) Salary TDS (192) Profession Tax Double Taxation Avoidance Agreements (Treaty) Transfer Pricing Rules / Arms Length Price Expatriate Taxation Services Tax Bonding (Central Excise) Local Sales Tax Central Sales Tax Foreign payments w ithholding (195) Software Technology Park of India (STPI), SEZ and RBI are regulatory authorities 8
B. Direct Taxes
B. Direct Taxes Entity Level Taxes (Advance Tax) Advance Tax (Sec 210) Payment of advance tax by the assessee of his own accord or in pursuance of order of Assessing Officer. 210. (1) Every person who is liable to pay advance tax under section 208 (whether or not he has been previously assessed by way of regular assessment) shall, of his own accord, pay, on or before each of the due dates specified in section 211, the appropriate percentage, specified in that section, of the advance tax on his current income, calculated in the manner laid down in section 209. Installments of advance tax and due dates 211. 95 [(1) Advance tax on the current income calculated in the manner laid down in section 209 shall be payable by (a) all the companies Advance Tax (Sec 211) Amount of Tax Payable Not < 15% of advance tax. Not < 45% of advance tax, less paid earlier. Not < 75% of advance tax, less paid earlier. Due date of installment On or before the 15th Jun On or before the 15th Sept On or before the 15th Dec 100% of advance tax, less paid earlier. On or before the 15th Mar 10
B. Direct Taxes Minimum Alternate Tax (MAT) MAT (Sec 115JB) Special provision for payment of tax by certain companies 115JB. (1) Notwithstanding anything contained in any other provision of this Act, where in the case of an assessee, being a company, the income-tax, payable on the total income as computed under this Act in respect of any previous year relevant to the assessment year commencing on or after the 1.4.2011, is less than 18% of its book profit, [such book profit shall be deemed to be the total income of the assessee and the tax payable by the assessee on such total income shall be the amount of income-tax at the rate of 18%.. 40.00 35.00 30.00 25.00 20.00 15.00 10.00 5.00 0.00 39.55 35.7 36.75 35.88 36.59 33.66 33.66 33.99 33.99 33.99 33.22 32.45 MAT & Corporate Tax Rate - A Glance 17.00 11.22 11.33 11.33 8.48 7.65 7.88 7.69 7.84 8.42 19.93 20.01 MAT rate Corp. tax rate 11
B. Direct Taxes Tax Deduction at Source (TDS -194C) TDS on Contractors (Sec 194C) Payments to contractors. 15 194C. (1) Any person responsible for paying any sum to any resident (contractor) for carrying out any work (including supply of labor for carrying out any work) in pursuance of a contract between the contractor and a specified person shall, at the time of credit of such sum to the account of the contractor or at the time of payment thereof in cash or by issue of a cheque or draft or by any other mode, whichever is earlier, deduct an amount equal to Payment is being made or credit is given to % of TDS TDS on Contractors (Sec194 C) Individual or a Hindu undivided family 1% a person other than an individual or a HUF 2% 12
B. Direct Taxes Tax Deduction at Source (TDS 194 J) TDS on Professional or Technical Services (Sec 194J) Fees for professional or technical services. 194J. (1) Any person, not being an individual or a Hindu undivided family, who is responsible for paying to a resident any sum by way of (a) fees for professional services, or (b) fees for technical services, [or] (c) royalty, or (d) any sum referred to in clause (va) of section 28, shall, at the time of credit to the payee or at payment thereof in cash or cheque or any other mode, whichever is earlier, deduct an amount equal to.. Provided Payment is being made or credit is given to % of TDS Individual or a Hindu undivided family 10% Where payment for services in a tax year to such person does not exceed Rs 30,000/- no tax shall be deducted 13
B. Direct Taxes Tax Deduction at Source (TDS -194-I) TDS on Rent (Sec 194-I) Rent 194-I. Any person, not being an individual or a Hindu undivided family, who is responsible for paying to [a resident] any income by way of rent, shall, at the time of credit of such income to the account of the payee or at the time of payment thereof in cash or by cheque or any other mode, whichever is earlier, [deduct income-tax thereon at the rate of Payment is being made or credit is given % of TDS for use of any machinery or plant or equipment 2 % TDS on Rent (Sec194-I) for use of any land / building (including factory building) / land appurtenant to a building (including factory building)/ furniture or fittings Where payment for rent in a tax year to such person does not exceed Rs 180,000/- no tax shall be deducted 10% 14
B. Direct Taxes Tax Deduction at Source (TDS -195) TDS on Foreign payment (Sec 195) Other sums. 195. (1) Any person responsible for paying to a non-resident, not being a company, or to a foreign company, any interest / any other sum chargeable under the Income Tax Act (not being income chargeable under Salaries ) shall, at the time of credit or payment of such income in cash or cheque or any other mode, whichever is earlier, deduct income-tax thereon at the rates in force : Provided Payment is being made to a foreign recipient % of TDS Where the Foreign Party does not have a PAN 20 % TDS on Foreign payment (Sec 195) Where the Foreign Party does not have a PAN 10% Where such Income / such payment is not taxable in India, no tax shall be deducted, however it has to be certified by a qualified chartered accountant in prescribed format 15
C. Individuals Taxes
C. Individual Taxes - TDS on Salaries (Sec 192) TDS on Salaries (Sec 192) Salary. 192 (1) Any person responsible for paying any income chargeable under the head Salaries shall, at the time of payment, deduct income-tax on the amount payable at the average rate of income-tax computed on the basis of the [rates in force] for the financial year in which the payment is made, on the estimated income of the assessee under this head for that financial year. Apr 11 to Mar 12 (Prior Yr) Apr 12 to Mar 13 (Budget) Income Slabs Tax Rate Income Slabs Tax Rate Up to Rs. 1.8 L Nil Up to Rs. 2 L Nil TDS on Salaries (Sec 192) Rs. 1.8 L to 5 L 10% Rs. 2 L to 5 L 10% Rs. 5 L to 8 L 20% RS. 5 L to 10 L 20% Rs. > 8 Lakhs 30% Rs. > 10 Lakhs 30% Cess % on Tax 3% Cess % on Tax 3% Max Marginal Rate 30.9% Max Marginal Rate 30.9% 17
C. Individual Taxes - Professional Taxes Professional Tax ANDHRA PRADESH - TAX ON PROFESSIONS, TRADES, CALLINGS AND EMPLOYMENTS ACT, 1987 The AP State Legislature empowered the local authorities to levy tax on professions, trades, callings and employments by incorporating that power in the statutes relating to local authorities i.e. the Municipal Corporations, the Municipalities and the Gram Panchayats. Thus, the levy and collection of the tax was administered by the local authorities Website: apvat.in Professional Tax Slabs in AP, Maharastra & Karnataka Gross Income Rs AP Tax in Rs Maharashtra Tax in Rs. Karnataka Tax in Professional Tax) Up to 5 K Nil Nil 5K to 6K 60 6K to 10K 80 175 Rs. Nil 10K to 15K 100 15K to 20K 150 >20K 200 200 * 300 for February 150 200 18
D. International Taxation
D. International Taxes - Evolution International Law evolved 1. Out of needs in fields like: Shipping, E-commerce, etc 2. resulting to certain accepted codes of conduct in Domestic Law 3. though the transactions are between 2 different countries International Tax can be considered as: 1. The body of legal provisions of different countries, covering tax aspects of cross border transactions (Direct and Indirect Taxes) OECD Organisation for Economic Co-operation & Development To facilitate cross border transactions with ease, without barriers of any kind & to eliminate double taxation of one s single income, The OECD prepared a draft called as Model Convention in 1977. 20
D. International Taxes - Objectives National Wealth Maximisation 1. Country ensures fair share of revenue in cross border transactions 2. For the well being of its citizens, 3. And maintains domestic tax base Tax Equity or fairness : 1. is all about imposing equal taxes on tax payers with equal income or 2. equal ability to pay 3. Without reference to legality or source or type of Income Economic Efficiency: 1. Developing a competitive domestic economy, 2. The pretax return should not distort the after tax return thereby affecting investment decisions 21
D. International Taxes - Treaty Aspects Treaty : is a formally concluded and ratified agreement between independent nations. Tax Treaties between nations: 1. Is generally a matter of bargain between 2 countries, 2. Keeping in view the economic interests of the countries involved How Treaty becomes a Law? 1. Only when it has the sanction of the constitution of the participating nations. 2. Part IV of Indian Constitution setting out the Directive Principles of State Policy includes specific provision, covering International Law and treaty obligations in Article 51. 22
D. International Taxes - Double Taxation Double Taxation : It is possible that Tax payers engaged in cross border transactions are taxed more than one (twice) on the same amount of Income, this phenomenon is known as Double Taxation. This led to 2 fundamental methods of Taxation under International Law: 1. Source based taxation 2. Residence based taxation 23
D. International Taxes - Concept of Nexus Subject Connecting Factor 1. Assessee Residential Status 2. Income Source Connecting Factors: Income Connecting Factors: Assessee Taxable Income Taxable Indian Resident (R) World Income Non residents /NOR s Only Income sourced in India is Taxable Indian sourced Income (irrespective of Assessee status) Foreign Sourced Income in India Only if earned by an Indian resident Foreign sourced Income earned by Non residents is not taxable in India As there is no nexus with India 24
D. International Taxes - Nexus with Income Tax Act * Section 4 Charging section Sec 4 (1) Income Tax shall be charged, at that rate or those rates, for that year, in accordance with the provisions of this act, In respect of the Total Income, of the previous year, of every person Sec 4 (2) In respect of income chargeable under clause (1), Income Tax shall be deducted at source or paid in advance, Where it is so deductible under the Act. 25
D. International Taxes - Nexus with Income Tax Act *** Sec 5 (1) The Total income of any previous year, of a Sub sec (1) Resident person ; Sub sec (2) Non Resident person Includes all incomes from whatever source is derived a) Is received or deemed to be received in India in such year, b) Accrues or arises or is deemed to accrue or arise in India during such year, c) Accrues or arises to him outside India during such year (For Resident Only) Provided that, in case of a person NOR in India, under Sec 6 (6), income accruing or arising to him outside India shall not be included unless it is derived from a Business controlled or profession set up in India. Explanation 1. Income shall not be deemed to be received by reason of the fact that it is taken into account in the Balance sheet prepared in India. Explanation 2. Income which has been included in the total income on the basis that it is deemed to have accrued or arisen to him shall not again be so included on the basis that it is received or deemed to be received by him in India. 26
D. International Taxes - Income deemed to Accrue/Arise* Sec 9 (1) The following Income shall be deemed to accrue or arise in India Sec 9 (I) (i) Income accruing or arising thru From a business connection in India, Income from any property in India, Income from any asset or any source in India, Transfer of capital asset situated in India Sec 9 (I) (ii) Income under head Salaries earned in India Sec 9 (I) (iii) Income under head Salaries paid by Govt. of India to a citizen outside India Sec 9 (I) (iv) Dividends by Indian company outside India Sec 9 (I) (v) Income by way of Interest Sec 9 (I) (vi) Income by way of Royalty Sec 9 (I) (vii) Income by way of Fees for technical Services 27
D. International Taxes - Business Connection Sec 9 (1) Explanation 2. It is declared that business connection shall include any business activity carried out thru a person acting on behalf of a NR a)..trader of goods b)..stockist c) authorized representative Provided that such business connection shall not include any business with Dependant agent Independent agent acting in the ordinary course of his business Sec 9 (1) Explanation 3. Attribution Rule (only so much of income attributable to operations carried out in India shall be deemed to accrue or arise in India). Business connection Requires continuity of action between a R in India and a NR who receives profit, Transaction must be of a commercial nature intimately linked with the business of a NR, contributing to an NR s Profit Isolated transactions between a R and NR will not constitute a business connection. 28
D. International Taxes - Model Treaty Article 1 Persons Covered : Article 2 Taxes Covered Article 3 General Definitions : Person, Company, Enterprise of a contracting state, International Traffic, Competent Authority, National Article 4 Resident Article 5 Permanent Establishment 29 1. Basic rule PE Criteria is : Fixed place of Business 2. Construction PE - Criteria is : Time and activities carried on 3. Agency PE - Criteria is : legal and economic dependence 4. Service PE Most India treaties have this clause Article 6 Income from Immovable property Article 7 Business Profits Article 8 Shipping, Inland waterways, Transport and Air Transport Article 9 Associated Enterprises -
D. International Taxes - Model Treaty Article 10 Dividends : Article 11 Interest Article 12 Royalties Article 13 Capital Gains Article 14 Independent Professional Services (IPS) Article 15 Income from Employment Article 16 Directors Fee s Article 17 Artists & Sportsmen Article 18 Pensions Article 19 Government Service Article 20 Students Article 21 Other Income Article 22 Capital 30
D. International Taxes - Model Treaty Article 23 Methods for elimination of Double Taxation: Article 24 Non Discrimination Article 25 Mutual Agreement Procedure Article 26 Exchange of Information Article 27 Assistance in collection of Taxes Article 28 Members of Diplomatic Mission Article 29 Territorial Extension Article 30 Entry into force Article 31 Termination 31
D. International Taxes - Article 4 (Tie Breaker Test) 32
D. International Taxes - Transfer Pricing Basics: Transfer Pricing is the process of setting prices for intra-group transactions All stakeholders of a business may question intra-group / inter-unit prices Commonly questioned by Government as a stakeholder and therefore need for specific legislation OECD recommends the Arm's length principle for setting Transfer Prices 33
D. International Taxes - Transfer Pricing Definition and objective: Transfer pricing refers to the pricing of cross-border transactions between two associated entities When two related entities enter into any cross-border transaction, the price at which they undertake the transaction is transfer price Due to the special relationship between related companies, the transfer price may be different than the price that would have been agreed between unrelated companies Price between unrelated parties in uncontrolled conditions is known as the arm s length To prevent price (ALP) shifting of profits from India Company A India Company B Overseas 34
D. International Taxes - Transfer Pricing in India International Transactions between Associated Enterprises at Arms Length Price supported by Extensive contemporaneous documentation 35
D. International Taxes - Transfer Pricing in India International Transaction: Between non-resident and non-resident Between non-resident and resident Normally not between resident and resident 36
D. International Taxes - Transfer Pricing in India Arms Length Price: Law requires an Arms Length Price ( ALP ) to be established ALP means price applied in uncontrolled conditions (open market price) Determined as an Arithmetic Mean of uncontrolled prices (or margins) Flexibility accorded to taxpayer to adopt any price within (+/-) 5% of the arithmetic mean (Budget 2012 clarified, cannot be considered a standard deduction) 37
Arm s length price As per Section 92F, Arm s length price means a price which is applied or proposed to be applied in a transaction between persons other than associated enterprises, in uncontrolled conditions Uncontrolled Transaction (ALP) Unrelated Enterprise B Enterprise A Controlled Transaction Related Enterprise C Arm s length price would be similar price charged to Unrelated Enterprise in an uncontrolled Transaction The ALP can vary by 5% of the Arithmetic Mean of more than one price (Budget 2012 clarified, cannot be considered a standard deduction) 38 2011 Deloitte Touche Tohmatsu India Private Limited
Associated Enterprise Equity / Debt Management Activities Control >= 26% direct /indirect holding by enterprise OR By same person in each enterprise Loan >= 51% of Total Assets Guarantees > = 10% of debt > 10% interest in Firm / AOP / BOI Appointment > 50% of Directors / one or more Executive Director by an enterprise OR Appointment by same person in each enterprise 100% dependence on use of intangibles for manufacture / processing / business Direct / indirect supply of >= 90% Raw Materials under influenced prices and conditions Sale under influenced prices and conditions One enterprise controlled by an individual and the other by himself or his relative or jointly One enterprise controlled by HUF and the other by itself, a member or his relative or jointly 39
Methods for Arm s length price determination Indian law provides for application of following methods: Comparable Uncontrolled Price method (CUP): Comparison of actual price Resale Price Method (RPM): Comparison of gross margin for a distributor Cost Plus Method (CPM): Comparison of gross margin for a manufacturer / service provider Profit Split Method (PSM): Sharing of profits among entities sharing proportionately in risks in a highly integrated operation Transaction Net Margin Method (TNMM): Comparison on a net (operating) profit basis No priority of methods; flexibility granted to tax-payer for selection of Most Appropriate Method 40 2011 Deloitte Touche Tohmatsu India Private Limited
Transfer Pricing Rules Rule 10A - Defines certain expressions Rule 10B Arms Length Price Sets out General Applicability of all five transfer pricing methods Comparability criteria defined Rule 10C Most Appropriate Method Flexibility of choice depending on facts and circumstances Sets out the factors to be considered in selecting the most appropriate method Rule 10D Documentation Mandatory / Supplementary Documentation requirements prescribed If aggregate value of the transactions does not exceed Rs. 10 million - documentation requirements are relaxed Rule 10E Accountants Report Accountant's Report required as prescribed To assist the Assessing officer in selecting cases for scrutiny 41 2011 Deloitte Touche Tohmatsu India Private Limited
Contemporaneous Documentation Step wise process Group Overview and Industry Analysis Determination of ALP Group Overview: This section of the TP Report discusses the following: Multinational group profile of which assessee enterprise is a part; Ownership structure and share holding pattern of the assessee enterprise with details of shares or other ownership interest Industry Analysis: Functional Analysis Economic Analysis The Industry analysis of the company covers the following A broad description of the business of the client and the industry in which the client operates, and of the business of the associated enterprises with whom the client has transacted 42 2011 Deloitte Touche Tohmatsu India Private Limited
Contemporaneous Documentation Step wise process Functional Analysis: A functional analysis enables mapping of the economically relevant facts and characteristics of transactions between associated enterprises with regard to their functions, assets and risks. Hence a functional analysis facilitates characterization of the associated enterprises and assists in establishing a degree of comparability with similar transactions in uncontrolled conditions. Economic Analysis: This section provides the following details: Value of international transactions Selection of MAM (Most Appropriate method Bench marking Process Adjustments Determination of ALP Result: Maintain Documentation to comply with the Transfer Pricing Regulations in India To establish that the international transactions of the Company are at arm s length as prescribed in the Indian Regulations 43 2011 Deloitte Touche Tohmatsu India Private Limited
D. Indirect Taxes
D. Indirect Taxes Overview VAT Tax on commodities/ Goods Service Tax Tax on services Customs duty Tax on imports / exports Central Excise Duty Tax on locally manufactured goods 45
D. Indirect Taxes Customs duty on Imports / Exports Customs duty Customs duty is applicable on Import transactions Refer to customs tariff act 1975 Part II for rates of duty applicable Part II of the Import tariff act is categorized into 98 chapters Part II of the Import tariff act also has a list of Generally exempted items Part III The second schedule covers Export Tariff & corresponding exemption notifications Customs duty 46
D. Indirect Taxes Central Excise Manufactured goods Central excise duty Central Excise Act 1944, The Levy of Duty on manufactured goods is covered under SECTION 3. of the Central Excise a duty of excise to be called the Central Value Added Tax (CENVAT)] on all excisable goods (excluding goods produced or manufactured in special economic zones) which are produced or manufactured in India as, and at the rates, set forth in the First Schedule to the Central Excise Tariff Act, 1985 (5 of 1986. Refer to the Central excise Tariff act 1985 for rates of duty Rate of duty at present is 10% basic duty (Budget recommends 12%) Depending on the item manufactured, Additional duties are applied (CVD, Special Duty, etc) Note: Central excise duty is based on valuation rules and the classification of the item manufactured. (Example : Tobacco attracts highest rate of duty while note books attract lower rate of duty) 47
D. Indirect Taxes Services Tax Service Tax Service Tax is administered under chapter V of the Finance Act and governed by rules of Central Excise Act Sec 65 covers the definition of services, 121 services are covered, more services are being added in the Budget 2012 Budget 2012 introduced the a negative list of 17 services not taxable There are more exempted services covered by various notifications from time to time Rate applicable for the services is specified in Sec 66 of Finance Act currently specified at 12% w.e.f 1 st Apr 2012 Service Tax Returns to be filed half yearly in prescribed format (ST 3 return) Service Tax payments have to be made online 48
D. Indirect Taxes VAT (Local Sales Tax) Local Sales Tax AP VAT Act 2005 An act to provide for and consolidate the law relating to levy of value added tax on sale or purchase of goods in the state of Andhra Pradesh and for matters connected therewith and incidental thereto.. Charging sec is Sec 4.. Sale is taxed.. Local Sales tax 49
II. Knowledge management, Appellate Hierarchy and Practical challenges
Knowledge Management Respective Acts Income Tax Rules, Central Excise Rules, Customs rules Circulars and notifications Advance rulings Case laws (SC, HC, Tribunal) Concept Papers Committee reports Clarifications & FAQ s Press Information Bureau releases 51
Appellate Hierarchy Income Tax Hierarchy If selected for audit Tax filing A O CIT (A) ITAT MAP High Court Supreme Court AO Assessing officer; CIT(A) Commissioner Income Tax (Appeals); ITAT Income Tax Appellate Tribunal (Highest Fact finding Authority) MAP Mutual Agreement Procedure (USA and India Government level negotiation); NA Not Applicable Service Tax Hierarchy Refund Application by Assessee Remand Notice/PH DC CCE(A) CESTAT High Court Refund can be sanctioned by any of the authorities CENVAT Refund Procedure Supreme Court EA 2000 Audit Notice/PH DC(A) Comm. CCE(A) CESTAT CENVAT Audit Procedure High Court Supreme Court DC Deputy Commissioner; CCE(A) Commissioner Customs & Central Excise(Appeals); Comm. Jurisdictional Commissioner, CESTAT Customs, Excise & Service Tax Appellate Tribunal (Highest Fact finding Authority) 52
Practical Challenges Generic Challenges Manage EGO s of Revenue officials, Systems automation by Revenue wings, not fully automated Software related challenges Frequent changes in forms / formats Statutory due dates / conflicting holidays Internal revenue targets How realistic? Availability of authorized signatories Teams knowledge, application of correct rates, classification / chapter issues Right and appropriate documentation New notifications, clarifications, advance rulings & court judgments Retrospective amendments to law 53 Specifics PAN not available of service provider Service Tax Registration # Typographical errors, 95% PAN rule, TAN mismatch Application of correct TDS sections, rates, amount deducted vs paid Correctly filling the forms (assessment year, Section, range, lower rates etc) Lower deduction certificate (with amount & period limitation) Interpretation issues E-TDS filings center's working hours Online filing requirements, not all banks notified to collect taxes Revisions / Revised filing requirements Digital signature requirements
Questions
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