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Income Tax & International Taxes


Income tax is an important branch of law which a corporate lawyer should take into his strides. Tax on income is regulated by Income Tact Act, 1961 made by the Central Government. There are number if Rules and Schemes promulgated by the Central Government under this Act.

The history of Income Tax in modern India dates back to 1860 when the first Income Tax Act was introduced. A number if Acts were made after this – every Act replacing the old one – till the year 1922 when Income Tax Act, 1922 was introduced as a result of the recommendations of the All India Income Tax Committee. This Act is considered as a milestone in the evolution of Direct Tax Laws in our country. Many of the concepts and structure present in the current Income Tax Act, 1961 dates back to this Act.

The present Income Tax classifies all the incomes into 5 broad heads viz: (1) Income from Salary (2) Income from House Property (3) Income from Business and profession (4) Income from Capital Gain (5) Income from Other Sources which is a catch-all the remaining types of Income.

Income Tax is administered by Central Board of Direct Taxes situated at Delhi at the helm of the pyramid. There are Chief Commissioners and other subordinate officers and staff in each of the state.

Income Tax

The taxability of a company’s income in India depends on its domicile. Indian domestic companies are chargeable to tax on their worldwide income irrespective of its source and origin. Foreign companies are taxable on income that arises out of their Indian Operations, or, in certain cases, income that is deemed to accrue or arise in India.

Income of the companies in India is taxed at the following rates [applicable for the financial year April 1, 2006 to March 31, 2007 including surcharge and education cess]:

Indian Domestic Companies
33.66% (inclusive of surcharge, Education Cess and Secondary Eduction Cess)

Foreign Companies
41.82% (Inclusive of Education Cess and Secondary Education Cess)

Capital Gains Tax

Tax is payable on capital gains on sale of assets.

Long-term Capital Gains Tax is charged if:
  • Capital assets are held for more than three years and
  • In case of shares, securities listed on a recognized stock exchange in India, units of specified mutual funds, the period for holding is one year.
Long-term capital gains are taxed at a basic rate of 20%. However, long-term capital gain from sale of equity shares or units of mutual funds are exempt from tax.

Short-term capital gains are taxed at the normal corporate income tax rates. Short-term capital gains arising on the transfer of equity shares or units of mutual funds are taxed at a rate of 10%.

Long-term and short-term capital losses are allowed to be carried forward for eight consecutive years. Long-term capital losses may be offset against taxable long-term capital gains and short-term capital losses may be offset against both long term and short-term taxable capital gains.

Personal Income tax

Personal income tax is levied by Central Government and is administered by Central Board of Direct taxes under Ministry of Finance in accordance with the provisions of the Income Tax Act. The rates for personal income tax are as follows:-

Taxable Income Slab (Rs.)                             Rate (%)
Up to 1,60,000
Up to 1,90,000 (for women)                                 
Up to 2,40,000 (for senior citizens)              Nil
1,60,001 – 3,00,000                                     10
3,00,001 – 5,00,000                                     20
5,00,001 upwards                                        30

Surcharges of 10% on total tax is levied if income exceeds Rs. 1 Millions.

Double Tax Avoidance Treaty

India has entered into DTAA with 65 countries including the US. In case of countries with which India has Double tax Avoidance Agreement, the tax rates are determined by such agreements. Domestic corporations are granted credit on foreign tax paid by them, while calculating tax liability in India.

In the case of the US, dividends are taxed at 20%, interest income at 15% and royalties at 15%.

Minimum Alternative Tax

In case of a company, if the income tax payable on its normal total income is less than 10% of its book profit, then such book profit shall be deemed to be the total income of the company and the tax at 10% (exclusive of surcharge and education cess) of the book profits shall be payable accordingly.

Withholding Tax

Certain payments made by the company are subject to withholding taxes whereby amounts as per the prescribed rate need to be deducted and remitted to the government before payment. Any delay in deduction or remittance of such deducted amount would result in levy of interest and disallowance of expenses while computing income tax.

Income is taxed on receipt (or deemed receipt) basis of accrual (or deemed accrual) basis and this principle is existing in most of the countries. Many times, it is possible for an income to get accrued in one country and received in another country. In such a situation, do you think that this income will be taxed both the countries? In order to avoid this kind of perplexing situation, India has entered Double Taxation Avoidance Agreements (“DTAA”) with most of the countries. Therefore in respect of any international transaction, DTAA holds the key to determine the taxability as DTAA overrides the provisions of Income Tax Act wherever there is a conflict.

The present Income Tax Act made in the year 1961 has already outlived and the government has already felt the need to replace this Act with a new one. Accordingly, the government has come out with a Direct Tax Code recently. It is expected that this Code will be enacted in 2010 replacing the existing Act.

Transfer Pricing Regulations

Transfer pricing provisions under the Income Tax law get attracted when there is an international transaction between two associated enterprises. Simply put, one entity will be associated with another if at least 26 per cent of the shareholding of one entity is held by the other. Where there are international transactions between associated enterprises, then the tax authorities would examine the transactions to ascertain whether they have been executed on an ‘arm’s length principle’. Transfer pricing regulations in India are more or less in line with OECD guidelines.

There is also another Act viz: Wealth Tax Act, 1957 made by the Parliament which levies tax on wealth of a person.

Log on to the following websites for bare text of law and other procedural requirements:

Ministry of Finance – www.finmin.nic.in
Central Board of Direct Taxes - http://www.incometaxindia.gov.in
Income Tax e-filing - http://incometaxindiaefiling.gov.in; www.tin-nsdl.com
DTAA - http://www.taxmann.com/TaxmannDit/IntTax/Dtaa.aspx

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