Direct Tax Laws & International Taxation

Cheatsheet Content

I. Direct Tax Laws: Core Concepts 1. Assessment of Income & Tax Liability Individual (Resident & Non-Resident) Residential Status: Determines taxability of global vs. India-sourced income. Resident: Satisfies $\ge 1$ basic condition (182 days in PY OR 60 days in PY + 365 days in 4 preceding PYs). Exceptions apply for Indian citizens/PIOs. Ordinarily Resident (ROR): Resident + $\ge 2$ out of 10 PYs resident AND $\ge 730$ days in 7 preceding PYs. Not Ordinarily Resident (RNOR): Resident but fails ROR conditions. Non-Resident (NR): Fails basic conditions. Computation of Total Income: Heads of Income: Salaries, House Property, PGBP, Capital Gains, Other Sources. Deductions: Chapter VI-A (e.g., 80C, 80D, 80G). Tax Rates (Individual): Slab rates apply. Special rates for certain incomes (e.g., STCG $111A$ @15%, LTCG @10%/20%, casual income @30%). Presumptive Taxation for NRs (PGBP): Shipping Business ($44B$): 7.5% of Indian receipts. Oil Exploration ($44BB$): 10% of Indian receipts. Aircraft Operation ($44BBA$): 5% of Indian receipts. Civil Construction ($44BBB$): 10% of Indian receipts. Cruise Ships ($44BBC$): 20% of Indian receipts. Royalty/FTS ($44DA$): Actual PGBP, if PE in India. No unabsorbed depreciation/loss benefit for $44B, 44BB, 44BBA, 44BBB$. Capital Gains for NRs: Shares/Debentures ($48$ proviso): Convert cost/sale into original foreign currency, then reconvert gain to INR. No indexation. Unlisted securities/shares (LTCG $112(1)(c)$): 12.5% tax. Special Rates for NRs ($115A-115AC$): Interest on notified bonds/foreign currency ($115A(1)(a)$): 5%/10%/20% (varies). Royalty/FTS ($115A(1)(b)$): 20% (if no $44DA$ PE). LTCG on units ($115AB$), foreign currency bonds/GDR ($115AC$): 12.5% (10% prior to 22-07-2024). No expenditure/Chapter VI-A deductions for most special rate incomes. Non-Resident Indian (NRI) Specifics ($115C-115I$): Investment income: 20%. LTCG on foreign exchange asset: 12.5% (10% prior to 22-07-2024). Exemption for re-investment in new assets ($115F$). Company Domestic Company: Indian company OR company making prescribed arrangements for dividend distribution in India. Foreign Company: Not a domestic company. Tax Rates (Domestic Company): $25\%$ if turnover $\le ₹ 400$ Cr in PY 2022-23. $30\%$ otherwise. Special rates for STCG ($111A$), LTCG ($112A$), casual income. Tax Rates (Foreign Company): Royalty/FTS (pre-1976 agreements): 50%. Other income: 35%. Surcharge & Cess: Applicable based on income thresholds. Alternative Tax Regimes: $115BA$: 25% for new manufacturing companies (post-01-03-2016). Restrictions on deductions. $115BAA$: 22% for domestic companies. Restrictions on deductions. $115BAB$: 15% for new manufacturing companies (post-01-10-2019). Strict conditions, restrictions on deductions. MAT ($115JB$): 15% (or 9% for IFSC units) of Book Profit if normal tax Carry Forward & Set-off of Losses ($79$): Closely held companies (non-start-up): 51% voting power continuity required. Eligible start-up companies: Conditions relaxed for 10 years. Unabsorbed depreciation is exempt from $79$ conditions. No set-off against undisclosed income ($79A$). Trusts Religious or Charitable Trust: Exemption ($11, 12$): Income from property/voluntary contributions exempt if applied for charitable/religious purposes. Conditions: Property under trust, charitable/religious purpose, registration ($12A, 12AB$), audit, 85% application of income. 15% of income can be accumulated freely. Anonymous donations ($115BBC$): Taxed @30% if exceeds threshold (5% of total donations or ₹1 lakh). Forfeiture of Exemption ($13$): If applied for private religious purpose, particular community, non-specified investments, or benefit of interested person. Exit Tax ($115TD$): Accreted income taxed at MMR if trust converts, merges inappropriately, or fails to transfer assets on dissolution. Securitisation Trust ($115TCA$): Income exempt in trust's hands, taxable in investor's hands as if direct investment. TDS ($194LBC$). Business Trust (REIT/InvIT) ($115UA$): Specific income (interest/dividend from SPV, rental income for REIT) exempt in trust's hands, taxable in unit holder's hands. Other income taxable in trust's hands at MMR. TDS ($194LBA$). Investment Fund ($115UB$): Non-business income exempt, business income taxable in fund's hands (company/firm @ tax rate, others @ MMR). Certain losses passed through to unit holders. TDS ($194LBB$). Mutual Association: Principle of mutuality applies (no one can trade with himself). Income from mutual activity generally not taxable. Exceptions for insurance business, trade/professional associations. 2. Tax Management, Return & Assessment Return of Income ($139$): Mandatory Filing: For companies/firms, or individuals/HUFs exceeding basic exemption limit. Also for NRs with foreign assets/signing authority. High-Value Transactions: Mandatory filing for individuals/HUFs (even if below basic exemption) if specified conditions met (e.g., cash deposit > ₹1 Cr, foreign travel > ₹2 lakh, electricity > ₹1 lakh). Forms: ITR-1 (Sahaj), ITR-2, ITR-3, ITR-4 (Sugam), ITR-5, ITR-6, ITR-7. Due Dates: Nov 30 (TP report), Oct 31 (audited accounts/company), July 31 (others). Late Filing Fee ($234F$): ₹1,000 (income $\le ₹5$ lakh), ₹5,000 (income $> ₹5$ lakh). Loss Return ($139(3)$): Must be filed by due date to carry forward most losses (except unabsorbed depreciation, HP loss). Belated Return ($139(4)$): By Dec 31 of AY or before assessment completion. Revised Return ($139(5)$): By Dec 31 of AY or before assessment completion. Updated Return ($139(8A)$): Within 24 months from end of AY. Cannot be a loss return or reduce tax/increase refund. Additional tax payable. Assessment Procedure: Self-Assessment ($140A$): Taxpayer calculates and pays tax. Intimation ($143(1)$): Summary assessment based on return, with automatic adjustments for arithmetic errors, incorrect claims, etc. Issued within 12 months from end of FY of return. Scrutiny Assessment ($143(3)$): Detailed examination by AO. Notice ($143(2)$) within 3 months from end of FY of return. Completed within 12 months from end of AY. Best Judgment Assessment ($144$): If taxpayer fails to file return, comply with notices, etc. Completed within 12 months from end of AY. Income Escaping Assessment ($147$): Notice ($148$) if AO has information suggesting escaped income. Time limits ($149$): 3 years (general), 10 years (if escaped income $\ge ₹50$ lakh). Prior approval required ($151$). Dispute Resolution Panel (DRP) ($144C$): For eligible assessees (NRs, TP adjustments). Assessee can object to draft order. Faceless Assessment ($144B$): Scheme for electronic, anonymized assessment. Interest & Fees: $201(1A)$ (TDS default): 1% p.m. (non-deduction), 1.5% p.m. (non-payment after deduction). $206C(7)$ (TCS default): Similar to $201(1A)$. $234A$ (late return): 1% p.m. on tax due from due date to filing date. $234B$ (advance tax default): 1% p.m. on shortfall from April 1 of AY till assessment. $234C$ (deferment of advance tax): 1% p.m. for periods of deferment. $234D$ (excess refund): 0.5% p.m. $234E$ (TDS/TCS statement default): ₹200 per day (max. tax). $234F$ (late return filing fee): ₹1,000/₹5,000. Survey, Search & Seizure: $131$ (Power to call for evidence): Equivalent to civil court powers. $132$ (Search & Seizure): Based on "reason to believe" undisclosed income/assets. Allows entry, search, seizure, examination on oath. $132A$ (Requisition of books/assets): If books/assets already with other authority. $133A$ (Survey): At business premises during working hours. Inspection, inventory, statements. No seizure. Collection, Recovery & Refund: $156$ (Demand Notice): Pay within 30 days (or as specified). $220(2)$ (Interest on default): 1% p.m. on unpaid demand. $221$ (Penalty on default): Up to tax in arrears. $222$ (Tax Recovery Officer certificate): Attachment/sale of property, arrest. $226$ (Other modes): Garnishee order, attachment of salary. $244A$ (Interest on Refund): 0.5% p.m. (from AY 1st day or filing date). 3. Grievance Redressal Mechanisms Rectification of Mistake ($154$): By IT authority (suo motu or on application) for mistake apparent from record. Within 4 years from end of FY of order. Appeals: JCIT (Appeals) ($246$): Against specified AO orders (below JCIT rank). New authority for small disputed demands. CIT (Appeals) ($246A-250$): Primary appellate authority. Can confirm, reduce, enhance, annul assessment/penalty. ITAT ($252-255$): Against CIT(A) orders. Both assessee & Dept. can appeal. Decision on facts is final. High Court ($260A$): Against ITAT order, only on "substantial question of law." Supreme Court ($261$): Against High Court judgment. Revision: $263$ (Prejudicial to Revenue): PCIT/CIT revises erroneous AO order prejudicial to revenue. Within 2 years from end of FY of order. $264$ (Not Prejudicial to Revenue): PCIT/CIT revises order (on application or suo motu) not prejudicial to revenue. Dispute Resolution Committee ($245MA$): For small disputes (variation $\le ₹10$ lakh, income $\le ₹50$ lakh). Board for Advance Rulings (BAR) ($245-OB$): Provides advance rulings on tax liability/GAAR for NRs, certain residents. 4. Penalties & Prosecutions Penalties: $270A$ (Under-reporting/Misreporting): 50% of tax on under-reported income, 200% for misreporting. $271A$ (Failure to maintain books): ₹25,000. $271B$ (Failure to get audit): 0.5% of turnover (max. ₹1.5 lakh). $271C$ (TDS/TCS failure): Equal to amount not deducted/paid. $271D$ (Cash loan/deposit > ₹20k): Equal to amount taken/accepted. $271DA$ (Cash receipt > ₹2 lakh): Equal to amount received. $271E$ (Cash repayment of loan/deposit > ₹20k): Equal to amount repaid. $273A$ (Waiver/Reduction): PCIT/CIT can waive/reduce penalty in certain cases (voluntary disclosure, cooperation, genuine hardship). Prosecutions: Evasion of Tax ($276C$): Rigorous imprisonment (3 months to 7 years) + fine. Failure to File Return ($276CC$): Rigorous imprisonment (3 months to 7 years) + fine. False Statement ($277$): Rigorous imprisonment (3 months to 7 years) + fine. Prior sanction of PCIT/CIT/CIT(A) required for most prosecutions ($279$). 5. Business Restructuring Amalgamation ($2(1B)$): Merger of companies. Conditions: All assets/liabilities transfer, $\ge 75\%$ shareholders of amalgamating company become shareholders of amalgamated company (Indian company). Tax Impact: Shareholders: No capital gain on exchange of shares if amalgamated company is Indian. Cost of old shares becomes cost of new. Amalgamating Co: No capital gain on asset transfer to Indian amalgamated company. Amalgamated Co: Carries forward losses/unabsorbed depreciation of amalgamating company ($72A$) if conditions met. Expenses ($35DD$): 1/5th deduction over 5 years. Demerger ($2(19AA)$): Transfer of undertaking to resulting company. Conditions: All assets/liabilities of undertaking transfer at book value, resulting company issues shares to demerged company shareholders proportionately, $\ge 75\%$ continuity of shareholders, undertaking on going concern basis. Tax Impact: Shareholders: No capital gain on receipt of shares in resulting company. Cost of original shares apportioned. Demerged Co: No capital gain on asset transfer to Indian resulting company. Resulting Co: Carries forward relatable losses/unabsorbed depreciation ($72A$). Slump Sale ($2(42C)$): Transfer of undertaking for lump sum consideration without individual asset values. Tax Impact: Capital gain (STCG if undertaking held $\le 36$ months, LTCG if $> 36$ months). Cost: Net worth of undertaking. No indexation. Conversion of Sole Prop. / Firm to Company ($47(xiii), (xiv)$): No transfer for capital gains if specified conditions met (e.g., all assets/liabilities transfer, specific shareholding continuity, no other consideration). Exemption withdrawn if conditions violated ($47A(3)$). Conversion of Pvt. Ltd. / Unlisted Public Co. to LLP ($47(xiiib)$): No transfer for capital gains if specified conditions met (e.g., all assets/liabilities transfer, all shareholders become partners, shareholding continuity, turnover/asset value limits). Exemption withdrawn if conditions violated ($47A(4)$). 6. Tax Planning Definition: Legal reduction of tax liability by utilizing exemptions, deductions, reliefs within law. Objectives: Tax reduction, litigation minimization, productive investment, economic growth. Essentials: Up-to-date knowledge, full disclosure, avoid sham transactions, foresight. Areas: Form of organization (Company, Firm, Proprietorship), Location (SEZ, specific states), Nature of Business (specific industries, presumptive schemes), Corporate Restructuring, Financial Management (debt vs. equity, lease vs. buy), Employee Remuneration, Non-Residents. Tax Avoidance: Legal exploitation of loopholes with malafide intent. Tax Evasion: Illegal reduction of tax by concealing income/falsifying records. Tax Management: Compliance with tax laws (timely filing, payments, maintaining records). 7. CBDT & Other Authorities Income Tax Authorities ($116$): CBDT, Principal DGs/CCs, DGs/CCs, Principal Ds/Cs, Ds/Cs (Appeals), Addl. Ds/Cs, Jt. Ds/Cs, Dy. Ds/Cs, Asst. Ds/Cs, IT Officers, Tax Recovery Officers, Inspectors. Appointment ($117$): Central Govt. appoints. Board/senior authorities appoint lower ranks. CBDT Powers ($119$): Issue instructions/directions to subordinates (binding, not interfering with quasi-judicial discretion). Can relax compliance for genuine hardship. Jurisdiction ($120$): Defined by territorial area, persons, income, cases. Transfer of Cases ($127$): Senior authorities can transfer cases between AOs (with/without hearing assessee). Succession ($129$): Successor IT authority continues proceedings from predecessor's stage. Faceless Jurisdiction ($130$): Scheme for electronic, anonymized exercise of powers. 8. E-commerce & Special Cases Equalisation Levy (EL) (Discontinued from 01-08-2024): Specified Services ($165$): 6% on consideration for online ads, digital ad space, etc. from non-resident (no PE), paid by resident/NR with PE. Exceptions: taxable as royalty/FTS, non-resident has PE, consideration E-commerce Supply/Services ($165A$): 2% on consideration by e-commerce operator from resident/NR in specified circumstances/person using Indian IP. Exceptions: taxable as royalty/FTS, e-commerce operator has PE, EL leviable u/s 165, turnover Tonnage Tax Scheme ($115V$ onwards): Presumptive taxation for shipping companies. Notional income based on ship tonnage. Taxed at normal corporate rate. Option for 10 years. Lock-in period. No set-off of loss/depreciation allowed against tonnage income. Legal Representatives ($159$): Liable for deceased's tax, limited to estate value. Executors ($168$): Taxable on estate income of deceased. Representative Assessee ($160$): Agent of NR, guardian of minor, trustee. Liable for tax in representative capacity ($161$). Company in Liquidation ($178$): Liquidator must notify AO, set aside funds for tax. Personal liability if defaults. Discontinued Business ($176$): Income taxable in year of discontinuance. Cash Transactions ($269SS, $269ST, $269T$): Limits/prohibitions on cash loans/deposits, receipts, repayments. Penalties for non-compliance. Electronic Payment ($269SU$): Mandatory for businesses > ₹50 Cr turnover to provide electronic payment facility. Penalty ($271DB$). II. International Taxation: Core Concepts 1. Double Taxation Avoidance Agreements (DTAA) Purpose: Avoidance of double taxation of income, promotion of trade, investment, exchange of information. Types: Limited (specific income) or Comprehensive (most income types). Relief Methods: Exemption Method: One country exempts income (e.g., residence country gives up right). Credit Method: Residence country allows credit for tax paid in source country. Tax Sparing: Credit for deemed tax paid in source country (even if exempted there for incentive). Underlying Tax Credit: Credit for corporate tax on profits out of which dividend is paid. $90, 90A$ (Bilateral Relief): Central Govt. enters into agreements. Benefit Rule: DTAA provisions apply to extent more beneficial than IT Act. (GAAR $X-A$ overrides). Tax Residency Certificate (TRC): Required for NRs to claim DTAA relief. $91$ (Unilateral Relief): For Indian residents taxed in country with no DTAA. Deduction for lower of Indian avg. tax rate or foreign avg. tax rate on doubly taxed income. Foreign Tax Credit (Rule 128): Credit for foreign tax paid against Indian tax (lower of Indian tax on foreign income or foreign tax paid). Permanent Establishment (PE): Fixed place of business through which enterprise carries on business. Determines taxing rights of source country. 2. Models of DTAAs (OECD & UN) OECD Model: Primarily for developed nations, emphasizes residence principle. UN Model: For developed & developing nations, emphasizes source principle. Most Indian treaties based on UN Model. Key Articles Comparison: Article 1 (Persons Covered): Residents of contracting states. Article 2 (Taxes Covered): Taxes on income & capital. Article 3 (General Definitions): Person, company, enterprise, international traffic, competent authority, national. Article 4 (Resident): Tie-breaker rules for dual residency (permanent home, vital interests, habitual abode, nationality, mutual agreement). Article 5 (Permanent Establishment): Fixed place of business (management, branch, office, factory, workshop, mine). UN model has shorter duration for construction PE (6 months vs 12 months in OECD). UN model also includes service PE. Exclusions for preparatory/auxiliary activities. Article 6 (Immovable Property Income): Taxable in state where property is situated. Article 7 (Business Profits): Taxable only in source state if PE exists. UN model includes "force of attraction" rule (taxation of direct sales/activities similar to PE). Article 8 (Shipping & Air Transport): Taxable only in residence state (OECD & UN Alternative A). UN Alternative B allows source state taxation for ships if activities are more than casual. Article 9 (Associated Enterprises): Adjustments for non-arm's length conditions. Article 10 (Dividends): Taxable in residence state, but also in source state (with limits, e.g., 5% or 15% of gross). Article 11 (Interest): Taxable in residence state, but also in source state (with limits, e.g., 10% of gross). Article 12 (Royalties): Taxable in residence state, but UN Model allows source state taxation (with limits). Article 12A (Fees for Technical Services): UN Model includes specific article for FTS, allowing source state taxation (with limits). Article 12B (Automated Digital Services): UN Model includes this new article, allowing source state taxation (with limits/options). Article 13 (Capital Gains): Taxable in source state for immovable property, PE assets, shares deriving value from immovable property. Article 14 (Independent Personal Services): Deleted in OECD, but UN Model allows source state taxation if fixed base or stay > 183 days. Article 15 (Employment Income): Taxable in residence state unless employment exercised in source state. Exceptions for short stays ($\le 183$ days). Article 16 (Directors' Fees): Taxable in source state (company's residence). UN Model also covers top-level managerial officials. Article 17 (Entertainers & Sportspersons): Taxable in source state. Article 18 (Pensions): Taxable only in residence state (OECD). UN Model has alternatives for source state taxation. Article 19 (Government Service): Taxable only in state paying remuneration. Article 20 (Students): Payments for maintenance/education not taxed in host state if from outside. Article 21 (Other Income): Taxable only in residence state (OECD). UN Model allows source state taxation if arising there. Article 22 (Capital): Taxable in state where immovable property/PE assets are situated. Article 23A/B (Elimination of Double Taxation): Exemption or Credit method. Article 24 (Non-Discrimination): Nationals/PEs not subjected to more burdensome taxation than domestic entities. Article 25 (Mutual Agreement Procedure - MAP): Competent authorities resolve disputes. Article 26 (Exchange of Information): Competent authorities exchange foreseeably relevant tax information. Article 27 (Assistance in Collection of Taxes): Mutual assistance in collecting revenue claims. Article 29 (Entitlement to Benefits): Limitations on treaty benefits (e.g., LOB clauses). 3. Transfer Pricing (TP) $92$ (Computation of Income): Income from international transactions/specified domestic transactions to be computed at Arm's Length Price (ALP). Associated Enterprise (AE) ($92A$): Direct/indirect participation in management, control, or capital. Deemed AEs if specific conditions met (e.g., $\ge 26\%$ voting power, $\ge 90\%$ raw material supply, $\ge 10\%$ loan/guarantee). International Transaction ($92B$): Transaction between AEs (at least one NR) involving tangible/intangible property, services, financing, etc. Deemed international transaction if third-party transaction influenced by AE. Specified Domestic Transaction ($92BA$): Domestic transactions (e.g., $80-IA, 10AA$ related) exceeding ₹20 Cr aggregate. Arm's Length Price (ALP) ($92C$): Price in uncontrolled conditions between unrelated persons. Methods (most appropriate): Comparable Uncontrolled Price (CUP), Resale Price Method (RPM), Cost Plus Method (CPM), Profit Split Method (PSM), Transactional Net Margin Method (TNMM), Other Method (Rule 10AB). TPO Reference ($92CA$): AO refers to TPO for ALP determination. TPO's order is binding on AO. Advance Pricing Agreement (APA) ($92CC$): Agreement between taxpayer & Board on TP methodology for future transactions (up to 5 years). Can include "rollback" for prior 4 years. Safe Harbour Rules ($92CB$): Board prescribes circumstances where declared TP/income is accepted by IT authorities. Thin Capitalisation ($94B$): Limitation on interest deduction to AEs. Excess interest (>$1$ Cr) restricted to 30% of EBITDA or actual interest to AE (whichever is less). Applies to Indian company/PE. Secondary Adjustment ($92CE$): Adjustment in books for primary adjustment. Excess money (from primary adjustment) not repatriated to India within 90 days is deemed advance to AE, interest imputed. Optional additional tax (18% + cess) to avoid secondary adjustment. Documentation ($92D$): Detailed info/documents required for international/specified domestic transactions. Report from accountant ($92E$). Notified Jurisdictional Area ($94A$): Special measures for transactions with persons in notified areas (e.g., deemed AE, deemed international transaction, higher TDS). 4. General Anti-Avoidance Rule (GAAR) $95$ (Applicability): Applies to "impermissible avoidance arrangements." $96$ (Impermissible Avoidance Arrangement - IAA): Main purpose is to obtain tax benefit AND: Creates non-arm's length rights/obligations. Misuses/abuses IT Act provisions. Lacks commercial substance ($97$). Not for bona fide purposes. Lacks Commercial Substance ($97$): Inconsistent substance/form, round trip financing, accommodating party, disguises value/location/ownership of funds, location without substantial commercial purpose (other than tax benefit), no significant effect on business risks/cash flows (apart from tax benefit). Consequences ($98$): Disregarding/recharacterizing arrangement/steps, treating as if not entered, disregarding/combining accommodating parties, reallocating income/expenditure, treating situs of asset/residence differently, looking through corporate structure. Non-Application (Rule 10U): Tax benefit $\le ₹3$ Cr. Certain FIIs/NRs investing in FIIs (if no DTAA benefit claimed). Investments made before 01-04-2017 (grandfathering). Process ($144BA$): AO makes reference to PCIT/CIT, who may issue notice to assessee. If PCIT/CIT not satisfied, refers to Approving Panel.