COMPREHENSIVE GUIDE TO CORPORATE AND INDIVIDUAL INCOME TAX -Rd Law Chambers

Income tax is a tax levied and charged on individuals and entities based on their income or profits, in accordance with the provisions of the Income Tax Act, 1961.

2. Apart from the Income Tax Act, 1961, are there any other acts, rules, regulations etc. which governs the application of the taxpayers for payment of income tax in a given financial year?

Yes, the payment and administration of income tax are governed not only by the Income Tax Act, 1961, but also by several other legal instruments. These include the Income Tax Rules, 1962; the Finance Act (enacted annually as part of the Union Budget); circulars issued by the Central Board of Direct Taxes (CBDT); and various government notifications. The Finance Act is particularly significant, as it is enacted each year to amend provisions of the Income Tax Act and to prescribe the applicable income tax rates for individuals, companies, and other entities such as Limited Liability Partnerships (LLPs).

3. What factors affect the incidence of tax on an Individual or a corporate entity?

Under the Income Tax Act, 1961, the incidence of tax—i.e., the determination of tax liability—is influenced by the following key factors:

a) Residential Status: The taxability of income varies based on whether the taxpayer (individual or entity) is classified as a resident or non-resident in India for the relevant financial year.

b) Place of Accrual or Receipt of Income: Whether the income is earned, accrued, or received in India or outside plays a crucial role in determining its taxability in India.

c) Nature of Income: Different categories of income—such as salary, business income, capital gains, or income from other sources—are taxed differently under the Act.

PART II: CHARGE, SCOPE AND COMPUTATION OF INCOME AND RATES OF INCOME TAX/CORPORATE TAX

4. What are the provisions relating to the charge of Income Tax and scope of total income?

Section 4 of the Income Tax Act, 1961 provides the legal basis for the charge of income tax. It states that income tax shall be charged for each assessment year at the applicable rates on the total income earned during the previous year, in accordance with the provisions of the Act.

The scope of total income—which determines what income is taxable—varies based on the residential status of the taxpayer, as outlined in Section 5 of the Act:

For a Resident in India:

A resident is taxed on their global income, which includes:

a) Income received or deemed to be received in India;
b) Income that accrues or arises, or is deemed to accrue or arise, in India; &
c) Income that accrues or arises outside India.

For a Non-Resident:

A non-resident is taxed only on income that:

a) Income received or deemed to be received in India;

b) Accrues or arises, or is deemed to accrue or arise, in India.

5. How is residential status determined?

For an individual, one is considered to b resident in India in any previous year if he:-

a) Is in India in that year for a period or periods amounting in all to 182 days or more; or

b) Having within the four years preceding that year been in India for a period or periods amounting in all to three hundred and sixty five days or more, is in India for a period or periods amounting in all to sixty days or more in that year. For more details, special situations and exceptions, one is advised to go through s.6 of the Income Tax Act, 1961.

CORPORATE RESIDENCY is determined based on the concept of Place of Effective Management. For detailed understanding of POEM concept under Income Tax Act, 1961, one is advised to go through https://rdlawchambers.com/determination-of-corporate-residence-under-income-tax-act-1961-tax-implications-for-foreign-corporations/.

6. What is the difference and applicability of provisions of Income tax act,1961 to resident Indian companies as against the non-resident companies?

The income tax act has various provisions and compliance requirements pertaining to payment of advance tax, computation of total income, set off and carry forward the losses and manner thereof, applicability of transfer pricing regime and applicability of provisions of tax deducted at source. Various of these provisions are specifically applicable to the resident companies or the company’s resident of India and not to non-resident companies. It is however important to note that the residence of a company is now determined by the tests of place of effective management and it is possible that a company not resident in India is considered to be an Indian resident company by virtue of POEM analysis and in that case the provisions as stated above will apply to such companies as well.

It is however very likely that the company considered to be Indian resident on the basis of POEM analysis may be so determined only after the end of the previous year and such a company apparently would not have complied with various requirements otherwise only to be complied with by the resident companies. While non-compliance of different provisions will attract penalties and other actions under the Income Tax Act, section 115JH provides for transitional arrangements for a foreign company that is said to be a resident in a previous year when it had not been resident in India in any of the previous years preceding such previous year, notwithstanding anything contained in the Income tax act and subject to the conditions notified by the Govt. of India, will not come within the ambit of compliance and other requirements under the act, relating to computation of total income, treatment of unabsorbed depreciation, carry forward of losses, collection & recovery and special provisions relating to avoidance of tax; While such provisions will apply but they will apply with necessary modifications, exceptions and adaptations as maybe specified in the notification by the government.

7. As important factors for determining the total taxable income of resident and non-resident are “whether the income is received or is deemed to be received in India” and “whether the income accrues or arises or is deemed to be accrues and arises in India”, can you explain the meaning of this terms?

The determination of whether a particular income is taxable in India, often depends on whether the income is received or deemed to be received in India, or whether it accrues, arises, or is deemed to accrue or arise in India. In addition to this, the method of accounting followed by the assessee also plays an important role. If the assessee follows the cash system of accounting, income becomes taxable when it is actually received by the assessee or on their behalf. On the other hand, if the mercantile system of accounting is followed, income is taxable when the right to receive the income is established, irrespective of when the amount is actually received.

There are certain types of income, such as salary and dividends (falling under “Income from Other Sources”), which are deemed to be received and are taxed immediately upon becoming due, regardless of the accounting system used by the assessee. The distinction between income being received and income accruing or arising can be illustrated with the example of interest on a fixed deposit. Interest on a fixed deposit accrues daily, meaning it becomes due over time, but it may be actually received only on a specific maturity date. This conceptual difference helps determine when and where the income is considered taxable under Indian tax law.

8. What is the meaning of income deemed to be accruing or arising in India?

Section 9 of the Income Tax Act, 1961 provides for situations where income shall be deemed to accrue or arise in India, even if it may not have actually accrued or arisen in India in the traditional sense. One of the key provisions under this section states that any income accruing or arising, directly or indirectly, through or from (a) any business connection in India, (b) any property situated in India, (c) any asset or source of income located in India, or (d) the transfer of a capital asset situated in India, shall be deemed to accrue or arise in India.

An important elaboration is found in Explanation 5 to this section relating to gains from transfer of shares or interest in a company incorporated out of India, which provides that a share or interest in a company or entity registered or incorporated outside India shall be deemed to be situated in India if such share or interest derives, directly or indirectly, its value substantially from assets located in India. This effectively brings into the Indian tax net transactions involving transfer of foreign company shares that derive substantial value from Indian assets.

Explanations 6 and 7 further refine this provision, with Explanation 7 carving out certain exemptions from the scope of Explanation 5 where specific conditions are met.

In addition to the above, income chargeable under the head “Salaries” shall also be deemed to accrue or arise in India if it is earned in India. The explanation to this clause clarifies that such income includes remuneration for services rendered in India as well as any salary received during rest or leave periods, provided such periods are preceded and succeeded by services rendered in India under the terms of employment. Additionally, any salary paid by the Government of India to a citizen of India for services rendered outside India is also deemed to accrue or arise in India.

The section further includes dividends paid by an Indian company outside India within its ambit. Likewise, interest income shall be deemed to accrue or arise in India if it is payable by (a) the Government, (b) a resident—unless it is in respect of debt incurred for a business or profession carried out outside India or for earning income from a source outside India, or (c) a non-resident, if the debt is incurred for business or profession carried on in India.

Similarly, royalty income is deemed to accrue or arise in India if payable by (a) the Government, (b) a resident—except in cases where the royalty pertains to the use of rights or services for a business carried outside India or to earn income from a source outside India, or (c) a non-resident, if the royalty is for use in a business or for earning income within India. The same rules apply to fees for technical services, which are defined to include any consideration for managerial, technical, or consultancy services, but do not include income in the nature of salary or payments related to construction, mining, or similar projects.

9. As the Income Tax is chargeable on the total income of an assessee in a previous year, how the previous year is defined?

Under the Income Tax Act, the term “previous year” refers to the financial year immediately preceding the relevant assessment year.

A financial year in India begins on 1st April of a calendar year and ends on 31st March of the following calendar year. The income earned during this period is assessed and taxed in the subsequent assessment year.

10. As the Income Tax is chargeable on the total income of the previous year, how the “Total Income” is defined under the Income Tax, 1961?

Under Section 14 of the Income Tax Act, 1961, all income is classified under the following five heads of income for the purpose of computation of total income:

a) Income from Salaries

b) Income from House Property

c) Profits and Gains from Business or Profession

d) Capital Gains

e) Income from Other Source

To determine the total income, the following steps are involved:

Gross Total Income (GTI): This is the aggregate of income computed under each of the five heads mentioned above, after adjusting for any permissible set-off of current and past losses (such as business or capital losses).
Deductions under Chapter VI-A: From the Gross Total Income, deductions available under Sections 80C to 80U (e.g., investments, insurance premiums, medical expenses, education loans, etc.) are subtracted.

The resultant amount, after claiming all applicable deductions, is termed as Total Income. This is the amount on which income tax is actually levied for the relevant assessment year.

11. What is the purpose of having different heads of income when the Income tax is to be charged on total income only?

The classification of income under different heads—namely salary, income from house property, profits and gains of business or profession, capital gains, and income from other sources—serves the purpose of applying specific provisions that are unique to each category. Each head of income is governed by distinct rules for computation, including allowances, deductions, depreciation, and other relevant considerations. These rules are tailored to the nature of income under each head and differ significantly across categories. Even the provisions relating to set-off and carry forward of losses are head-specific. Therefore, income is first computed separately under each head by applying the relevant provisions, and the aggregate of these computations forms the gross total income. This gross total income is then reduced by eligible deductions under Sections 80C to 80U of the Act, resulting in the total income, which becomes the basis for levying income tax.

12. What are the applicable rates of tax currently applicable for individuals and different corporate entities?

– For the Individuals in FY. 2025-26: –

Sr. No.	Taxable Income (Rs.)	Rate of Tax (%)
1	12,00,001 – 16,00,000	15%
2	16,00,001 – 20,00,000	20%
3	20,00,001 – 24,00,000	25%
4	Above 24,00,000	30%

For the corporate entities in FY. 2025-26: –

Sr. No.	Domestic Corporate Entities Turnover (Rs.)	Rate of Tax (%)
1	Where its total turnover or gross receipt during the previous year does not exceed Rs. 400 crores.	25%
2	Any other domestic company.	30%

*Effective CIT rate will be slightly different for companies with different quantum of income factoring in the surcharge leviable.

For the Partnership firm and Limited Liability Partnership (LLP) rate of tax will be 30%.

Tax Rates for Foreign Companies are as under: –

For Foreign Companies having permanent establishment (PE) in India, the rate of tax is 35% irrespective of the quantum of total income. Effective tax rate for Foreign Companies having PE in India factoring in the surcharge will however be 36.40%(when income is less than INR 10 million), 37.13% (when income is more than INR 10 million and less than INR 100 million) and 38.22% (when income is more than INR 100 million)

PART III: SPECIAL INCOME CATEGORIES AND TAXATION

13. How are the intangibles taxed in India?

Intangible assets such as patents, copyrights, trademarks, licenses, know-how, and other business or commercial rights having attributes similar to intellectual property rights are treated differently under Indian tax law depending on their nature and usage.

One specific provision is Section 115BBF of the Income Tax Act, 1961, which provides that if an eligible assessee—defined as a resident patentee—derives income by way of royalty from a patent developed and registered in India, such income shall be taxed at a concessional rate of 10%. This provision seeks to encourage innovation and patent registration in India.

In general, intangible assets that are developed internally by a business using its resources are likely to be classified as capital assets used in the course of business. These assets are typically eligible for tax depreciation under the head “Profits and Gains from Business or Profession.” Upon transfer of such intangibles, the resulting gains may be taxed as capital gains. However, depending on the specific facts and the manner in which the asset is characterized, the transfer of an intangible may also give rise to business income rather than capital gains, particularly if the intangible is held as trading stock or developed for sale.

A critical issue in taxing intangibles arises in determining the situs (location) of the intangible asset, which becomes particularly relevant for cross-border taxation. Under Section 9(1)(i) of the Act, income arising from the transfer of a capital asset situated in India is deemed to accrue or arise in India and is taxable accordingly. While Explanation 5 to this provision deems shares or interests in foreign companies that derive substantial value from Indian assets to be located in India, this explanation is limited to equity or interests and may not extend to general intangibles such as trademarks or brand rights.

In the absence of a specific statutory deeming provision for intangible assets, the courts have applied general legal principles to determine situs. In the 2016 case of CUB PTY Limited (formerly known as Foster’s Australia Limited) v. Union of India, the Hon’ble Delhi High Court held that there was no deeming fiction to locate intangibles in India, and therefore, the principle of mobilia sequuntur personam (the situs of intangible property follows the domicile of the owner) would apply. Accordingly, since the owner was an Australian company, the court ruled that India did not have taxing rights over the transfer of such intangibles.

More recently, in 2023, the Mumbai Bench of the Income Tax Appellate Tribunal (ITAT) in Star Television Entertainment Ltd. v. PDIT reaffirmed the Delhi High Court’s view. The Tribunal examined Explanations 5 and 6 to Section 9(1)(i) and concluded that the situs of an intangible asset is determined by the location of its owner. The fact that the intangible may have been used to generate income in India was held to be irrelevant for determining its situs for tax purposes.

Thus, while certain statutory provisions cover specific intangibles like patents, the taxation of other intangibles, especially in cross-border scenarios, continues to evolve through judicial interpretation in the absence of clear legislative guidance.

14. How are Derivatives taxed in India?

A derivative is a financial contract whose value is derived from an underlying asset, such as shares, commodities, or indices. Common examples include futures and options contracts, i.e., call and put options. Since these instruments do not involve the actual transfer of the underlying asset, the income or loss arising from derivative trading is generally not considered under the head “Capital Gains,” which applies only to transfers of capital assets.

Instead, derivative income is typically taxed under the head Profits and Gains from Business or Profession. Depending on the nature of the assessee and the frequency and scale of transactions, such income may also be considered under Income from Other Sources, although this is less common in the case of regular trading. The characterization has implications for the applicable tax rate and, more importantly, for the treatment of losses under sections 71 to 73 of the Income Tax Act, 1961.

Section 71 deals with setting off losses from one head of income against another, while Section 72 allows carry forward of business losses (other than speculative business losses) for up to eight assessment years. Section 73, however, imposes a restriction in respect of speculative business losses—they can only be set off against gains from another speculative business. Whether derivatives are considered speculative becomes crucial for determining the ability to claim set-off or carry forward.

Section 43(5) defines a speculative transaction as one where a contract for purchase or sale of any commodity or securities is settled otherwise than by actual delivery. Based on this definition, derivative contracts—being cash-settled in most cases—would ordinarily fall under speculative transactions. However, the same section provides specific exceptions from this treatment. Notably, eligible transactions in derivatives traded on recognized stock exchanges are excluded from the definition of speculative transactions under clauses (d) and (e) of the proviso to Section 43(5). Recognized stock exchanges include BSE, NSE, and MCX-SX. Therefore, derivatives traded on these platforms are treated as non-speculative business transactions.

As a result, income or losses from such derivatives are taxed under the normal provisions applicable to business income, and losses can be set off against other business income or carried forward as per the rules under Section 72. This treatment gives derivative traders the advantage of more flexible loss adjustment compared to those engaged in speculative transactions.

In conclusion, while derivative transactions are prima facie speculative in nature, the Income Tax Act carves out significant exceptions for trades on recognized stock exchanges, thereby treating such trades as regular business activity and subjecting them to more favourable tax treatment.

15. Is there a concept of Digital tax, where foreign business can be taxed in India absent permanent establishment?

Yes, India has introduced a concept of Digital Tax, particularly through the Equalisation Levy. Under the Finance Act, 2016, an Equalisation Levy of 6% was introduced on the amount of consideration received or receivable by a non-resident for specified services, even if the non-resident does not have a Permanent Establishment (PE) in India.

As per Section 166, any person who is a resident and carrying on business or profession in India, or a non-resident having a PE in India, is required to deduct the equalisation levy on payments made to a non-resident for specified services. This levy was primarily imposed on online advertisement services provided by foreign entities and informally referred to as the Google Tax.

In 2020, a 2% Equalisation Levy was introduced for non-resident e-commerce operators on any supplies or services made, provided, or facilitated by the e-commerce operator. However, in the July 2024 Union Budget, the finance minister confirmed that the 2% Equalisation Levy will not apply to any online transactions occurring on or after 1st August 2024. The necessary legislative changes to this effect have already been implemented.

Additionally, the 6% Equalisation levy has been abolished from April 1, 2025, as per the Finance Bill 2025-2026.

16. How are Dividend taxed in India (DDT)?

Up to the financial year 2019–20, dividend income from Indian companies was not taxable in the hands of the shareholders. Instead, the tax was levied at the company level in the form of Dividend Distribution Tax (DDT) under Section 115-O of the Income Tax Act, 1961. The distributing company was liable to pay DDT at an effective rate of around 20.56% (including surcharge and cess) before distributing the dividend to shareholders, who then received the dividend income tax-free.

However, the Finance Act, 2020 abolished the DDT regime with effect from 1st April 2020 (FY 2020–21), and adopted a classical system of dividend taxation—that is, dividends are now taxed in the hands of shareholders.

Under this new regime:

Dividend income is taxable in the hands of the recipient shareholder at the applicable slab rate.
As per Section 10(34), the exemption for dividend income received from domestic companies no longer applies for dividends declared on or after 1st April 2020.
If the total dividend received by a shareholder during the financial year does not exceed ₹5,000, no tax is required to be deducted at source (TDS).
If the dividend exceeds ₹5,000, the company is required to deduct TDS at 10% under Section 194 (for Indian residents).
In case of non-resident shareholders, TDS is deductible at 20% under Section 195, subject to applicable DTAA (Double Taxation Avoidance Agreement) benefits.
The head under which dividend income is taxed depends on the nature of shareholding:

If shares are held as investments, dividend income is taxed under the head “Income from Other Sources”.

If the recipient is in the business of share trading, dividend income may be treated as “Business Income”.

Further, under Section 57, only a deduction for interest expense incurred to earn dividend income is allowed, and such deduction is capped at 20% of the total dividend income.

PART IV: TRANSFER PRICING, WITHHOLDING TAXES, PRESUMPTIVE TAXATION, SPECIAL REGIMES ETC.

17. What are the rules pertaining to Transfer Pricing in terms of Indian legislation?

– The Transfer pricing provision under the Income Tax legislation are developed based on the OECD’s guidelines on Transfer pricing and largely follows the same and globally accepted proposition pertaining to Transfer pricing regulations.

– The provisions pertaining to Transfer pricing rules are contained in section 92 to section 92(F) and section 93 of the Income Tax Act 1961. Section 92 lays down a broad proposition that income arising from international transaction shall be competent having regard to Arm’s length price.

– Subsection 2 of 92 lays down a proposition that in case of international transaction or specified domestic transaction, when two or more associated enterprises enter into a mutual agreement or arrangement for allocation or apportionment or any contribution to, any cost or expenses incurred in connection with a benefit service of facility provided or to be provided to any one or more of such enterprises, the cost or expenses allocated by such enterprises shall be determined having regard to Arm’s length price of such benefit, service, or facility.

– “International Transaction” is defined to mean a transaction between two or more associated enterprise when either or both of them are non-resident, in the nature of purchase, sale or lease of tangible or intangible property, or provision of services, or lending or borrowing money, or any other transaction having a bearing on the profits, income, losses or assets of such enterprises.

– Associated enterprises are defined to be two enterprises, if at any time during the previous year-

“(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, licences, 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.”

– The specified domestic transaction covered within the ambit of Transfer pricing regulation are defined in Section – 92BA of the Income Tax Act, 1961.

– Section – 92C provides computation of Arm’s length transaction price by considering the factors such as CUP method, resale price method, cost plus method, profit split method, transactional net margin method or such other method as maybe prescribe by the board.

– Section – 92CB provides that the board can make the rules for safe harbor and explains “Safe Harbor” as meaning circumstances in which the Income Tax authority shall accept the Transfer pricing income as maybe declared by the assessee.

– Rule – 10 TD of the Income Tax Rules, contains the Safe harbor rules and gives detailed information about eligible international transaction and circumstances in which the pricing or income deemed to have accrued to assessee must be accepted as declared by the assessee; it gives information about circumstances for different eligible internation transactions including provision for software development services, for provisions of information technology enable service, provision of knowledge processing outsourcing services, advancing of intra group loans, providing corporate guarantee, and many more.

18. Can you explain concept and provisions pertaining to withholding tax in India?

Withholding tax in India refers to the obligation placed on the payer to deduct a certain percentage of tax at the time of making payments to others and deposit the deducted amount with the Income Tax Department. This tax is credited to the payee’s account and is reflected as part of their tax liability. The payee’s actual tax liability may vary—either it could be nil, more, or less than the amount withheld by the payer.

The primary purpose of withholding tax is to ensure that the government receives tax revenue in a timely manner and to reduce the chances of tax evasion. It also serves as a mechanism to track income-generating transactions. In case the payer fails to deduct and deposit the required tax amount, Section 40(a)(ia) of the Income Tax Act stipulates that the payer cannot deduct the amount payable (equivalent to the tax that should have been deducted but wasn’t) from their income under “Profits & Gains of Business or Profession.”

For payments to non-residents, if the payer fails to deduct and deposit the withholding tax, the entire payment made to the non-resident will be disallowed as an expense for the payer. However, relief from these stringent provisions may be available if the payer deducts and deposits the tax in the subsequent year, subject to meeting specific conditions.

In addition to the disallowance of expenses, failure to comply with withholding tax obligations may lead to penalties, interest, and criminal charges, particularly if the non-payment is deemed intentional and part of a scheme of tax evasion.

Withholding taxes while making the payment to Indian resident.

The amount of the tax required to be withheld and deposited with the government by the payer depends upon the nature and type of income and whether the payee is resident or non-resident in India. As far as the payment to resident entities is concerned, the different rates pertaining to different kinds of payment required to be made to the resident are contained in section 193 to section 194LA. The following table broadly seeks to indicate the threshold limit of payment for applicability of the provisions of withholding taxes and the rate of withholding tax while making the payment to residents.

Nature of Payment	Threshold Limit (INR)	WHT Rate (%)
Purchase of goods	5 million	0.1%
Specified type of interest	–	10%
Non-specified type of interest	5,000	10%
Professional service	30,000	10%
Technical service	30,000	2%
Remuneration/fee/commission to a director	30,000	10%
Royalty for sale, distribution, or exhibition of cinematographic films	30,000	2%
Perquisite arising from business or profession	20,000	10%
Payment from transfer of VDA	50,000 / 20,000	1%
Commission and brokerage	15,000	2%
Rent of plant, machinery, or equipment	2,40,000	2%
Rent of land, building, or furniture	2,40,000	10%
Contractual payment (except for individual/HUF)	30,000 (single); 100,000 (aggregate)	2%
Contractual payment to individual/HUF	30,000 (single); 100,000 (aggregate)	1%
Payments by individual/HUF not covered under payments to contractors/commission or brokerage/fees of professional or technical services	5 million	2%
Dividend income on shares	5,000	10%
Dividends for units of mutual fund	5,000	10%
Purchase of immovable property	5 million	1%
Cash withdrawal from bank or banking company	10 million	2%
Payments to an e-commerce participant, in relation to sale of goods or services facilitated by e-commerce operator through digital platform	5 Lakhs	0.1% (5% if no PAN)

– Section 195 is a provision dealing with payment to non-resident or a foreign company of any interest (other than the interest specifically dealt with in section 194LB or Section 194LC or Section 194LD) or any other sum chargeable under the provisions of the Income Tax Act at the rates in force. These rates are prescribed in the Finance Act for the concerned year. However, the payer is required to deduct the tax at the rate prescribed in the Finance Act or the rate prescribed in the Double Taxation Avoidance Agreement (DTAA) between India and the country of resident residence of the non-resident payee. Section – 195 will cover different natures of payment such as dividend payment, interest, royalty, purchase price of equity on purchase of such equity from foreign shareholder, fees for technical services, etc.

– The stark distinction in the provisions pertaining to deduction of the amount of tax while making the payment to non-resident as against the payment to resident lays in the fact that the responsibility or obligation to deduct the amount of tax while making the payment of payment to resident is generally absolute, the liability of deducting the amount of tax while making the payment to non-resident springs into force only if such sum being paid to non-resident is chargeable under the provisions of the Income Tax Act. This will necessarily mean that if looking at the Double Taxation Avoidance Agreement (DTAA) between India and the country of residence of payee the sum being paid is not chargeable to Income tax in India, no deduction is required to be made.

19. Can you explain the provision and regime pertaining to presumptive taxation under Income Tax Act?

The regular tax provisions under the Income Tax Act can be complex and burdensome for businesses, requiring detailed account maintenance, audits, and compliance with various regulations. To ease this burden, the Income Tax Act provides a mechanism called presumptive taxation, which allows businesses and professionals meeting specific criteria to declare a certain percentage of their turnover as income. This eliminates the need for maintaining detailed accounts, conducting audits, and complying with other rigorous requirements.

When opting for presumptive taxation, taxpayers are not required to maintain books of accounts as specified under Section 44AA that typically mandates the maintenance of records like income, expenses, assets, liabilities, ledgers, day books, cash books, and supporting documents such as bills and receipts. However, under the presumptive taxation provisions, such record-keeping is not necessary.

Different presumptive taxation provisions apply to various businesses or individuals based on the nature of the taxpayer and whether they are residents or non-residents in India. Below are some key provisions:

Section 44AD:

This section allows any business (excluding businesses engaged in hiring or leasing goods carriages) whose total turnover in the previous year does not exceed ₹2,00,00,000 to offer 8% of the total receipts as income under the presumptive taxation scheme.

Section 44ADA:

This provision applies to an individual or a partnership firm resident in India, engaged in professions such as legal, medical, engineering, architectural, accountancy, or technical consultancy. These professionals can declare 50% of their gross receipts as income, without the requirement to maintain books of accounts or meet other compliance obligations.

Section 44B (for Non-Residents):

This section provides that 7.5% of the aggregate revenue paid to a non-resident in connection with the business of operating ships can be declared as income under the presumptive taxation scheme. Additionally, 10% of the amounts paid or payable to the taxpayer, whether within or outside India, for services related to the exploration of minerals, oils, and supply of plant and machinery, can also be offered as income under the presumptive taxation regime.

Section 44BBA:

This section specifically deals with the presumptive taxation regime for businesses involved in the operation of aircraft by non-residents.

Section 44BBB:

This provision applies to non-residents or foreign companies engaged in civil construction activities, allowing them to declare income under the presumptive taxation scheme.

20. Do any special regimes exist in India for particular businesses/activities such as oil & gas, shipping, insurance, investment funds? Are there any special zones where the tax provision applies differently?

The Government of India has incorporated various provisions through amendments in the Income Tax Act, 1961 to treat income differently based on the nature of the activity generating the income or the location where the activity is carried out, particularly in notified zones.

Different schemes are provided for various activities, including insurance, mutual funds, shipping business, real estate investment trusts (REITs), foreign institutional investors (FIIs), and more. Section 10 and its subsections exempt certain types of income from being taxed, as the income specified under these provisions is not considered part of the total income.

The Income Tax Act is amended periodically to introduce new subsections that exempt specific incomes based on government policies designed to incentivize particular sectors or activities.

Here are some key provisions:

Section 10A:

This section relates to the income of newly established undertakings in Free Trade Zones (FTZs). It provides exemptions for such units, promoting the establishment of businesses in these zones.

Section 10AA:

This provision offers special tax treatment for newly established units in Special Economic Zones (SEZs). These zones are created under the Special Economic Zones Act, 2005 to promote export-oriented businesses by providing tax incentives.

Section 10B:

This section deals with newly established 100% Export Oriented Units (EOUs), allowing them to benefit from specific tax exemptions on income derived from export activities.

Section 80LA:

This provision grants a tax deduction for the income of offshore banking units and international financial services centres (IFSCs). A notable example is the GIFT City in Gujarat, which hosts an International Financial Services Centre. Entities operating in this area, with the status of a GIFT IFSC, are eligible for a tax exemption on offshore banking and international financial services activities for 10 consecutive years out of a 15-year period.

In addition to these, there are many other special regimes for various sectors, ensuring targeted tax relief for activities such as shipping, investment funds, and real estate, under the Income Tax Act, 1961.

PART V: ANTI-AVOIDANCE RULES

21. Are there any General Anti Avoidance Rules (GAAR) in force in India and what is the framework of any such rules?

– The Indian Income Tax Act, 1961 contains the General Anti-Avoidance Rules (GAAR) in Chapter X-A (Sections 95 to 102) of the Act. These rules were initially introduced through the Finance Bill 2012, but their implementation was deferred several times before they came into effect on 1st April 2018. GAAR recognizes the principle of substance over form and aims to disregard the whole or part of a transaction or treat it as if it had never been entered into or carried out. It may also result in various consequences, such as reallocating capital or revenue receipts, expenditures, or deductions among the parties involved in the transaction.

– GAAR applies to both domestic and cross-border transactions, with no distinction in applicability. It operates based on the concept of an “Impermissible Avoidance Arrangement”.

– An Impermissible Avoidance Arrangement, as defined in Section 96, is an arrangement with the primary purpose of obtaining a tax benefit, provided it satisfies any of the following conditions:

- It creates rights or obligations that are not ordinarily created between parties dealing at arm’s length.
- It directly or indirectly results in the misuse or abuse of the provisions of the Income Tax Act.
- It lacks commercial substance, or is deemed to lack commercial substance, either wholly or partly.
- It is entered into or carried out by means or in a manner not typically used for bona fide purposes.

– Therefore, an arrangement is deemed impermissible if it is entered into with the primary purpose of obtaining a tax benefit and meets any of the conditions outlined above.

– Section 97 defines what constitutes an arrangement that lacks commercial substance. It includes arrangements such as round-trip financing, accommodating parties, and transactions conducted through one or more persons to disguise the value, location, source, ownership, or control of funds involved in the transaction, among other scenarios.

– When an arrangement is determined to be impermissible, the following consequences may arise:

- Disregarding part or all of the arrangement.
- Treating the impermissible arrangement as though it had never been entered into.
- Disregarding any accommodating party involved.
- Reallocating among the parties to the arrangement, including adjustments to expenditure deductions, reliefs, or any capital or revenue receipts.
- Re-assessing the place of residence of any party or the situs of assets or treating the transaction as if it occurred at a different location than specified in the arrangement.

The provisions of GAAR do not apply if the total tax benefit sought by the arrangement is below ₹3 crores for all parties involved in the transaction in that particular year. Additionally, safe harbour rules apply to certain transactions, particularly those involving Foreign Institutional Investors (FIIs).

22. Apart from the General Anti Avoidance Rules (GAAR) under Indian Income Tax Act, are there any specific anti-avoidance rules dealing with peculiar situations/transactions?

– The provisions of specific anti-avoidance rules are contained in Section – 94 to Section – 94B of the Income Tax Act 1961. Section – 94 deals with avoidance of tax by certain transactions in the securities. Section – 94 deals with various situations such as owner of a security selling and buying back a security resulting in any interest becoming payable in respect of the securities being receivable otherwise then by the owner of the securities, any transaction in the securities in a given financial year which results in no or less income being received by the person holding beneficial interest in securities and many other aspects.

– Essentially Section – 94 and subsections contain in Section – 94 seek to ignore certain transactions or reallocate losses, income or profits which otherwise then the by way of result of the particular types of transactions would not have arisen.

– Section – 94A contains special provisions in respect of the transactions with the persons located in notified jurisdictional areas.

– Section – 94B provides that when and India company or permanent establishment of foreign company in India that is borrower in case of any expenditure by way of interest exceeding Rs. 1 crore that is deductible while computing the income under “profits and gains from business and profession” and if the if such interest is in respect of the debt issued by a non-resident which is an Associated enterprise of such borrower, interest will not be allowed to deducted in computation of income.

PART VI: RESTRUCTURING, REORGANIZATIONS AND TAX IMPLICATIONS

23. What are the tax implications under the Income Tax Act, 1961 which may arise from corporate restructuring?

The Indian Income Tax Act recognizes two specific forms of corporate restructuring: Amalgamation and Demerger.

Amalgamation (Section 2(1B))

Amalgamation, in relation to companies, refers to the merger of one or more companies with another company, or the merger of two or more companies to form a single company. The companies that are merged are called amalgamating companies, while the entity that results from such merger is referred to as the amalgamated company.

To qualify as an amalgamation under the Act, three essential conditions must be satisfied. First, all the property of the amalgamating company or companies, immediately before the amalgamation, must become the property of the amalgamated company by virtue of the amalgamation. Second, all liabilities of the amalgamating company or companies, existing immediately before the amalgamation, should similarly become liabilities of the amalgamated company. Third, shareholders holding at least three-fourths in value of shares in the amalgamating company or companies—excluding shares already held by the amalgamated company or its subsidiary—must become shareholders of the amalgamated company as a result of the amalgamation.

Importantly, such an arrangement should not be in the nature of a mere purchase of property or the result of property distribution following the winding up of the amalgamating company.

Demerger (Section 2(19AA))

Demerger, as defined in the Act, refers to the transfer of one or more undertakings by a demerged company to a resulting company, pursuant to a scheme of arrangement under Sections 391 to 394 of the Companies Act, 1956. For such a transfer to qualify as a demerger under the Income Tax Act, several conditions must be met.

Firstly, all the property of the undertaking being transferred, as it existed immediately before the demerger, must become the property of the resulting company by virtue of the demerger. Secondly, all liabilities relating to the undertaking must become the liabilities of the resulting company. Thirdly, the property and liabilities transferred should be recorded at the same value as they appear in the books of account of the demerged company immediately before the demerger.

However, a proviso inserted with effect from April 1, 2020, allows the resulting company to record the assets and liabilities at a different value—if required under the Indian Accounting Standards specified in the Companies (Ind AS) Rules, 2015.

Furthermore, the resulting company must issue shares to the shareholders of the demerged company on a proportionate basis, except where the resulting company is already a shareholder of the demerged company. It is also necessary that not less than three-fourths in value of the shareholders of the demerged company (excluding shares already held by or for the resulting company or its subsidiary) become shareholders of the resulting company by virtue of the demerger.

Additionally, the transfer must be on a going concern basis, and the demerger should comply with any conditions notified by the Central Government under Section 72A (5).

Clarificatory Explanations

The term “undertaking” for the purpose of demerger includes any part, unit, or division of an undertaking, or a business activity as a whole. It excludes individual assets or liabilities that do not form a complete business activity.

Liabilities transferred under a demerger include: (a) those arising out of the activities or operations of the undertaking, (b) specific loans or borrowings raised and used solely for that undertaking, and (c) a proportionate amount of general or multipurpose borrowings based on the asset value transferred in the demerger.

For computing the value of property transferred under clause (iii), any increase due to asset revaluation is to be ignored.

The splitting or reconstruction of a statutory authority, local body, or public sector company into separate entities will be treated as a demerger if the conditions notified by the Central Government are met. Similarly, if a company, formerly a public sector company, is split into separate entities as a condition attached to the transfer of its shares by the Central Government, and further conditions notified by the government are met, such restructuring will also qualify as a demerger.

Other Forms of Corporate Restructuring and Tax Implications

While amalgamations and demergers have clear recognition under the Income Tax Act, corporate restructuring can also occur in other ways—such as asset sales, share sales, slump sales, or schemes of compromise and arrangement under the Companies Act, 2013.

Each of these transactions may carry their own tax implications, particularly with respect to capital gains. However, if a scheme of compromise or arrangement approved by the National Company Law Tribunal (NCLT) qualifies as an amalgamation or demerger under the Income Tax Act, such a transaction will not be treated as a ‘transfer’, and therefore, the provisions of Section 45 (Capital Gains) will not apply.

In other words, if the NCLT-approved restructuring which also satisfies the conditions for an amalgamation or demerger as defined in the Act, will be exempt from capital gains tax under the Income Tax Act, 1961.

PART VII: MINIMUM ALTERNATE TAX AND ALTERNATIVE MINIMUM TAX

24. What is Minimum Alternate Tax (MAT) and how is it levied?

– MAT is a text introduced by Finance Act 1987 to take effect from assessment year 1988-89. Introduction of MAT was to deal with the peculiar situation of “zero tax companies”. This was essentially the companies which had taxable income generated; However, by taking the recourse to different provisions of the Income Tax Act pertaining to various exemptions, depreciations, deductions and other provisions under the Income Tax Act, the companies were able to have their tax liability at 0.

– The MAT provisions were therefore introduced through Section 115JB of The Income Tax Act 1961.

– The provisions of 115JB in effect provide that where in case of an assessee being a company, income tax payable on total income is computed under the Income Tax Act in a given previous year was less than 18.5% of the book profit of the company, book profit shall be deemed to be total income, the assessee and tax will be required to be paid on book profit at the rate of 18.5%. The impact of the provision is that the tax liability of the company will be higher of tax liability of the company competed in terms of regular provisions of the Income Tax Act and the tax liability in terms of Section – 115GB at the rate of.18.5% of book profit.

What is book profit?

– Section-105JB (2) provides that every assessee being company shall prepare the profit & loss statement in terms of the provisions schedule – III of the Companies Act 2013 and explanation 1 & 2 of 115JB provides for the meaning or definition of book profit. While definition is quite lengthy, in summary the book profit is the net profit shown in the statement of profit & loss prepared in terms of Schedule 3 of the Companies Act is increased by various items stated in explanation 1 e.g. The amount of depreciation, amount of deferred tax and provision therefore, amount of income tax paid or payable and provision therefore, amount of dividend paid or proposed etc and as reduced by various items is detailed in said explanation 1 itself e.g. the amount withdrawn from any reserve or provision, the amount of income to which provisions of section 10 or section 11 or section 12 applies, amount of income by way of royalty in respect of patent chargeable under Section 115BBF etc.

Inapplicability of MAT

– MAT provisions do not apply to

a) the domestic companies that have opted for special tax regimes under Section – 115BAA & Section – 115BAP.

b) Income accruing or arising to a company from life insurance business as referred to in Section-115B.

c) Shipping company, the income of which is subject to tonnage taxation.

The credit of MAT and carry forward of the same.

– The provisions pertaining to tax credit and carrying forward are contained Section 115JAA of the Income Tax Act which essentially provides that the tax credit of MAT paid shall be allowed and shall be equivalent to difference of the tax paid for any assessment here and a sub section 1 of Section 115JB and the amount of tax payable by the assessee on is total income completed in accordance with the other provisions of Act.

25. What is Alternative Minimum Tax (AMT).

The provisions for Alternate Minimum Tax (AMT) are outlined in Section 115JC to 115JF of the Income Tax Act, 1961. The concept behind AMT is similar to Minimum Alternate Tax (MAT), which was initially applicable only to corporate taxpayers. AMT, however, extends this concept to non-corporate taxpayers who claim specific deductions under provisions such as Section 80H to 80RRB, Section 35AT, or Section 10AA of the Income Tax Act.

AMT applies only if the “adjusted total income” of the taxpayer exceeds ₹20 lakhs in the case of individuals or Hindu Undivided Families (HUFs). For other taxpayers, such as Associations of Persons (AOP), Body of Individuals (BOI), AMT provisions apply irrespective of their adjusted total income.

For the purpose of this guide, we do not intend to delve into the detailed calculations of adjusted total income or the provisions related to carrying forward AMT credit. However, it is important to note that the AMT provisions function in a manner similar to the MAT provisions, ensuring a minimum level of tax liability for certain taxpayers, even after claiming specific deductions.

PART VII: INTERNATIONAL TAXATION, IMPACT OF TAX TREATIES, DIGITAL TAX ETC.

26. When India has double taxation avoidance agreement with other country, will there be a difference in the way in which provisions of income tax act, 1961 will apply to a given transaction or a person resident in foreign jurisdiction when activity/transactions bring it in the purview of Income tax Act, 1961?

When there is no Double Taxation Avoidance Agreement (DTAA) between India and another country, the person concerned will be governed entirely by the provisions of the Income Tax Act, 1961. However, limited relief is available under Section 91 of the Income Tax Act. For example, Section 91(1) offers benefits to Indian residents for income that accrued or arose outside India in the previous year. Section 91(3) allows a deduction from the Indian income tax payable by non-residents on doubly taxed income, at the lower of the Indian tax rate or the foreign country’s tax rate, subject to certain conditions.

In the case of a tax treaty between India and another country, the provisions of the Income Tax Act (except for the General Anti-Avoidance Rules) will apply only to the extent that they are more beneficial to the assessee. This means that the assessee can choose whether to be governed by the provisions of the Income Tax Act, 1961 or the relevant provisions of the DTAA for determining aspects such as:

Residency (normally under Article 4 of the DTAA vs. corporate residency under the Income Tax Act).
Permanent Establishment (under the DTAA versus “business connection” in the Income Tax Act).
Business Profits (under Article 7 of the DTAA vs. the allocation of profits under Indian tax laws).
Interest, Royalties, and Dividend Income (under Articles 9, 10, and 11 of the DTAA vs. Section 9 of the Income Tax Act).
Capital Gains (under Article 13 of the DTAA vs. Section 35 of the Income Tax Act).

Thus, the assessee has the option to choose the provisions that are more beneficial to their tax situation, which are normally those of the Double Taxation Avoidance Agreement and if assessee chooses to be governed by DTAA, it will totally override the provisions of Income Tax Act, 1961.

For more details on the implications of Double Taxation Avoidance Agreements, you may visit https://rdlawchambers.com/tax-treaty-benefits-under-indian-income-tax-act-1961/

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GUIDE ON TAX DISPUTES AND RESOLUTION IN INDIA

GUIDE ON CRYPTOCURRENCY AND TAXATION IN INDIA

COMPREHENSIVE GUIDE TO CORPORATE AND INDIVIDUAL INCOME TAX

PART I: INTRODUCTION TO INCOME TAX

PART II: CHARGE, SCOPE AND COMPUTATION OF INCOME AND RATES OF INCOME TAX/CORPORATE TAX

PART III: SPECIAL INCOME CATEGORIES AND TAXATION

PART IV: TRANSFER PRICING, WITHHOLDING TAXES, PRESUMPTIVE TAXATION, SPECIAL REGIMES ETC.

PART V: ANTI-AVOIDANCE RULES

PART VI: RESTRUCTURING, REORGANIZATIONS AND TAX IMPLICATIONS

PART VII: MINIMUM ALTERNATE TAX AND ALTERNATIVE MINIMUM TAX

PART VII: INTERNATIONAL TAXATION, IMPACT OF TAX TREATIES, DIGITAL TAX ETC.

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