Few Tips for preparation of Income Tax return to the Tax-payers.

Though the due date for filing of your income tax returns is extended till 31st August 2015, I thought of writing about a few things which you as a tax payer should do before you actually sit down to prepare your income tax return yourself or visit your chartered accountant’s office. Even if you do not intend to file your return by 31st August, there are certain things which you should do before the due 31st August for this year. Please note the due date for filing generally falls on 31st July.

Verify the form number 26AS

The present system does not allow you to attach any physical document with your income tax returns. Therefore the credit for TDS and taxes paid is given on the basis of data available with the income tax department. Such data of TDS or taxes collected by the income tax department through returns of TDS filed by the person deducting the tax or the banks is important. Due to some mistake on the part of either the bank or the person deducting the tax some error might have crept in and the proper credit for TDS or tax is not reflected in the statement of your tax credits i.e. form No. 26AS.

Now you can view your form no. 26AS either through your internet banking login or through login to income tax web site. Please verify that all the tax deducted or collected or paid by you is correctly reflecting in form No. 26AS. Verify the same from the form no. 16 and 16A received by you. In case of any discrepancy, take up the matter with the deductor concerned or the bank where you had deposited the tax and take appropriate steps to ensure that the errors are rectified so as to ensure that true tax credit is reflected in the form no. 26AS. This will ensure proper credit at the time of processing of your return.

Verify the form number 16 /16A

By now all of you must have received your Form No. 16. So you should verify that the details furnished in form no.16 are correct. Please verify that your PAN correctly mentioned on this or you will not get the credit for the TDS.

In addition to verifying PAN it is equally important that all the exempt allowances like HRA, Medical reimbursement, LTA etc, in respect of which you have already submitted documentary evidence are shown as exempt in the form. There may be some discrepancy due to you having submitted the documents at the fag end and the same having not been taken cognizance of. Do not forget to verify the amount of various deductions available to you, for LIC, health insurance premium, home loan repayment, interest on education loan, school fee etc, are properly mentioned in the form no 16.

It is very important to verify the details in form no. 16 since your tax consultant will rely on the figures as per the form no. 16 and may not realize that some exempt allowances have been treated as taxable in form no. 16. In case there is any such discrepancy, please bring it to the notice of your employer and request them to get the data corrected appropriately.

There may be cases of excess deduction of tax. Though your employer can not refund you the excess tax so deducted, you can claim refund for the excess tax deducted from your salary in the return of income being filed now.

Similarly verify the form no. 16A received from bank etc for correctness as regards PAN number, amount of income shown and amount of TDS mentioned on it.

Open the capital gains account before 31st August 2015

There are certain things which you should do by the due date of filing of your return even if you are not able to file your income tax return by the due date. This is opening of capital gains account which is required to be done by the taxpayers who have sold earned some taxable long term capital gains and have planned to avail tax exemption by investing in a house.

As per Section 54 of the Income Tax Act, if you have sold your residential house property in the last year which was held for more than 36 months, you can save long term capital gains tax by investing the capital gains for purchase or construction of another residential house within specified period. Likewise if you have sold any other long term asset other than a residential house property, you can save your income tax by investing the net consideration in another residential house property within specified time limits.

Though the law provides for longer period for making investments, the law also prescribes that if you have not been able to invest the required money fully by the due date of filing of the income tax return, you have to deposit the unutilized money in the capital gains account with specified bank before you actually file your return by the date. However if you are not able to file your income tax return by the due date, please ensure that you open the capital gains account and deposit the money unutilized by 31st August 2015, so as not to lose your exemption.

Hope the above discussion will help you better prepare for filing of your income tax return.

Compiled from various sources by Ketan Kapoor. To know more, visit the contact us section.

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Is Filing of Income Tax return mandatory for you?

While talking to my acquaintances around me I gather an impression that majority of the salaried people feel that they are not required to file their income tax returns as tax is already deducted from their salaries. This is not correct legal position. Payment of taxes and filing of income tax return are two separate obligations. There is another misconception that if I miss the deadline of 31st July, I cannot file my return later on as the deadline is sacrosanct and a now or never thing.

In this article I will explain the legal position concerning individual tax payers as regards requirement of filing the income tax return.

Who is required to file the IT returns?

So to start with, you are required to file your income tax return if your gross total income is more than the basic exemption limit. For the year ended 31st March 2015 this is Rs. 2.5 lakhs for an ordinary individual, Rs. 3 lakhs for an individual over 60 years and Rs. 5 lakhs for an Individual above 80 years.

The word gross total income is not the same as the income on which your tax liability is calculated. Gross total income is the income calculated before any deduction under Sections like 80 C, 80 CCC, 80 CCD, 80 CCG, 80D, 80E, 80EE, 80G and 80 GGA and 80 TTA is availed. The deductions cover various items like contribution towards PF, NPS and PPF, payment of School fee for your children, premium for your life and health insurance. This also covers purchase of NSC, home loan repayment, rent paid etc. as well as interest on saving bank account.

So even if you may not have any tax liability after availing above deductions, you still need to file your tax return in case your gross total income before such deductions exceeds the amount of basic exemption applicable in your case.

You need to file return in case you own any asset outside India or you are an authorized signatory for any account located outside India. This becomes applicable to those of you, without you noticing it, who had gone outside India on deputation or employment and had opened a bank account and did not close the bank account. If you have any investments like shares, bonds or mutual fund units of foreign companies, you also are required to file return irrespective of your income level for the year. So in case you have received shares of a foreign company as ESOP as part of your compensation package, you are covered under this provision and file the return.

What is the last date for filing of my income tax return?

In case you are required to file return as discussed, the due date is July 31(It may be extended by a Notification, For eg., for A/Y 2015-16, date has been extended to 31st August, 2015). The due date is applicable generally in case of individual tax payers. However in case you are carrying on a business and your accounts are required to be audited, the due date gets extended till 30th September. Even for the people who are working partners in partnership firms, whose accounts are audited, the due date is 30th September.

What happens if you miss the deadline?

In case you file your current income tax return after due date i.e. 31st August, 2015, you will not be able to revise your income tax return in case any omission or error is detected. You also will have to pay penal interest on the amount of tax for the period of delay in case any tax is still payable. Another consequence of missing the deadline would be that, in case you have business loss or capital gains loss in the current year, you will not be able to carry it forward to be set of in subsequent years.

Do I pay any penalty if you do not file the return by due date?

There is no penalty if you fail to file your return by 31st July, 2015 (or 31st August 2015) and file the same by March 31, 2016. However if your income is taxable and you fail to file your return of income by March 31, 2016, the same can be filed only by 31st March 2017. However in such a situation the income tax officer can levy a penalty of Rs. 5,000 after giving you an opportunity to explain your case.

So from the above discussion it becomes clear that even if you do not have any tax liability or appropriate taxes have been deducted from your income, you are still required to file your return. Moreover it is better to file the return by the due date to avoid any complication later on.

Compiled by Ketan Kapoor. To know more about the author, visit the Contact Us page or. Comments on above are invited.

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Clarifications on TDS provisions

Circular: No.5/2002, Dated 30-7-2002

1126. Clarifications on various provisions relating to tax deduction at source regarding changes introduced through Finance Act, 1995

The Finance Act, 1995, has enlarged the scope of income-tax deduction at source by making various amendments. In regard to the changes introduced through the Finance Act, 1995, a number of queries have been received from the various associations and professional bodies on the scope of tax deduction at source. It would be desirable to clarify the doubts by issuing a public circular in the form of question answers as under :

Question 1 : What would be the scope of an advertising contract for the purpose of section 194C of the Act?

Answer : The term ‘advertising’ has not been defined in the Act. During the course of the consideration of the Finance Bill, 1995, the Finance Minister clarified on the Floor of the House that the amended provisions of tax deduction at source would apply when a client makes payment to an advertising agency and not when advertising agency makes payment to the media, which includes both print and electronic media. The deduction is required to be made at the rate of 1 per cent. It was further clarified that when an advertising agency makes payments to their models, artists, photographers, etc., the tax shall be deducted at the rate of 5 per cent as applicable to fees for professional and technical services under section 194J of the Act.

Question 2 : Whether the advertising agency would deduct tax at source out of payments made to the media ?

Answer : No. The position has been clarified in the answer to question No. 1 above.

Question 3 : At what rate is tax to be deducted if the advertising agencies give a consolidated bill including charges for art work and other related jobs as well as payments made by them to media ?

Answer : The deduction will have to be made under section 194C at the rate of 1 per cent. The advertising agencies shall have to deduct tax at source at the rate of 5 per cent under section 194J while making payments to artists, actors, models, etc. If payments are made for production of programmes for the purpose of broadcasting and telecasting, these payments will be subjected to TDS @ 2 per cent. Even if the production of such programmes is for the purpose of preparing advertisement material, not for immediate advertising, the payment will be subject to TDS at the rate of 2 per cent.

Question 4 : Where the tax is required to be deducted at source on payments made directly to the print media/Doordarshan for release of advertisements ?

Answer : The payments made directly to print and electronic media would be covered under section 194C as these are in the nature of payments for purposes of advertising. Deduction will have to be made at the rate of 1 per cent. It may, however, be clarified that the payments made directly to Doordarshan may not be subjected to TDS as Doordarshan, being a Government agency, is not liable to income-tax.

Question 5 : Whether a contract for putting up a hoarding would be covered under section 194C or 194-I of the Act ?

Answer : The contract for putting up a hoarding is in the nature of advertising contract and provisions of section 194C would be applicable. It may, however, be clarified that if a person has taken a particular space on rent and thereafter sub lets the same fully or in part for putting up a hoarding, he would be liable to TDS under section 194-I and not under section 194C of the Act.

Question 6 : Whether payment under a contract for carriage of goods or passengers by any mode of transport would include payment made to a travel agent for purchase of a ticket or payment made to a clearing and forwarding agent for carriage of goods ?

Answer : The payments made to a travel agent or an airline for purchase of a ticket for travel would not be subjected to tax deduction at source as the privity of the contract is between the individual passenger and the airline/travel agent, notwithstanding the fact that the payment is made by an entity mentioned in section 194C(1). The provision of section 194C shall, however, apply when a plane or a bus or any other mode of transport is chartered by one of the entities mentioned in section 194C of the Act. As regards payments made to clearing and forwarding agent for carriage of goods, the same shall be subjected to tax deduction at source under section 194C of the Act.

Question 7 : Whether a travel agent/clearing and forwarding agent would be required to deduct tax at source from the sum payable by the agent to an airline or other carrier of goods or passengers ?

Answer : The travel agent, issuing tickets on behalf of the airlines for travel of individual passengers, would not be required to deduct tax at source as he acts on behalf of the airlines. The position of clearing and forwarding agents is different. They act as independent contractors. Any payment made to them would, hence, be liable for deduction of tax at source. They would also be liable to deduct tax at source while making payments to a carrier of goods.

Question 8 : Whether section 194C would be attracted in respect of payments made to couriers for carrying documents, letters, etc. ?

Answer : The carriage of documents, letters, etc., is in the nature of carriage of goods and, therefore, provisions of section 194C would be attracted in respect of payments made to the couriers.

Question 9 : In case of payments to transporters, can each GR be said to be a separate contract, even though payments for several GRs are made under one bill ?

Answer : Normally, each GR can be said to be a separate contract, if the goods are transported at one time. But if the goods are transported continuously in pursuance of a contract for a specific period or quantity, each GR will not be a separate contract and all GRs relating to that period or quantity will be aggregated for the purpose of the TDS.

Question 10 : Whether there is any obligation to deduct tax at source out of payment of freight when the goods are received on "freight to pay" basis ?

Answer: Yes. The provisions of tax deduction at source are applicable irrespective of the actual payment.

Question 11 : Whether a contract for catering would include serving food in a restaurant/sale of eatables?

Answer : TDS is not required to be made when payment is made for serving food in a restaurant in the normal course of running of the restaurant/cafe.

Question 12 : Whether payment to a recruitment agency can be covered by section 194C ?

Answer : Provisions of section 194C apply to a contract for carrying out any work including supply of labour for carrying out any work. Payments to recruitment agencies are in the nature of payments for services rendered. Accordingly, provisions of section 194C shall not apply. The payment will, however, be subject to TDS under section 194J of the Act.

Question 13 : Whether section 194C would cover payments made by a company to a share registrar ?

Answer : In view of answer to the earlier question, such payments will not be liable for tax deduction at source under section 194C. But these will be liable to tax deduction at source under section 194J.

Question 14 : Whether FD commission and brokerage can be covered under section 194C ?

Answer : No

Question 15 : Whether section 194C would apply in respect of supply of printed material as per prescribed specifications ?

Answer : Yes.

Question 16 : Whether tax is required to be deducted at source under section 194C or 194J on payment of commission to external parties for procuring orders for the company’s product ?

Answer : Rendering of services for procurement of orders is not covered under the provisions of section 194C. However, rendering of such services may involve payment of fees for professional or technical services, in which case tax may be deductible under the provisions of section 194J.

Question 17 : Whether advertisement contracts are covered under section 194C only to the extent of payment of commission to the person who arranges release of advertisement, etc., or whether deduction is to be made on the gross amount including bill of media ?

Answer : Tax is to be deducted at the rate of 1 per cent of the gross amount of the bill.

Question 18 : Whether deduction of tax is required to be made under section 194C for sponsorship of debates, seminars and other functions held in colleges, schools and associations with a view to earn publicity through display of banners, etc., put up by the organisers ?

Answer : The agreement of sponsorship is, in essence, an agreement for carrying out a work of advertisement. Therefore, provisions of section 194C shall apply.

Question 19 : Whether deduction of tax is required to be made on payments for cost of advertisement issued in the souvenirs brought out by various organisations ?

Answer : Yes.

Question 20 : Whether payments made to a hotel for rooms hired during the year would be of the nature of rent ?

Answer : Payments made by persons, other individuals and HUFs for hotel accommodation taken on regular basis will be in the nature of rent subject to TDS under section 194-I.

Question 21 : Whether the limit of Rs. 1,20,000 per annum would apply separately for each co-owner of a property ?

Answer : Under section 194-I, the tax is deductible from payment by way of rent, if such payment of the payee during the year is likely to be Rs. 1,20,000 or more. If there are a number of payees, each having definite and ascertainable share in the property, the limit of Rs. 1,20,000 will apply to each of the payee/co-owner separately. The payers and payees are, however, advised not to enter into sham agreements to avoid TDS provisions.

Question 22 : Whether the rent paid should be enhanced for notional income in respect of deposit given to the landlord ?

Answer : The tax is to be deducted from actual payment and there is no need of computing notional income in respect of a deposit given to the landlord. If the deposit is adjustable against future rent, the deposit is in the nature of advance rent subject to TDS.

Question 23 : Whether payments made by company taking premises on rent but styling the agreement as a business centre agreement would attract the provisions of section 194-I ?

Answer : The tax is to be deducted from rent paid, by whatever name called, for hire of a property. The incidence of deduction of tax at source does not depend upon the nomenclature, but on the content of the agreement as mentioned in clause (i) of Explanation to section 194-I.

Question 24 : Whether in a case of a composite arrangement for user of premises and provision of manpower for which consideration is paid as a specified percentage of turnover, section 194-I of the Act would be attracted ?

Answer : If the composite arrangement is in essence the agreement for taking premises on rent, the tax will be deducted under section 194-I from payments thereof.

Question 25 : Whether the receipts prior to 1-7-1995 are to be aggregated to determine limit of Rs. 20,000 for each financial year ?

Answer : Clause (B ) of proviso to section 194J(1) makes it clear that tax shall be deducted at source if the aggregate sums credited or paid or likely to be credited or paid during the financial year are likely to exceed Rs. 20,000. Therefore, in regard to financial year 1995-96, the limit of Rs. 20,000 will have to be worked out taking into account all the payments from 1-4-1995 to 31-3-1996. But the deduction of tax at source would be made at the specified rate only from the payment made on or after 1-7-1995.

Question 26 : Whether payments made to a hospital for rendering medical services will attract deduction of tax at source under section 194J ?

Answer : Yes.

Question 27 : Whether commission received by the advertising agency from the media would require deduction of tax at source under section 194J of the Act ?

Answer : Yes.

Question 28 : Whether the services of a regular electrician on contract basis will fall in the ambit of technical services to attract the provisions of section 194J of the Act? In case the services of the electrician are provided by a contractor, whether the provisions of section 194C or 194J would be applicable ?

Answer : The payments made to an electrician or to a contractor who provides the service of an electrician will be in the nature of payment made in pursuance of a contract for carrying out any work. Accordingly, provisions of section 194C will apply in such cases.

Question 29 : Whether a maintenance contract including supply of spares would be covered under section 194C or 194J of the Act ?

Answer : Routine, normal maintenance contracts which includes supply of spares will be covered under section 194C. However, where technical services are rendered, the provision of section 194J will apply in regard to tax deduction at source.

Question 30 : Whether the deduction of tax at source under sections 194C and 194J has to be made out of the gross amount of the bill including reimbursements or excluding reimbursement for actual expenses ?

Answer : Sections 194C and 194J refer to any sum paid. Obviously, reimbursements cannot be deducted out of the bill amount for the purpose of tax deduction at source.

Question 31 : Whether TDS from income in respect of units is applicable to dividend or is it applicable to capital appreciation distributed at the time of repurchase/redemption of the units ?

Answer : The provisions of section 194K regarding deduction of tax at source from income in respect of units are applicable to periodical distribution of income, which is in the nature of dividend. These provisions do not apply to capital gains arising at the time of repurchase or redemption of the units.

Question 32 : Whether TDS on reinvestment term deposit should be made on accrual basis, which is quarterly, or once in a financial year ?

Answer : Tax has to be deducted at source at the time of credit of interest to the account of the payee or at the time of payment thereof, whichever is earlier. If credit is given to the account of the payee or payment is made to him annually, the tax may be deducted annually. It may be clarified that a credit to interest payable account or suspense account, etc., is also taken as credit to the account of the payee, even though this credit is not reflected separately in the payee’s account.

Question 33 : Whether variable deposit schemes are liable to deduction of tax at source from interest?

Answer : Under section 194A, tax is to be deducted from interest from banks on time deposits. As variable deposits are in the nature of time deposits, tax is deductible at source from interest on such deposits.

Question 34 : Whether tax has to be deducted from principal on renewal of deposits made after 1-7-1995 but which matured on or before 30-6-1995 when the renewal is made retrospectively?

Answer : Tax has to be deducted from interest credited or paid, whichever is earlier, on time deposits with a bank made on or after 1-7-1995. When a time deposit is renewed retrospectively, the relevant date for deciding the applicability of section 194A would be that date of renewal. Thus, if the time deposit is renewed after 1-7-1995, the tax deduction at source will have to be made from interest paid or credited in respect of such a time deposit.

Circular : No. 715, dated 8-8-1995.

Clarification regarding question No. 20

1. Circular No. 715 dated 8-8-1995 has been issued by the Central Board of Direct Taxes to clarify various provisions relating to tax deduction at source under various provisions of the Income-tax Act. Question No. 20 of the aforesaid Circular related to applicability of the provisions of section 194-I of the Income-tax Act in respect of payments made to a hotel for rooms. The relevant question and answer is reproduced below :—

". . . Q. No. 20 : Whether payments made to a hotel for rooms hired during the year would be of the nature of rent?

Ans. : Payments made by persons other than individuals and HUF for hotel accommodation taken on regular basis will be in the nature of rent subject to TDS under section 194-I." [Emphasis supplied]

In this context, doubts have been raised as to what constitutes "hotel accommodation taken on regular basis" for the purpose.

2. The Board have considered the matter. First, it needs to be emphasised that the provisions of section 194-I do not normally cover any payment for rent made by an individual or HUF except in cases where the total sales, gross receipts or turnover from business and profession carried on by the individual or HUF exceed the monetary limits specified under clause (a) or clause (b) of section 44AB. Where an employee or an individual representing a company (like a consultant, auditor, etc.) makes a payment for hotel accommodation directly to the hotel as and when he stays there, the question of tax deduction at source would not normally arise (except where he is covered under section 44AB as mentioned above) since it is the employee or such individual who makes the payment and the company merely reimburses the expenditure.

Furthermore, for purposes of section 194-I, the meaning of ‘rent’ has also been considered. "‘Rent’ means any payment, by whatever name called, under any lease . . . or any other agreement or arrangement for the use of any land. . . ." [Emphasis supplied]. The meaning of ‘rent’ in section 194-I is wide in its ambit and scope. For this reason, payment made to hotels for hotel accommodation, whether in the nature of lease or licence agreements are covered, so long as such accommodation has been taken on ‘regular basis’. Where earmarked rooms are let out for a specified rate and specified period, they would be construed to be accommodation made available on ‘regular basis’. Similar would be the case, where a room or set of rooms are not earmarked, but the hotel has a legal obligation to provide such types of rooms during the currency of the agreement.

3. However, often, there are instances, where corporate employers, tour operators and travel agents enter into agreements with hotels with a view to merely fix the room tariffs of hotel rooms for their executives/guests/customers. Such agreements, usually entered into for lower tariff rates, are in the nature of rate-contract agreements. A rate-contract, therefore, may be said to be a contract for providing specified types of hotel rooms at pre-determined rates during an agreed period. Where an agreement is merely in the nature of a rate contract, it cannot be said to be accommodation ‘taken on regular basis’, as there is no obligation on the part of the hotel to provide a room or specified set of rooms. The occupancy in such cases would be occasional or casual. In other words, a rate-contract is different for this reason from other agreements, where rooms are taken on regular basis. Consequently, the provisions of section 194-I while applying to hotel accommodation taken on regular basis would not apply to rate contract agreements.

Circular : No. 5/2002, dated 30-7-2002

Posted by: Hardeep Singh. For any query or any suggestions visit Contact Us section 

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FREQUENTLY ASKED TAX QUESTIONS BY QUALIFIED FOREIGN INVESTORS (QFIs)

PRESS RELEASE, DATED 26-12-2012

Q.1. What is Permanent Account Number (PAN) Card?

Ans: Permanent Account Number (PAN) is a ten-digit alphanumeric number, issued by the Income Tax Department of India to any "person" to facilitate him in making tax payments filing, returns and claiming refunds. The number, along with other relevant details, is printed on a card called PAN card.

Q.2. Are QFIs required to obtain PAN Card to comply with tax norms in India?

Ans: Yes. Under the current provisions, QFIs would be required to obtain PAN card. The process of obtaining a PAN card is simple, and user friendly. An application can be filed by a foreign investor online and the process can be completed within 2 to 3 weeks.

Q.3. What are the benefits to QFIs of having a PAN Card?

Ans: QFIs who have a PAN card would be eligible for tax deduction at source (TDS) as per the rates applicable in the Double Taxation Avoidance Treaty (DTAA) of the country of which the QFI is a resident, if it is more beneficial than the rate prescribed under the domestic law. If a QFI has not obtained a PAN card it would be subject to a higher rate of tax deduction under Section 206 AA of Income Tax Act, 1961.

Q.4. How QFIs can apply for a PAN Card?

Ans: In order to facilitate QFIs in applying for a PAN as well as to comply with Know your Customer (KYC) norms of the Securities Exchange Board of India (SEBI), a combined form (FORM 49 AA) has been notified by the Central Board of Direct Tax (CBDT). Form 49 AA and detailed instructions regarding how it is to be filled up are available at :

http://law.incometaxindia.gov.in/DITTaxmann/IncomeTaxRules/pdf/itr62form49 aa.pdf

http://law.incometaxindia.gov.in/DITTaxmann/IncomeTaxRules/pdf/Not58_2011. pdf

Q.5. Can QFIs make an On-line application for PAN Card?

Ans: Yes, application for allotment of PAN can be made online through the Internet. Further, requests for changes or correction in PAN data or request for reprint of PAN card (for an existing PAN) may also be made through the Internet. Online application can be made either through the portal of National Securities Depository Limited (NSDL) (https://tin.tin.nsdl.com/pan/index.html)

or portal of UTI Infrastructure Technology and Services Limited (UTITSL) (http://www.utitsl.co.in/utitsl/uti/newapp/new-pan-application.jsp). Supporting documents required to be submitted by QFIs to obtain PAN card are listed at the following link:

http://law.incometaxindia.gov.in/DITTaxmann/IncomeTaxRules/pdf/Not58_2011. pdf

Q.6. What are the attestation requirements for a QFI for obtaining PAN card?

Ans: For a QFI who is an individual, Rule 114 of the Income Tax Rules, 1961 read with Form No. 49AA, requires a copy of the passport to be filed (without any attestation), this will be taken as both proof of identity and proof of residence. For QFIs other than individuals, the process requires filing of copy of certificate of registration duly attested by an "apostille" or at the Indian Embassy in that country.

In order to meet the know you client (KYC) requirements as prescribed by Securities Exchange Board of India (SEBI), the list of documents to be submitted by a QFI for KYC are available at:

http://www.sebi.gov.in/cms/sebi_data/attachdocs/1340167306959.pdf

Q.7. What are the tax related responsibilities of Qualified Depository Participants (QDPs)?

Ans: In order to facilitate investments by QFIs, the QDPs have been assigned the responsibility to act as a single point of contact for QFIs for all purposes including tax. For tax purposes, a QDP will facilitate the QFI to obtain a PAN card. QDPs will be responsible for any withholding tax in India before making remittance to QFIs. QDPs will also be treated as a representative assessee/agent of the QFI. For this purpose QDPs would be required to submit a declaration that they have no objection to being treated as a representative assessee/agent of QFI. A QDP may ensure that the broker engaged by it for undertaking QFI transactions deducts and deposits tax at source failing which the QDP should deduct and deposit the tax on such transactions.

Q.8. Can QFIs claim refund from Income Tax Department in India?

Ans: Yes. QFIs can claim refund from Income Tax Department for which the QFI would have to file its return of Income in India for that year.

Q.9. Can a QFI carry forward losses over the years?

Ans: Yes. QFIs are allowed to carry forward losses over years provided the QFI files its return of income declaring the loss for the relevant year within the stipulated time limits.

Q.10. Whether profits earned by QFI from their investments in Indian securities market would be treated as Capital Gain or business income?

Ans: As per the Income-Tax Act, 1961, whether the profits earned from transaction in securities would be capital gains or business income will depend on facts and circumstances of each case like the number and frequency of transactions etc. Please refer to circular No.4/2007 dated 15/6/2007 issued by the Central Board of Direct Taxes.

Q.11. Whether QDPs should compute tax deduction at source (withholding tax) on QFI income for one settlement period on settlement basis or on transaction basis?

Ans: Currently, settlement on Indian stock exchanges is done at the end of every trading day. Tax deducted at source under the Income-tax Act, 1961 is to be deposited by the seventh day succeeding 

the end of each month. The withholding tax on QFI income will be computed on settlement basis and not on transaction basis since the stock broker would credit the net proceeds of all transactions to QFIs on settlement basis for one settlement period.

Q.12. For determining the tax deducted at source (withholding tax) liability, can QDPs set off losses of QFIs against profits earned on monthly basis in a given year?

Ans: As per TDS provisions, the deductor has to deduct tax either at time of payment of the amount or at time of credit of such amount (whichever is earlier). Therefore, any loss of current year available at such time of deducting tax would be eligible to be set off against the sum payable and the TDS shall be effected on net basis. However, TDS once effected cannot reduced by the deductor even if there is loss in subsequent transaction.

Example, in a given year, a QFI makes three settlements, it earns profit of Rs. 200 on day one settlement, incurs a loss of Rs. 250 on day two settlement and earns profit of Rs. 100 on day three settlement. The TDS would be deducted on credit of net profit of Rs 200 whereas, no TDS shall be effected against profit of Rs. 100 as at time of credit of Rs. 100 a loss of Rs. 250 is available for set off and net basis there is no amount chargeable to tax.

Q.13. For the purpose of computing tax deducted at source (withholding tax) Can QDPs set off in the case of QFIs, the profits earned in one security against losses earned in another security during a given year?

Ans: Yes. For computing tax deducted at source (withholding tax) QDPs can set off profits earned by the QFI in one security against losses earned in another security as long as these securities are subject to Securities Transaction Tax (STT). Therefore, this would not be applicable in case of QFI investments in bonds as bond transaction are not subject to Securities Transaction Tax Such setting off for computing tax deduction at source would therefore be permissible only in the case of listed securities and mutual fund Units and redemption by mutual funds as these are subject to STT. The set off would again be subject to the general principle that an earlier loss of current year can be set off against subsequent profit which is credited or paid to the QFI. However, if tax deduction at source (TDS) has already been effected for a particular credit or payment, it cannot be reduced by subsequent loss. A QFI is, however, eligible to claim refund of excess amount of tax deducted at source (withholding) by filing a return of income for the relevant year.

Q.14. For the purpose of computing tax deducted at source (TDS), can QFIs Set off of profits earned by a QFI in the current year against losses incurred in previous years?

Ans: No, A QDP cannot set off losses of a previous year of a QFI against profits earned in the current year by the QFI while computing the tax liability for deduction at source, which would therefore be based only on the profits of the year. However, QFIs can themselves set off their profits earned in the current year against losses incurred in previous years. For the purpose, the QFI would need to file its return of income within the time limits stipulated in the Income-tax Act, 1961. For this purpose, QFIs need to file return for the relevant year within the time limits stipulated in the Income-tax Act, 1961.

Q.15. What would be the applicable rates of taxation if a QFI comes from a jurisdiction with which India has a Double Taxation Avoidance Agreement (DTAA) as against one which comes from a non-DTAA Jurisdiction?

Ans: The applicable rates of taxation in the case of investment from a country will be at the rate provided in the Income-tax Act or the rate provided in the Double Taxation Avoidance Agreement, whichever is more beneficial to the investors.

Q.16. Whether the capital gains arising on sale of shares are computed in Indian currency or in other currency?

Ans: The capital gains arising on sale of shares shall be computed by converting the cost of acquisition, expenditure incurred and full value of consideration in the same currency, as was initially utilized for purchase of shares and the gains so computed shall be reconverted in India currency.

Q.17. Whether DTAA provisions will apply while deducting tax at source?

Ans: Yes. Also see answer to question No. 15.

Q.18. Will the QDPs be held responsible for withholding taxes against profits on mutual fund investments by QFI's?

Ans: Income from investment from mutual fund may arise by way of distribution of profits by the fund or by way of redemption by the fund or by way of sale of units of the fund. In case of distribution of profits by the mutual fund, the mutual fund itself pays tax on distribution of profits. In case of sale of units of the fund, the QDP would be required to withhold tax if the buyer of the mutual fund units has not deducted tax. In case of redemption of units by the fund or sale of units of the fund, the QDP would be required to withhold the tax.

Q.19. If the QFI is no longer the client of the QDP, then can the QDP be called upon to make good the shortfall in tax and liable to interest and penalty having acted in bonafide and good faith?

Ans: QDP, being a deductor, shall be liable for any short deduction or non-deduction of tax even after the QFI ceases to be the client of QDP.

Q.20. What are the deductible expenses that may be incurred by QFI for purchase & sale of shares and Mutual Funds?

Ans: The deductibility of expenses would depend on the fact that whether the income on the sale of shares is treated as business income or capital gains. In general if the income is treated as capital gains expenses like brokerage fees would be allowed.

Q.21. Whether QDP should treat residence certificate as a sufficient proof of residence and beneficial ownership of the shares in India by the QFI?

Ans: Prima facie, the Tax Residency Certificate is evidence of residence in a particular country and the QDP may rely on such a certificate. However, as per Explanatory Memorandum to the Finance Bill, 2012, the amended section 90 and 90A of the Income-tax Act makes submission of Tax Residency Certificate containing prescribed particular, as a necessary but not sufficient condition for availing benefits of the tax treaties.

Q.22. Whether the QDP is required to obtain an Income Tax Order under Section 195(2) of the Act for determining the income component (capital gains) on the sale of shares?

Ans: Central Board of Direct Taxes (CBDT) Circular No. 4/2009 dated 29/06/2009, clarifies that the term 'payer' also means a remitter. As the QDP is making the payment of the income to the QFI, the QDP could be considered as a 'payer' Under Section 195(2) of the Act, if any person responsible for paying any sum chargeable under the Act to a non-resident, considers that the whole of such sum would not be income chargeable in the case of the recipient, he may make an application to the Assessing Officer(AO) to determine the appropriate proportion to such sum on which tax is to be deducted (TDS).

The requirement of obtaining CA Certificate is only in the context of remittance of money outside India. It is not in the context of TDS liability. The QDP is custodian of all data in respect of transactions on which income has arisen to a QFI. It will also maintain the QFI account, wherein the QFIs' income is determined. Therefore, the QDP is supposed to deduct tax on the basis of sum chargeable to tax. In normal situations such as working out the capital gains on a transaction, there would not be any difficulty and QDP can itself determine the amount chargeable to tax and deduct tax thereon or take help of Chartered Accountant in this behalf. However, in case there is complexity in determining such income the QDP should approach the Assessing Officer for determination u/s 195(2). Even for other deductees, it is not mandatory that in each and every case, they should obtain 195(2) order before deducting TDS. However, in case a complex issue, it is advisable to do so. This is because the liability to deduct proper taxes remains on the deductor (i.e. QDP).

Q.23. For the purpose of computing tax deduction at source (withholding tax), what is the proof and declaration that the QDP can rely upon for allowing the full time benefit of a DTAA to a QFI?

Ans: There is no standard set of documents on the basis of which the DTAA treaty benefit can be said to have been rightly allowed. It depends on the facts of each case. The treaty benefit is to be claimed by the person concerned before it can be allowed. For this purpose, the QDP should obtain the Tax Residency Certificate from the QFI.

Q.24. Having relied on the documentations and given the treaty benefits, if later the same is held not allowable by the tax officer, can the QDP be held responsible and called upon to pay for any shortfall in tax, interest and penalties?

Ans: The liability to deduct and pay proper taxes remains that of the QDP as a deductor. Therefore, for any shortfall in tax QDP can be held responsible. The responsibility remains both for non-deduction or short deduction of tax if it is found that the treaty benefit have been incorrectly claimed or considered.

Q.25. What is the maximum number of years in which an assessment can be done or reopened in case of TDS returns filed by the QDP?

Ans: As the payment would be made to QFIs, who are non-residents, the Act does not prescribe any time limit for scrutiny of transaction for TDS purposes under section 201 of the Act.

Q.26. Can the QDP be held responsible for withholding of tax at source in case of a QFI on sale considerations received under an open offer or buy back of shares where the purchaser of the shares is responsible for withholding tax and complying with the TDS filings under the Act?

Ans: Under the Income-tax Act, any person responsible for paying to a non-resident (not being a company) or to a foreign company, any sum chargeable under the provisions of the Act, has to deduct tax at the time of credit of such income to the account of the payee or at the time of payment, whichever is earlier. The responsibility of tax deducted at source by the QDP in the case of sale consideration received by a QFI on account of an open offer or a buyback of shares would depend upon the facts of the case. In case the purchaser of shares is crediting the sum to the account of the QFIs or making payment to QFIs, the purchaser would be required to deduct the tax. However, if the QDP is crediting the sum to the account of the QFIs or making payment to the QFIs, the QDP would be required to deduct the tax. Please also refer to question no. 7.

Source: www.incometaxindia.gov.in
link: http://www.incometaxindia.gov.in/Pages/communications/circulars.aspx

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Accounting Standard 22: Accounting for taxes on Income

DEFERRED TAX (ASSETS AND LIABILITIES) [AS- 22]:

AS- 22: Accounting for Taxes on Income:

Applicability of Accounting Standard: Applicable for all enterprises.

Main gist of accounting standard:

The need for establishing a standard arises due to difference between profit computed for accounting purpose and that for tax purpose. As per this accounting standard, the income tax-expense should be treated just like any other expenses on accrual basis irrespective of the timing of payment of tax.

Tax Expense = Current Tax + Deferred Tax

Current tax is the amount of income tax determined to be payable (recoverable) in respect of the taxable income (tax loss) for a period. Deferred tax is the tax effect of timing difference.

The difference accounts for:

• Treatment of revenue and expenses as appearing in the Profit and Loss Account and as considered for the tax purpose.
• The amount of revenue or expenses as recognized in the Profit and Loss Account and as allowed for tax purpose.

The difference as arising in the above context gives rise to ‘deferred tax’ and it needs to be ensured that the tax charges in future accounting period is not vitiated. The difference in accounting profit and taxable profit can be broadly categorized into two categories:

1. Permanent difference: Permanent difference which originates in one period and do not reverse in subsequent periods. E.g. Personal expenses disallowed, interest/penalty disallowed as expense or tax-free agricultural income, various deductions under Section 10 of Income Tax Act, benefits/ reliefs under Section 80 of Income Tax Act in computing taxable income. Permanent differences do not result in deferred taxes.
2. Timing difference: Timing difference which originates in one period and is capable of reversal in subsequent period(s):
1. Difference in net block of fixed assets as per accounts and as per tax due to difference in the rate and method of depreciation.
2. Provision for doubtful debts and advances, provision for warranties, provision for Voluntary Retirement Scheme (VRS), provision for asset write-off, disallowed payments under Section 43 B of Income Tax Act, provision for excise liabilities, research expenditure (not weighted deduction which is a permanent difference), Section 350 deduction, amortization of deferred revenue expenditure, lease income.

Situations which leads to Deferred Tax:

Deferred tax is the tax effect due to timing difference. They arise due to the following reasons (situations):

• Accounting Income less than Tax Income.
• Accounting Income more than Tax Income.
• Income as per Accounts but loss as per Income Tax Act.
• Loss as per Accounts but income as per Income Tax Act.

The impact of such timing differences may lead to:

1) Deferred Tax Liability (DTL): Deferred Tax Liability (DTL) is postponement of tax liability, which states, “Save Now, Pay Later”.

                Journal Entry:-

                Profit and Loss A/c………Dr.

                       To Deferred Tax Liability A/c

2) Deferred Tax Asset (DTA): Deferred Tax Asset (DTA) is pay you tax liability in advance, which states, “Pay Now, Save Later”.

                Journal Entry:-

                Deferred Tax Asset A/c…….Dr.

                       To Profit and Loss A/c

In the year of reversing time difference, either Deferred Tax Liability (DTL) is written back to Profit and Loss Account or the Deferred Tax Asset (DTA) is revised by debiting Profit and Loss Account. For the recognition of Deferred Tax Asset (DTA), prudence should be applied. Such recognition is based on “reasonable certainty” that sufficient taxable income would be available in the future to realize the Deferred Tax Asset (DTA). In case of unabsorbed depreciation and carry forward losses, Deferred Tax Asset (DTA) should only be recognized to the extent that there is “virtual certainty” that in future sufficient taxable income would be available to realize the Deferred Tax Asset (DTA). Reasonable certainty shall be deemed to be in existence if the profitability of future taxable income is greater than 50%. Virtual certainty shall be deemed to be in existence only when the evidence suggests that there will be sufficient taxable income in the future.

Mandatory Disclosure to be made under AS-22:

1. Break up of the deferred tax asset/liability.
2. Deferred Tax Liability (DTL) should be shown after the head “Unsecured Loans” and Deferred Tax Asset (DTA) after the head “Investments” with a separate heading.

Taxes on Income:

• Income tax is computed in accordance with Accounting Standard 22 ‘Accounting for Taxes on Income (AS-22), notified by the Companies (Accounting Standards) Rules, 2006. Tax expenses are accounted in the same period to which the revenue and expenses relate.
• Provision for current income tax is made for the tax liability payable on taxable income after considering tax allowances, deductions and exemptions determined in accordance with the prevailing tax laws. The differences between the taxable income and the net profit or loss before tax for the year as per the financial statements are identified and the tax effect of timing differences at the end of the accounting year based on effective tax rates substantively enacted by the Balance Sheet date.
• Deferred tax assets, other than on unabsorbed depreciation or carried forward losses, are recognized only if there is reasonable certainty that they will be realized in the future and are reviewed for the appropriateness of their respective carrying values at each Balance Sheet date. In situations where the Company has unabsorbed depreciation or carried forward losses, deferred tax assets are recognized only if there is virtual certainty supported by convincing evidence that the same can be realized against future taxable profits.

Interpretation of AS – 22:

1. There is a need for this accounting standard since there is a difference between profit computed for accounting purpose and that for income tax purposes.
2. The income tax expense should be treated just like any other expenses on accrual basis irrespective of the timing of payment of tax.
3. The difference in accounting profit and taxable profit can be broadly categorized into two categories: permanent difference which originates in one period and do not reverse in subsequent periods and timing difference which originates in one period and is capable of reversal in subsequent period(s). 
4. Deferred Tax Liability (DTL) is postponement of tax liability whereas Deferred Tax Asset (DTA) is payment of your tax liability in advance.
5. In case of Deferred Tax Liability (DTL) it should be shown with a separate heading after the head “Unsecured Loans” in the Balance Sheet.

-Ketan Kapoor. To know more about the authors, visit contact us section.

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