Concepts of income taxation

The income tax system in India is unitary. Income less permissible expenses from all sources (other than long-term capital gains) of each tax payer s aggregated and subject to tax at a flat rate in the case of companies and partnership firms and at progressives rates in the case of other taxpayers. Long-term capital gains are concessionally taxed at lower rates.

Residents are taxed on their worldwide income. Subject to treaty exemptions, nonresidents are taxed only on income that is received in India or that arises in India or is deemed to arise in India.

India follows the "classical system," under which corporate income is taxed both to the corporation and upon distribution to the shareholders as dividends. However, dividends received by one domestic company from another domestic company are not taxed in the hands of the recipient company to the extent it distributes the dividends to its shareholders within the time allowed for filing its tax return.

Geographical source of income

Generally, income arises in India if it becomes due in India. This depends on where the income-producing asset is located, where the services giving rise to the income are performed, where the sale is effected, and other considerations. In addition, the Income Tax At specifically mentions that the following income is deemed to arise in India.

1. Income arising directly or indirectly through or from any business connection in India; through or from any property, asset or source of income in India; or through the transfer of a capital asset situated in India.
2. Salaries earned in India, even if paid outside India.
3. Dividends paid by Indian companies outside India.
4. Interest, royalties or technical service fees payable by the government.
5. Interest, royalties or technical service fees payable by persons other than the government unless the funds borrowed, the patent, the technical information, etc., are utilized in a business outside India or for earning income from a source outside India.

These categories of deemed Indian-source income are subject to the following qualifications.

1. In the case of a business with some operations not performed in India, the income deemed to arise in India is only that part or the income reasonably attributable to the operations performed in India.
2. In the case of nonresidents, no income is deemed to arise in India from operations that are confined to the following:
a. Purchase of goods in India for the purpose of export;
b. Collection of news for transmission out of India in the case of a nonresident publisher of newspapers, magazines or journals;
c. Shooting of cinematographic films in India by foreigners and nonresident firms or companies not having any partner or shareholder who is an Indian citizen or Indian resent; and
d. Transfer of rights in computers and software by a nonresident manufacturer along with computer-based equipment under an approves scheme of the government of India, against lump-sum payment.

Classes of taxpayer

The income tax law classifies taxpayers as follows.

1. Companies.
2. Firms (partnerships).
3. Associations of persons or bodies of individuals.
4. Individuals.
5. Hindu undivided families.
6. Local authorities (municipal bodies).
7. Artificial juridical persons.

Taxable income

Income is classified into the following five heads, depending on its source.

1. Income from salaries.
2. Income from house properties.
3. Profits and gains from business or profession.
4. Capital gains.
5. Income from other sources.

Specific provisions govern the computation of net income from each source. Gains on the transfer of capital assets (other than long-term capital gains) are aggregated with the net income from other heads to arrive at the total taxable income. Longer-term gains are taxed at lower rates.

Tax year

For tax year-end must be March 31. This is known as the previous year. The fiscal year, starting on the April 1 immediately following the previous year, is known as the corresponding assessment year. The taxable income of the previous year is subject to tax at the rates in force for the corresponding assessment year.

Tax-free zones

To encourage foreign exchange earnings, the following free-trade zones in which industrial undertakings can be set up for manufacture and processing for exports, have been notified.

1. Santa Cruz Electronics Export Processing Zone (SEEPZ). Mumbai (Bombay), Maharashtra.
2. Kandala Free Trade Zone (KAFTZ), Gujrat.
3. Falta Export Processing Zone (FEPZ), West Bengal.
4. Cochin Export Processing Zone (CEPZ), Kerala.
5. NOIDA Export Processing Zone (NEPZ), Uttar Pradesh (bordering New Delhi).
6. Madras Export Processing Zone (MEPZ), Tamil Nadu.
7. Surat Export Processing Zone, Gujrat.
8. Vishakhapatnam Export Processing Zone, Andhra Pradesh.

Industrial undertakings set up in these zones are exempt from income tax for any five consecutive years during the first eight years of their operation, provided they export at least 75 percent of their total turnover of each year. Similar exemption is also granted to 100 percent export-oriented undertakings (EOUs) set up elsewhere and to units set up in notified Software Technology Parks (STPs) and Electronic Hardware Technology Parks (EHTPs). Other exporters also enjoy specified deductions for export profits in computing their taxable income.

Tax holidays

Both new industrial undertakings located in the specified "backward states" or districts and new industrial undertakings set up for generation or generation and distribution of power are entitled to full tax exemption of profits for the first five years of operation, followed by partial tax exemption of 30 percent (for companies) of the profits of the next five years. Similar exemption is available to enterprises carrying on the business of developing, maintaining and operating a notified "infrastructure facility" with respect to profits land gains spread over any 10 consecutive years falling within the first 12 years.

  

CAPITAL TAXATION