Tag: 5 International Tax & Regulation Osmania University B.com Notes

An Income Tax penalty is a punitive measure which applies to assessees who make default in compliance with the Income Tax Act. The Act has introduced various penalties for contraventions committed by taxpayers. The penalty prescribed as per the Income Tax Act can either be mandatory or leviable at the discretion of a tax authority. In this article, the various income tax penalties are discussed.

Audit and Audit Report

• If the assessee fails to get his accounts audited, obtain audit report, or furnish report of such auditor, a penalty will be leviable at the ₹1,50,000 or ½% of the total sale/ Turnover/ gross receipts whichever is lesser.
• Failure of assessee to furnish Audit report related to foreign transaction, a penalty @ ₹1,00,000 will be payable.

TDS/TCS

• Where a person fails to deduct tax at source, he will be liable to pay a penalty equal to the amount of tax which he has failed to deduct/ pay.
• Where a person fails to collect tax at source, he will be liable to pay a penalty equal to the amount of tax which he has failed to collect.
• Failure to furnish TDS/TCS statement or furnishing incorrect statements, shall attract a penalty ranging from ₹10,000 to ₹1,00,000.
• Failure to furnish information/ furnishing inaccurate information related to TDS deduction related regarding Non-residents shall attract a penalty of ₹100,000.

Penalty for Failure to Comply with Notice

According to the Income Tax Act, an Income Tax Assessing Officer is allowed to issue a notice demanding the taxpayer to file an income tax return. The officer can demand the assessee to produce documents pertaining to an income tax assessment. If a taxpayer may fail to comply with a notice from an Income Tax Officer. In such cases, the taxpayer shall be liable for a penalty of Rs.10,000 for each instance of failure to comply. The officer may also require the taxpayer to furnish in writing any information. The taxpayer should get the accounts audited or re-audited by a Chartered Accountant.

Undisclosed income

• Where the income determined includes undisclosed income, a penalty @10% is payable. However, no such penalty will be leviable, if such income was included in the return and tax was paid before the end of the relevant previous year.
• Where Search has been initiated on/ after 1/7/2012 but before 15/12/2016,
• If undisclosed income is admitted during the course of search and assessee pays tax and interest and files return, a penalty @ 10% of such undisclosed income is payable.
• If undisclosed income is not admitted but the same is furnished in the return filed after such search, 20% of such undisclosed income is payable.
• In all other cases, penalty is leviable @ 60%

Penalty for Concealing Income

The taxpayer may endeavour to reduce his tax liability by concealing income or by furnishing inaccurate particulars of income. In such cases, a penalty can be levied by the Assessing Officer. Penalty for such contravention shall be 100% to 300% of the tax evaded.

Penalty for Not Maintaining Book of Accounts

The Income-tax Act mentions that a taxpayer is bound by the need to maintain books of account. The taxpayer may fail to maintain books of account. In such cases a penalty of up to Rs.25000 is applicable.

Default in making payment of tax

The amount of penalty leviable will be as determined by the Assessing Officer. However, the amount will not exceed the amount of tax in arrears.

Income Tax Return (ITR) is a form in which the taxpayers file information about his income earned and tax applicable to the income tax department.

The department has notified 7 various forms i.e. ITR 1, ITR 2, ITR 3, ITR 4, ITR 5, ITR 6 & ITR 7 till date.Every taxpayer should file his ITR on or before the specified due date. The applicability of ITR forms varies depending on the sources of income of the taxpayer, the amount of the income earned and the category the taxpayer like individuals, HUF, company, etc.

if your gross annual income is more than the basic exemption limit as specified below:

Types of Income Tax payers

The Income tax Act has classified the types of taxpayers in categories so as to apply different tax rates for different types of taxpayers.

Taxpayers are categorized as below:

• Individuals, Hindu Undivided Family (HUF), Association of Persons (AOP) and Body of Individuals (BOI)
• Firms
• Companies

ITR-1 OR SAHAJ

This Return Form is for a resident individual whose total income for the AY 2021-22 includes:

Income from Salary/ Pension.

• Income from One House Property (excluding cases where loss is brought forward from previous years).
• Income from Other Sources (excluding Winning from Lottery and Income from Race Horses)
• Agricultural income up to Rs.5000.

Types of Income / Heads of Income

Everyone who earns or gets an income in India is subject to income tax.(Yes, be it a resident or a non-resident of India ).For simpler classification, the Income tax department breaks down income into five main heads:

Interest Income

Interest that gets accumulated in your savings bank account must be declared in your tax return under income from other sources. Do note that bank does not deduct TDS on savings bank interest. Interest from both fixed deposit and recurring deposits is taxable while interest from savings bank account and post office deposits are tax-deductible to a certain extent. But they are shown under income from other sources. Interest income from a savings bank account or a fixed deposit or from a post office savings account are all shown under this head.

Deduction on Interest Income Under Section 80TTA

For a residential individual (age of 60 years or less) or HUF, interest earned upto Rs 10,000 in a financial year is exempt from tax. The deduction is allowed on interest income earned from:

• Savings account with a bank.
• Savings account with a co-operative society carrying on the business of banking.
• Savings account with a post office.

Avoiding TDS on Fixed Deposits

Banks are required to deduct tax when interest income from deposits held in all the bank branches put together is more than Rs.40,000 in a year (Prior to FY 2019-20, it was Rs.10,000). A 10% TDS is deducted if PAN details are available. It is 20% if the bank does not have your PAN details. The details of TDS deducted on Fixed Deposit Interest is in the Form 26AS. If your total income is below the taxable limit, you can avoid tax deduction on fixed deposits by submitting Form 15G and Form 15H to the bank requesting them not to deduct any TDS. Form 15H is for senior citizens (60 years or older); Form 15G is for everybody else. These forms are for residents only and for those whose taxes add up to zero. These forms must be submitted at the start of the financial year. If you missed submitting them, then you can claim a refund by filing an income tax return. These forms are valid for one year only. Therefore, they must be submitted each year to keep banks from deducting tax.

Tax on Fixed Deposits

Fixed deposit interest that you receive is added along with other income that you have such as salary or professional income, and you’ll have to pay tax on that income at a tax rate that’s applicable to you. TDS is deducted on interest income when it is earned, though it may not have been paid. Example: The bank will deduct TDS on interest accrued each year on a FD for 5 years. Therefore, it is advisable to pay your taxes on an annual basis instead of doing it only when the FD matures. Senior citizens, with effect from 1 April 2018, will enjoy an income tax exemption upto Rs 50,000 on the interest income they receive from fixed deposits with banks, post offices etc under Section 80TTB.

Dividend

Dividend usually refers to the distribution of profits by a company to its shareholders.

However, in view of Section 2(22) of the Income-tax Act, the dividend shall also include the following:

(a) Distribution of accumulated profits to shareholders entailing release of the company’s assets.

(b) Distribution of debentures or deposit certificates to shareholders out of the accumulated profits of the company and issue of bonus shares to preference shareholders out of accumulated profits.

(c) Distribution made to shareholders of the company on its liquidation out of accumulated profits.

(d) Distribution to shareholders out of accumulated profits on the reduction of capital by the company.

(e) Loan or advance made by a closely held company to its shareholder out of accumulated profits.

Tax rate on dividend income

The dividend income shall be chargeable to tax at normal tax rates as applicable in case of an assessee except where a resident individual, being an employee of an Indian company or its subsidiary engaged in Information technology, entertainment, pharmaceutical or bio-technology industry, receives dividend in respect of GDRs issued by such company under an Employees’ Stock Option Scheme. In such a case, dividend shall be taxable at concessional tax rate of 10% without providing for any deduction under the Income-tax Act. However, the GDRs should be purchased by the employee in foreign currency.

Taxable in the hands of resident shareholder

A person can deal in securities either as a trader or as an investor. The income earned by him from the trading activities is taxable under the head business income. Thus, if shares are held for trading purposes then the dividend income shall be taxable under the head business or profession. Whereas, if shares are held as an investment, then income arising in nature of dividend shall be taxable under the head other sources.

The income, taxable under the head PGBP, is computed in accordance with the method of accounting regularly followed by the assessee. For the purpose of computation of business income, a taxpayer can follow either mercantile system of accounting or cash basis of accounting. However, the method of accounting employed by the assessee does not affect the basis of charge of dividend income as Section 8 of the Act provides that final dividend including deemed dividend shall be taxable in the year in which it is declared, distributed or paid by the company, whichever is earlier. Whereas, interim dividend is taxable in the previous year in which the amount of such dividend is unconditionally made available by the company to the shareholder. In other words, interim dividend is chargeable to tax on receipt basis.

A tax credit is a tax incentive which allows certain taxpayers to subtract the amount of the credit they have accrued from the total they owe the state. It may also be a credit granted in recognition of taxes already paid or a form of state support.

Income tax systems often grant a variety of credits to individuals. These typically include credits available to all taxpayers as well as tax credits unique to individuals. Some credits may be offered for a single year only.

Low income subsidies

Several income tax systems provide income subsidies to lower income individuals by way of credit. These credits may be based on income, family status, work status, or other factors. Often such credits are refundable when total credits exceed tax liability.

Tax credit is an amount that offsets the overall tax liability of a person. It is basically the sum that can be subtracted from the total payable tax by an individual. Tax credits are different from deductions as deductions are applicable indirectly, i.e. they help in reducing the base taxable amount of an individual, whereas tax credits directly reduce the amount of liability irrespective of the base tax liability of the tax player.

Foreign Tax Credit

Foreign tax credit is available to Indians as per the Double Taxation Avoidance Agreement (DTAA), which India maintains with more than 80 countries worldwide. According to this agreement, if you are a resident Indian with income from abroad, you will be levied taxes in both the countries. To avoid double payment, DTAA allows for tax credits in the country of residence if the host country has deducted TDS on income. This credit can then be used to reduce the amount of payable tax in the country.

Child Tax Credit

There are no specific laws regarding child tax credits in India. However, there are various exemptions and deductions that can be claimed if you have a child.

Income Tax Credit

Income tax credit is a popular form of tax credit. If an individual is invariably charged more tax than their actual liabilities due to various factors, then the excess amount is available as tax credit to the individual. This credit can be adjusted against future tax liabilities in an absolute manner, i.e. the credit is entirely deducted from the payable tax amount regardless of the individual’s tax bracket or liabilities.

Input Tax Credit

Input tax credit is available for manufacturers and dealers. These taxpayers are entitled to tax credit on inputs purchased through the course of manufacture. Similarly, a trader will receive input tax credit on goods purchased for the purpose of reselling. The tax credits are available on capital goods purchases made within the state, and only those goods that are involved in the processing or manufacture are applicable under this credit.

This tax credit is state-specific. If the final product is sold outside the state of manufacture, the input tax credit has to be reversed to authorities. Also, if the final product has tax exemptions, the input tax credit will not be applicable. The tax credit is usually spread over a period of 3 years; however, rules vary according to individual states.

Tax incentives for undertakings other than infrastructure development undertakings

If certain conditions are met, a tax holiday is permitted on the profits earned by an undertaking engaged in any of the following:

• Integrated business of handling, storage, and transportation of food grains.
• Commercial production or refining of mineral oils.
• Processing, preservation, and packaging of fruits or vegetables.
• Operating and maintaining a hospital in a rural area.