Tax Advisory

Tax Advisory Service

We were set up in early 2016 to provide a trusted source of trustworthy expat financial advice by arranging referrals to professional, regulated and fully qualified International Financial Advisers to English speaking expatriates Worldwide. We did this after seeing evidence of more and more expats around the World being ripped off by unregulated or simply unscrupulous advisers.

We act as a vetting service to ensure that any adviser we pass on to a client is bona fide, and working under a proper licence in a tightly regulated jurisdiction. Such firms will have their own money locked in a kind of bond with their local regulator (via a mandatory capital adequacy requirement for the maintenance of the licence) and they therefore have something to protect and cannot run away if they receive many complaints. However this is only relevant if the jurisdiction they are licensed in takes complaints very seriously, so we take this into consideration as well.

Personal Tax Planning

Why should I pay tax on your income?

Clubbing of income is an important principle under Income tax law. Clubbing provisions have been inserted with a view to make tax avoidance difficult and to give clarity on the actual tax liability an individual would face in certain situations.

In general a person is taxed on the income earned by him/her.Nevertheless there are some special circumstances when incomes of other persons are clubbed together in the hands of the assessee. For example,incomes of minor children are clubbed with the incomes of their parents.

Clubbing Provisions

Sections 60 to 64 of the Income Tax act contain various provisions relating to clubbing of income. Situations and circumstances where incomes may be clubbed are listed below.

Transfer of income without transfer of asset

Earnings are clubbed in cases where incomes alone are transferred without transfer of the asset producing the income.For example,when rents generated by a building are given to another person while the building continues to be owned by the transferor.

Revocable transfer

Similarly when the transfer of an asset is revocable, that is, the transferor directly or indirectly exercises control/right over the asset transferred or over the income from the asset.As per Section 61 of the Income Tax act, if a transfer is held to be a revocable, then income from the asset covered under revocable transfer is taxed in the hands of the transferor. The provisions of section 61 will not apply in case of a transfer by way of trust which is not revocable during the life time of the beneficiary or a transfer which is not revocable during the lifetime of the transferee.

Remuneration received by spouse

Remuneration received by spouse from a concern in which the individual is substantially interested will be clubbed in the hands of the individual.The conditions for this to happen are that the spouse should be employed by the concern and he//she is employed without any technical, professional knowledge or experience; that is, remuneration is not justified. An individual shall be deemed to have substantial interest in any concern, if such individual alone or along with his relatives beneficially holds at any time during the previous year 20% or more of the equity shares (in case of a company) or is entitled to 20% of profit (in case of concern other than a company).

Assets transferred to spouse without adequate consideration

Income from assets transferred to spouses without adequate consideration can be clubbed in the hands of the individual.Income from transfer of house property without adequate consideration will also attract clubbing provisions, however, in such a case clubbing will be done as per section 27 and not under section 64(1)(iv). The clubbing provisions of section 64(1)(iv) will apply even if the form of asset(from cash to securities or vice versa) is changed by the transferee-spouse.

When clubbing provisions do not apply in case assets transferred to spouse
The clubbing provisions of section 64(1)(iv) are not applicable in the following situations:

If the transfer of asset is for adequate consideration;
If the transfer of asset is in connection with an agreement to live apart;
If the asset is transferred before marriage, no income will be clubbed even after marriage, since the relation of husband and wife should exist both at the time of transfer of asset and at the time of accrual of income;
If on the date of accrual of income, transferee is not spouse of the transferor (i.e. the relation of husband and wife does not exist).

Assets transferred to son’s wife without adequate consideration

If an individual transfers assets to his/her son’s wife income arising from that asset would be clubbed in the hands of the individual. As per section 64(1)(vi), if an individual transfers (directly or indirectly) his/her asset to his/ her son’s wife otherwise than for adequate consideration, then income from such asset will be clubbed with the income of the individual (i.e., transferor being father-in-law/mother-in-law).The provisions of clubbing will apply even if the form of asset is changed by the transferee-daughter-in-law. The clubbing provisions will not apply if the transfer is made before the date of marriage or if on the date of accrual of income the relation of father-in-law/mother-in-law and daughter-in-law does not exist. Assets transferred to any person for the benefit of spouse or for the benefit of son’s wife without adequate consideration Even assets transferred for inadequate consideration to other persons, or association of persons, the income from which benefits spouse or son’s wife can be clubbed with the income of the transferor.

Minor child’s income

The income of a minor child is clubbed with the income of his/her parent whose income (excluding minor’s income) is higher. However income of minor child earned on account of manual work or any activity involving application of his/her skill, knowledge, talent, experience, etc. will not be clubbed with the income of his/her parent. However, accretion from such income will be clubbed with the income of parent of such minor. If the marriage of parents does not sustain, then minor’s income will be clubbed with the income of parent who maintains the minor. These provisions do not apply to a minor suffering from a disability.

Transfer of assets to Hindu Undivided Family

According to the income tax act, section 64(2), when an individual, being a member of HUF, transfers his property to the HUF otherwise than for adequate consideration or converts his property into the property belonging to the HUF (it is done by impressing such property with the character of joint family property or throwing such property into the common stock of the family), then clubbing provisions will apply as follows: Before partition of the HUF, entire income from such property will be clubbed with the income of transferor. After partition of the HUF, such property is distributed amongst the members of the family. In such a case income derived from such property by the spouse of the transferor will be clubbed with the income of the individual and will be charged to tax in his hands.

Tips to Save Capital Gains Tax

Capital Gains tax is a tax on the gains made by assesses while selling assets. It does not relate to one’s income. As such it has a special treatment in the Income tax act. Since the amounts involved are generally high, one must take care in making investments in the most tax efficient way.

Basically capital gain is calculated as the difference between the consideration or sale price received, as reduced by the purchase cost. The act allows a cost acquisition indexation which is designed to offset for inflation in the years between purchase and sale of an asset. By this the original price of the asset, for tax calculation purposes, is boosted by an incremental annual percentage specified by the department. Hence the purchase price for calculating tax will be more than the actual price paid. Cost of improvements made to the asset is also reduced from the consideration received. This relates particularly to sale of real estate assets.

Computation of Capital Gains/Losses
Computation of Short term capital gain:
Full value of consideration
Less:

Expenses incurred wholly and exclusively with sale or transfer

Cost of acquisition

Gross Short Term Capital Gain

Exemptions under sec. 54B/54D54G/54GA

Equals:

Net Short Term Capital Gain

On which: Tax as per normal income tax slabs

Long Term Capital Gains

Full value of consideration

Less:

Expenses incurred wholly and exclusively with sale or Transfer

Indexed cost of acquisition

Indexed cost of improvement

Equals:

Gross Long Term Capital Gains

Less Exemptions under sec. 54/54B/54D/54EC/54ED/54EE/54F/54GB

On which:

Tax at 20% on the balance as computed.

Advance tax too should be paid

Capital Gain Account Scheme

The money received from sale of property must be deposited in a Capital Gains Account in a bank. Deposits can be done in instalments or at one go and the account can be either a fixed or savings deposit account. It can be opened only in specified banks and must mention clearly that it is an account under the scheme. The deposit must be made before filing the return of income tax. This is only a temporary account for keeping funds, to be used for buying or building a new house. Withdrawals from this account can be used only for building or buying purposes. Taxpayers can use this exemption only for the net consideration or the capital gain amount.

Netting rules and carry forward of capital losses

Long term capital losses can be set off against only long term gains, while short term losses can be set off against short term losses. The capital loss must be from an earlier date. Losses can be carried forward for eight years. Long term loss from sale of securities cannot be set off. Hence this loss cannot be carried forward.

Exemptions in Capital Gains

There are several exemptions from capital gains. Taxpayers should evaluate these avenues while making decisions to sell properties and invest. The amount of exemption would be calculated based on the proportionate amount invested in each asset, based on sale and purchase prices.

The following exemptions are available if invested in the assets specified.

Sale of a residential unit can be offset by an investment in a new residential house.
Sale of an agricultural land can be offset by an investment made in another agricultural land.
Capital gains from compulsory acquisition of lands and buildings of an industrial undertaking; investment made for purchase of land or building to shift or re-establish the industrial undertaking.
Long term capital gains resulting from transfer of machinery or plant or building or land of an industrial undertaking situated in an urban area; may be invested in machinery or plant or building or land for the purpose of shifting the industrial undertaking to any area other than an urban area.
Capital gains on sale of asset other than a residential house and investment made in a residential dwelling.
Investments in financial assets and investments under Sec. 54EC.

Tax Planning Tips

Capital Gains Bond Scheme – Section 54EC:

This avenue can be used by those persons who already have a house. Under this scheme any amount from Rs. 20,000 to Rs, 50,00,000 can be invested in fully secured bonds issued by NHAI, REC etc. Holding period is three years. The bonds cannot be pledged and if sold before that period, capital gains would become chargeable.

Section 54GB:

This section was introduced in 2012. This allows assesses to invest in shares of companies engaged in production and manufacturing goods. The section has a five year window, starting from 1, April 2012 and ending on 31st March 2017.

The following are the conditions for the investment:

The date of incorporation of the company should not be prior to the 1st day of April of the financial year in which the capital gain arises and not later than the due date of furnishing return of income.
The company should be engaged in the production of an article or a thing.
The company should qualify as a small or medium enterprise under the Micro, Small and Medium Enterprises Act, 2006.
The eligible assessee, before the due date of furnishing the return of income u/s 139(1) of the Act, must utilize the amount of net consideration for subscribing to the ordinary shares of an eligible company.
After subscription of shares, the eligible assessee should hold more than 50% of the share capital of the company or should be entitled to more than 50% of the voting rights in the company.
The eligible company, within one year from the date of subscription, should utilize the amount for purchase of capital asset.
The new asset must be purchased by the company, within a maximum time period of one year from the date of subscription to the ordinary shares by the assessee.
New asset means new plant and machinery but does not include second hand machinery, equipment installed in a residential accommodation, a vehicle, office appliances and computers.

Section 54EE:

Under this section, assesses may invest in a ‘fund of funds’ which will fund start-ups. The amount invested cannot exceed Rs. 50,00,000 and the lock in period is three years. The government aims to garner as much as Rs. 10,000 crores from this scheme.

Tax Tips for your business income

Profits and gains from any business, profession or vocation are chargeable to income tax. This head includes a wide ambit of income sources and hence it is no surprise that it accounts for a high percentage of the tax collected. Assesses can be individuals, partnerships, Hindu Undivided Families, Companies or Association of Persons. Income is computed based on sales as reduced by allowable expenses. Incomes can be even illegal, yet it would be subject to tax. Income from speculation is taxed separately. Loss from business can be set off against income over a period of several years, in accordance with relevant rules. The accounting method used can be either on cash or mercantile basis.

Incomes defined

According to the Income tax Act 1961, the following incomes are chargeable to tax under the head Profits and Gains of Business or Profession. The profits and gains of any business or profession, which was carried on by the assessee at any time during the previous year.

Any compensation or other payment due to or received by:

Any person, by whatever name called, managing the whole or substantially the whole of the affairs of an Indian company, at or in connection with the termination of his management;
Any person, by whatever name called, holding an agency in India for any part of the activities relating to the business of any other person, at or in connection with the termination of the agency;
Income derived by a trade, professional or similar association from specific services performed for its members;
Profits on sale of a licence granted under the Imports (Control) Order, 1955, made under the Imports and Exports (Control) Act, 1947 (18 of 1947);
Cash assistance (by whatever name called) received or receivable by any person against exports under any scheme of the Government of India;
Any duty of customs or excise re-paid or re-payable as drawback to any person against exports under the Customs and Central Excise Duties Drawback Rules, 1971;
Any profit on the transfer of the Duty Entitlement Pass Book Scheme, being the Duty Remission Scheme under the export and import policy formulated and announced under section 5 of the Foreign Trade Development and Regulation) Act, 1992 (22 of 1992);
Any profit on the transfer of the Duty Free Replenishment Certificate, being the Duty Remission Scheme under the export and import policy formulated and announced under section 5 of the Foreign Trade (Development and Regulation) Act, 1992 (22 of 1992) ;
The value of any benefit or perquisite, whether convertible into money or not, arising from business or the exercise of a profession;
Any interest, salary, bonus, commission or remuneration, by whatever name called, due to, or received by, a partner of a firm from such firm;
Any sum received under a Keyman insurance policy including the sum allocated by way of bonus on such policy;
Any sum, whether received or receivable, in cash or kind, on account of any capital asset (other than land or goodwill or financial instrument) being demolished, destroyed, discarded or transferred, if the whole of the expenditure on such capital asset has been allowed as a deduction under section 35AD.

Expenses and Deductions

Sections from 30 to 37 detail the deductions that are available to be set off against profits from business or profession. Some of the allowable expenses are as follows:

1. Sec. 30: – Any rent, rates, taxes, insurance premiums paid by the assessee during the previous year in respect of the place for business purpose.
2. Sec. 31: – Any amount spent on repairs, insurance or hire charges, on plant, machinery, furniture.
3. Sec. 32: Depreciation on fixed assets like buildings, plant and machinery, furniture and other fixed assets is allowed. After 1, April, 1998, intangible assets like patents knowhow copyright, trademarks, licenses or any other right of business or commercial nature are also eligible for depreciation. An important condition is that the asset must be put to use during the previous year for which depreciation is claimed. Further, the assets must be owned in full or in part by the assesse. Depreciation can be claimed even on assets bought under a scheme of hire purchase.
4. Depreciation can be classified into three parts:
  1. Normal Depreciation
  2. Additional Depreciation
  3. Depreciation on SLM (straight line method) basis in case of electricity companies

Normal depreciation is provided on block of assets method on WDV (written down value) of the block as on every 31st March. Depreciation is provided in full for the whole year, except when an asset is bought and put to use for less than 180 days during the year, in which case only 50% is allowed. Unabsorbed depreciation can be set off against other heads except salary or can be carried forward to future years (subject to rules).

Sec 36:
1. Interest on borrowed capital, used for business
2. Bonus or commission to employees: deduction subject to section 43B
3. Discount on issue of zero coupon bonds to be allowed as deduction on pro-rata basis
4. Employer’s contribution to recognized provident fund or approved superannuation fund subject to section 43B
5. Employer’s contribution to approved gratuity fund subject to section 43B
6. Insurance on health of employees by any mode other than cash
7. Insurance premium on stocks
Other sections

Expenses of licenses to operate telecommunication services can be written off in equal installments over the useful period of the license Expenses incurred prior to starting a business or preliminary expenses can be written off at 5% every year.

Further, under section 37(1) any expense that a normally prudent person will make for the purpose of his/her business and which can be related to the business can be deducted. The only condition is that it should have been spent wholly and exclusively for the purpose of business or profession.

Expenses not allowed

Expenses incurred by a particular business cannot be transferred to another business. Expenses incurred during a financial year cannot be used for setoff for any other year. Capital expenditure cannot be set off. All expenses must be of revenue nature. If expenses allowed in an earlier year are recovered, it will be subject to income tax. It is up to the assesse to show that any expenditure is permissible for deduction.

Special Provisions
Section 40A (2):

Assessing officer may disallow payments made to the assesse’s relatives, if in his opinion it is in excess of market value.

Section 40A (3):

Any payment in cash exceeding Rs. 20000, or Rs.35000 in case of payment to a transporter engaged in plying, hiring, transporting etc., in a day will be disallowed.

Deduction under section 43b:

The following sums can be claimed only on actual payment before due date of filing:

Amounts payable by employer by way of contribution to provident fund or superannuation fund or any other employee benefit fund.
Amounts payable as bonus, commission to employees for services rendered.
Amounts payable by employer in lieu of leave salary to employee.
Amounts payable by way of tax, cess, duty or fee under any law and by whatever name called.
Amounts payable as interest on loan borrowed from public financial institutions or state financial institutions.
Amounts payable as interest on loan taken from scheduled bank including co-operative societies.
Maintenance of books of accounts – If in any of the three preceding years income exceeds Rs. 1, 20,000 or if gross sales exceed 10, 00,000, the assesse must maintain prescribed books of accounts. Audit of accounts is compulsory if gross receipts of a profession exceeds Rs. 25, 00,000 or in the case of a business Rs. 1, 00, 00,000.

Deemed Income/Presumptive income

If gross receipts of an eligible business does not exceed Rs. 2, 00, 00,000, assesses can declare 8% of such receipts as presumptive income. For specified professions like accountancy and interior decoration, if gross receipts does not exceed Rs. 50,00,000 assesses can declare 50% as income and pay the relevant tax.

Tax Shelter and Tax Holidays
Presently tax holiday is available under section 80IA, 80IB etc.
Under sections 80IA, profits and gains of industrial undertakings engaged in infrastructure development can claim 100% deduction from such business for a period of ten assessment years.
For undertakings engaged in the telecommunication sector, can claim 100% of the profits for the first five years and thereafter 30% for the next five years.
80 IB relates to enterprises other than those engaged in infrastructure. These enterprises can claim deduction which should be equal to the percentage and number years as may be specified in the act.
Tax planning tips
Some methods to reduce the incidence of taxation is given below.
Section 35(i), (ii), (iii)

Assesses can invest money in research activities which are related to their business with outside institutions. A weighted deduction of 175% of the actual expenditure is available. Similar deduction is available for monies given for research to Universities and other approved institutions, whether or not the research carried out is related to the assesse’s business. If the money is given for social science and statistical research, then 125% deduction would be available.

Section 35(2AA)

A weighted deduction of 200% is available when money is given in response to a specific direction of a prescribed authority to National Laboratories, Universities, IITs, and specified persons approved by prescribed authorities.

Section 35(i) (iia)

A weighted deduction of 125% can be availed for money given to an Indian company engaged in scientific research, even if the research is not related to the assesse’s business. Further, capital expenditure incurred for the purpose of research can be debited in full to the profit and loss account and if profits are insufficient to absorb this, the excess can be set off against other heads of income and if any is still remaining, the unadjusted balance can be carried forward. Stocks of raw materials, consumables and finished goods also play an important role in determining profits.

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