Chapter 5: INCOME TAX: WITHHOLDING AND REPORTING REQUIREMENTS


The government of India imposes an income tax on taxable income of individuals, Hindu Undivided Families (HUFs), companies, firms, co-operative societies and trusts (Identified as body of Individuals and Association of Persons) and any other artificial person. Levy of tax is separate on each of the persons. The levy is governed by the Indian Income Tax Act, 1961
The Indian Income Tax department is governed by the Central Board for Direct Taxes (CBDT) and is part of the Department of Revenue under the Ministry of Finance, Govt. of India.

Heads of Income

The total income of a person is divided into five heads, viz., taxable:
1.     Salaries
2.     Income from House Property
3.     Profits and Gains of Business or Profession
4.     Capital Gains
5.     Income from Other sources

Income from Salary

All income received as salary under Employer-Employee relationship is taxed under this head. Employers must withhold tax compulsorily, if income exceeds minimum exemption limit, as Tax Deducted at Source (TDS), and provide their employees with a Form 16 which shows the tax deductions and net paid income. In addition, the Form 16 will contain any other deductions provided from salary such as:
1.     Medical reimbursement: Up to Rs. 15,000 per year is tax free if supported by bills.
2.     Conveyance allowance: Up to Rs. 800 per month (Rs. 9,600 per year) is tax free if provided as conveyance allowance. No bills are required for this amount.
3.     Professional taxes: Most states tax employment on a per-professional basis, usually a slabbed amount based on gross income. Such taxes paid are deductible from income tax.
4.     House rent allowance: the least of the following is available as deduction
1.     actual HRA received
2.     50%/40%(metro/non-metro) of 'salary'
3.     Rent paid minus 10% of 'salary'. Salary for this purpose is basic+ DA forming part+ commission on sale on fixed rate.
Income from salary is net of all the above deductions.

Income from House property

Income from House property is computed by taking what is called Annual Value. The annual value (in the case of a let out property) is the maximum of the following:
  • HRA Rent received
  • Municipal Valuation
  • Fair Rent (as determined by the I-T department)
If a house is not let out and not self-occupied, annual value is assumed to have accrued to the owner. Annual value in case of a self occupied house is to be taken as NIL. (However if there is more than one self occupied house then the annual value of the other house/s is taxable.) From this, deduct Municipal Tax paid and you get the Net Annual Value. From this Net Annual Value, deduct :
  • 30% of Net value as repair cost (This is a mandatory deduction)
  • Interest paid or payable on a housing loan against this house
In the case of a self occupied house interest paid or payable is subject to a maximum limit of Rs,1,50,000 (if loan is taken on or after 1 April 1999 and construction is completed within 3 years) and Rs.30,000 (if the loan is taken before 1 April 1999). For all non self-occupied homes, all interest is deductible, with no upper limits.
The balance is added to taxable income.

Income from Business or Profession        

An example; a Hospitality Consultant works out of home and co-ordinates work for his clients. All the following expenses would be deductible from his professional fees.
  • he uses a computer,
  • he travels to sites in his car,
  • he has a peon to help him collect payments
  • He has a maid who comes in daily
  • part of the society maintenance bills
  • Entertainment expenses incurred..
  • Books and magazines for his professional practice.

The income referred to in section 28, i.e., the incomes chargeable as "Income from Business or Profession" shall be computed in accordance with the provisions contained in sections 30 to 43-D

Corporate Income tax

For companies, income is taxed at a flat rate of 30% for Indian companies, with a 10% surcharge applied on the tax paid by companies with gross turnover over Rs. 1 crore (10 million). 
Foreign companies pay 40%.An education cess of 3% (on both the tax and the surcharge) are payable, yielding effective tax rates of 33.99% for domestic companies and 41.2% for foreign companies.
From 2005-06, electronic filing of company returns is mandatory.

Tax Penalties

"If the Assessing Officer or the Commissioner (Appeals) or the Commissioner in the course of any proceedings under this Act, is satisfied that any person-
(b) has failed to comply with a notice under sub-section (1) of section 142 or sub-section (2) of section 143 or fails to comply with a direction issued under sub-section (2A) of section 142, or
(c) has concealed the particulars of his income or furnished inaccurate particulars of such income,
he may direct that such person shall pay by way of penalty,-
(ii) in the cases referred to in clause (b), in addition to any tax payable by him, a sum of ten thousand rupees for each such failure;
(iii) in the cases referred to in clause (c), in addition to any tax payable by him, a sum which shall not be less than, but which shall not exceed three times, the amount of tax sought to be evaded by reason of the concealment of particulars of his income or the furnishing of inaccurate particulars of such income"
Withholding tax
Payers of amounts may be required to withhold income or other taxes from such amounts and pay the tax to the government levying the tax. Withholding tax or withholding at source may be required against payments to residents or payments to nonresidents of the taxing jurisdiction. Such withheld tax may constitute a final tax or merely a prepayment of part of taxes otherwise due. The amount of tax withheld may be a fixed percentage of the payment or may vary depending on the magnitude of the current or other expected payments. Amounts withheld are generally required to be paid to the levying government fairly promptly, and a withholding agent's failure to do so may result in substantial penalties.
Reporting
Nearly all systems imposing withholding tax requirements also require reporting of amounts withheld in a specified manner. Copies of such reporting are usually required to be provided to both the person on whom the tax is imposed and to the levying government. Reporting is generally required annually for amounts withheld with respect to wages. Reporting requirements for other payments vary, with some jurisdictions requiring annual reporting and others requiring reporting within a specified period after the withholding occurs.

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