India

Income computation and disclosure standards (ICDS)

The CBDT has notified ten ICDS to be followed by all taxpayers that follow the mercantile system of accounting for the purpose of computation of income chargeable to income tax under the head ‘profits and gains of business or profession’ or ‘income from other sources’ and not for the purpose of maintenance of books of accounts. In case of conflict between the provisions of the Income-tax Act and the ICDS, the provisions of the Income-tax Act will prevail to that extent. These standards have been in effect since tax year 2016/17.

The list of certain important points on implementation of ICDS is given below:

• Inventory has to be valued at lower of cost or net realisable value. Further, cost of inventory is to include taxes paid, irrespective of recoverable or not.
• Interest on compensation or enhanced compensation is to be offered to tax in the year of receipt.
• Any subsidy or grant received from the government that is not adjusted to cost of asset will be offered to tax in year of receipt of such subsidy/grant even if the conditions attached to it are not yet fulfilled.
• Marked-to-market loss computed in accordance with ICDS will only be allowed.
• Gain/loss on account of foreign currency fluctuation for monetary and non-monetary items will be computed and allowed as per provisions of ICDS.
• Profits from construction contracts and/or service contracts will be calculated based on the percentage of completion method. For service contracts with less than a 90-days period, the project completion method can be used. Further, for service contracts with an indeterminate number of acts over a specific period of time, the straight-line method can be used. Retention money will be included while computing contract revenue.
• It may be noted that ICDS does not recognise the concept of materiality and the concept of prudence.

Capital gains

Capital gains refer to the gains made on the transfer of a capital asset. Transfer includes sale, exchange, relinquishment, or extinguishment of rights in an asset. Capital assets are either short-term capital assets or long-term capital assets. Long-term capital gains are eligible for a concessional rate of tax and indexation of cost of purchase and cost of improvement (discussed below).

Short-term capital assets are capital assets held for a period of not more than 36 months. In case of listed shares, listed securities, or units of specified mutual funds or zero-coupon bonds, the short-term holding period is not more than 12 months, and in case of unlisted shares is not more than 24 months. Capital assets that do not qualify as short-term capital assets are considered as long-term capital assets.

Normally, long-term capital gains are determined after increasing the cost by a prescribed multiplier that varies with the period of holding, to adjust for inflation. In case of non-residents, capital gains on transfer of shares or debentures in Indian companies are computed in the foreign currency in which the shares or debentures were acquired, and the capital gains are then reconverted into Indian currency to compute the tax liability thereon.

Capital gains are taxed as follows:

• Long-term capital gains on the transfer of equity shares in a company acquired on or after 1 October 2004 will be exempted only if STT was paid at the time of acquisition. This exemption stands withdrawn from 1 April 2018. Post such withdrawal, the long-term capital gains exceeding INR 125,000 will be taxed at the rate of 10% (plus surcharge and health and education cess). The said amendment will be applicable to units of equity-oriented funds as well. The benefit of adjustment of cost of inflation index will not be available. In addition, the benefit of computation of long-term capital gains in foreign currency in the case of a non-resident will not be allowed.
• Other long-term capital gains are subject to taxation at 20% (plus the surcharge and health and education cess). However, long-term capital gains arising from the transfer of listed securities, units, or zero-coupon bonds on which STT is not paid are taxed at 10% (without adjusting the cost for inflation) or at 20% (after adjusting the cost for inflation), whichever is more beneficial to the taxpayer. These rates exclude surcharge and health and education cess.
• Long-term capital gains arising to a non-resident (not being a company) or a foreign company from transfer of unlisted securities, shares, debentures, etc. are taxable at 10% (plus surcharge and health and education cess) without any indexation benefit.
• Short-term capital gains on the transfer of listed shares in a company or units of an equity-oriented fund that are subject to STT are taxed at 15% (plus surcharge and health and education cess).
• Other short-term capital gains are subject to taxation at the normal rates.
• The indexation benefit is available on cost of acquisition and cost of improvement for assets classified as long-term while computing capital gains. The taxpayer will have the option to consider the fair market value of the asset on 1 April 2001 as the cost of acquisition where date of acquisition is before 1 April 2001. This is effective from the tax year 2018/19.

Finance Act, 2024 has rationalised the capital gains tax regime. These amended provisions are applicable for transfer made on or after 23 July 2024. The provisions amended by Finance Act, 2024 have been provided as follows:

• Period of holding for determining nature of capital gains:
  • All capital assets are to be treated as long-term capital assets if they are held for a period of more than 24 months.
  • All listed securities are to be considered as long-term capital assets if they are held for more than 12 months.

• Applicable tax rate:

• • Tax on short-term capital gains on transfer of listed securities that are subject to STT shall be levied at 20%.
  • Tax on long-term capital gains on all assets shall be levied at 12.5%. The benefit of indexation while computing long-term capital gains have been abolished.
  • The exemption limit on long-term capital gains on transfer of listed securities is increased to INR 125,000.

• Income on transfer, redemption, or maturity of unlisted debentures or unlisted bonds on or after 23 July 2024 is to be deemed as short-term capital gains.

Finance Act, 2024 also provides that for resident individuals and HUFs, if a land or building was acquired before 23 July 2024 and such land/building is transferred on or after 23 July 2024, the tax on long-term capital gains is required to be computed in accordance with the amended provisions, and in case tax computed in accordance with the amended provisions exceeds the tax computed as per the capital gains tax regime applicable prior to Finance Act, 2024, such excess capital gain tax shall be ignored and shall not be required to be paid.

Taxability of transfer of property for nil or inadequate consideration

Where a person is in receipt of the following property for nil consideration or for an inadequate consideration, then the difference between the fair value of the property and the consideration paid will be considered as deemed income in the hands of recipient of the property:

• Any sum of money.
• Any immovable property being land or building, or both.
• Any property, other than immovable property, being shares and securities, jewellery, archaeological collections, drawings, paintings, sculptures, any work of art, and bullion.

In a case where the difference between the fair value of property and consideration paid does not exceed INR 50,000, the same will be ignored from this taxation. However, the limit of INR 50,000 was libralised in case of immovable property. It is now provided that no adjustments will be made in a case where the variation between stamp duty value and the sale consideration is not more than 10% of the sale consideration.

Dividend income

Dividend income received by a domestic company with effect from 1 April 2020 will be taxable in hands of resident shareholders at the rates applicable to them.

A provision in the Income-tax Act has been introduced to provide for WHT at 10% on dividends in respect of units of mutual funds (in excess of INR 5,000) on dividend payments to resident shareholders.

Finance Act, 2022 has also withdrawn the concessional rate of 15% on dividend income received by Indian companies from specified foreign companies (shareholding of 26% or more) with effect from FY 2023/24.

In case of non-resident shareholders, dividends received post 1 April 2020 may be taxed at the rate of 20% under the Income-tax Act or tax treaty rate, whichever is beneficial.

WHT obligations will arise in the hands of a company distributing dividends to non-resident shareholders in such case. A corresponding deduction on account of interest would be allowed to the extent of 20% of such dividend income. This change is brought considering that the dividend distribution tax (DDT) has been abolished with effect from 1 April 2020.

Finance Act, 2024 has amended the provisions related to taxability of buyback of shares. As per the amended provisions, the buyback proceeds shall be considered as deemed dividend in the hands of shareholders. The amended provisions shall be applicable with effect from 1 October 2024.

Interest income

Interest income received by an Indian company is taxable at normal CIT rates. Interest income received by a foreign company is taxed at a concessional rate of withholding at 5%/20%, subject to conditions. For companies engaged in manufacturing business and opting to pay corporate tax at the lower rate, interest income shall be taxable at 25.17% (including applicable surcharge and education cess).

Foreign income

An Indian company is taxed on its worldwide income. A foreign company is taxed only on income that is received in India, or that accrues or arises, or is deemed to accrue or arise, in India. This income is subject to any favourable tax treaty provisions. According to the current tax law, payments for allowing/transferring the right to use software, customised data, or transmission of any signal by satellite, cable, optic fibre, or similar technology are taxable as royalty income deemed to accrue or arise in India, whether or not the location of such right or property is in India. The Indian Revenue Department notified the rules to grant foreign tax credit to resident taxpayers in respect of taxes paid in overseas countries. The rules lay down broad principles and conditions for computation and claim of foreign tax credit, respectively. In cases where the taxpayer has not been given credit of certain taxes paid outside India since the tax was under dispute, the taxpayer can approach the tax officer within six months from the end of the month in which the dispute was settled with prescribed documents. The tax officer has been empowered to pass an order granting consequential relief. This has been made effective from FY 2018/19 onwards.

Double taxation of foreign income for residents is avoided through tax treaties that generally provide for the deduction of the lower of foreign tax or Indian tax on the doubly taxed income from tax payable in India. Similar relief is allowed unilaterally where no tax treaty exists, in which case a resident would be taxed under the Income-tax Act but would be allowed a deduction from the Indian income tax payable of a sum being the lower of the Indian tax rate on the doubly taxed income or the rate of tax prevailing in the other country in which income is already taxed.