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Maze of Tax Laws

Albert Einstein once expressed that if there is one thing in the world that is difficult to understand, that is Income Tax.

The landscape of Indian Income Tax is no exception, with the maze created by taxation of notional income, retrospective amendments, and somewhat contradictory court decisions – life does get complicated.  You may think, why so much of complications should exist, and can’t it be simpler.  I will try to give the reasoning with a short story.

Ramesh was very happy to move into his newly bought villa in a private layout.  It was surrounded by trees, plants and a well maintained Garden.  It had a big patch of lawn in the front which added to the aesthetics of the villa.  Ramesh was very proud.  But his happiness was short lived when he watched people mindlessly walking on the lawn.  So Ramesh had to put a sign board which stated “Walking on the lawn is prohibited”.  But to his disgust, after this people started running on the lawn.  So he had to change the sign board to “Walking and running on the lawn is prohibited”.  Now people started hopping on the lawn.  Which again made him to add “hopping” to the prohibited list.  Next people started jumping on the lawn.  This went on and on and the sign board grew bigger and creasier day by day. Like the people tried to avoid the instructions, tax avoidance is the first reason for the creation of a maze of tax laws.

Taxation laws have an impact on cash flow which makes the tax payers resort to tax planning.  It is a universal truth that people do not want to pay more taxes.  It is human tendency to minimize his tax outflows.  At the same time Governments want to collect more and more by way of taxes to have the luxury of more funds at their disposal and go on bringing amendments in the name of anti avoidance.  This tug of war leaves the statute book fat and cumbersome.  Let us now discuss few areas which makes the law tough.

Taxing of Notional Income

Notional Income is an illusionary income which is never earned.  ‘Foul’ did you scream?  Not in the eyes of law. But that is the reality.  There are many areas under Income Tax Act, 1961 wherein it is not the real income but the notional income which is taxed.  To name a few:

              a. Where you let out a property for less than the market value, you may have to pay tax on the market rent even though it is never earned.  For instance you decide to give a property to your friend at a concessional rate.  In that case you need to pay tax on the prevailing rent for similar property in the vicinity even though it is let out at a lower rate. (Read Taxation of Income from House Property – First Guide to Basics)

              b. In case of small businesses with less than 2 crores of annual turnover, they have two options – One to declare profit equal to 8% of sales irrespective of the possibility that the profit could be much lesser than 8% or Two to go with the other option of maintaining complete books of account, get them audited (cost of an accountant, auditor’s fees to name a few as additional costs) which can substantiate lower profit than 8% of sales.

              c. If an immovable property is sold for lesser price than the circle rates prescribed for stamp duty purposes, stamp duty value will be deemed to be the consideration received for sale of immovable property. This amounts to taxation of artificial income.

Retrospective Amendments

Let us say the Government brings in a new law asking all the citizens who own a four-wheeler to pay a pollution cess and makes it effective five years prior to the date.  How do you think sentiments get affected? The Government resorts to this means to negate the adverse judgement against it by various forums.  According to many experts, India made a blunder when it resorted to this means to negate the judgement in the famous Vodafone case.

Contradictory judgments

Taxation in India has got four levels of Dispute Forums. These add, many times, confusion and additional dimensions to the maze of tax laws.  They are usually:

              a.  Commissioner of Appeals at First Level

              b.  Appellate Tribunal

              c.  High Court

              d.  Supreme Court

Contradictory judgments
Judgments can be contradictory

Many times, decisions by these forums throw different views on the same subject matter at a later stage which makes life tough for taxpayers to take a decision and move ahead. The journey in the maze continues.

For instance, in case a businessman fails to remit the provident fund deducted from employees’ salary within the due date prescribed by Employees Provident Fund Act, it will not be allowed as deduction even though it is remitted at later stage.  This is based on a Karnataka High Court decision.  Now since income tax returns filed all over India get processed at Centralized Processing Centre which is located in Bengaluru, belated remittance of employee portion of provident fund gets disallowed as CPC follows the decision of Karnataka High Court which is a jurisdictional Court.  This is inspite of decisions by other High Courts which allow deduction if it is remitted within the due date for filing of income tax return – which falls much later than the due dates as per Provident Fund Rules.

Structure of tax laws

The income taxes we pay is not just a product of just the Act passed by the parliament. There are many entanglements – Taxation Laws are usually structured as under:

              a.  Act

              b.  Rules

              c.  Forms

              d.  Schedules

              e.  Notifications

              f.   Circulars

              g.  Press Releases

That is quite a handful, even for practicing professionals. These parts possess their own statutory values and needs to be treaded carefully.  For instance, Goods and Service Tax in India, which was supposed to be a very simple tax, is weighed down with innumerable notifications. Notifications are not part of the Act passed by the parliament. These are issued by the bureaucrats running the tax departments. Many times, bureaucracy’s overindulgence defeats the spirit of the law envisioned by the law makers.

We at Daily Economics try to demystify the taxation statutes and educate on varied rigors in a simple and easily understandable manner. This article has tried to give the reader a view of the “tip of the iceberg” of complications under tax laws. We will try to guide you through this maze of tax laws.

Please do give your feedback which will help us to map our journey forward.

The views expressed are based on the statutory provisions as it stands on the date of this article. Readers are advised to take professional help in the tax matters and not to self-venture based on this article.

In the previous chapter, you had seen how the whole idea of starting something on my own turned up and how life changed after that. This post is in continuation of the roller coaster ride called “My Entrepreneurial Journey – Chapter 1

Hanging-On – Last phase of My Entrepreneurial Journey

Within 5 months of me running the franchise many of other same franchisor outlets were closed (whom I had contacted before opening my outlet). The focus was still on improving footfall but there was minimal increase. Repeat customers were good but number of new customers were few.

All attempts in discussing with the franchisor was a waste of time, as they were busy in getting more investors and making believe that business was good. While the reality was almost all outlets which were opened then were steadily closing, however the number of new outlets across India were increasing. So there was no doubt they were selling better and once you paid the hefty initial investment you were just a helpless guinea pig to them.

In addition to this, the operational issues were causing another nightmare

·       The good staff were moving out to newer outlets

·       Menu prices were increased without intimation

·       No alterations were allowed to pricing or the menu

·       Outlet maintenance issues started showing up

·       License issues (with local authorities)

With very minimal control on food, pricing, marketing and operational costs, the only element that I had under my control was improving customer service. But that was not helping either. The brand had taken a beating as there were a lot of negative reviews from other outlets of the same franchisor. While founders were still running behind investors all of us who had invested realized its game over.

Reality Check

After running 9 months of operations, breakeven was still a far sight. I realised that inspite of investing a lot of money to keep it operational there were zero returns. That’s when I decided to take the step to go ahead and close it.

Lessons learnt

Being a first timer to enter business I had the courage to go after the unknown which taught me some hard lessons. Every entrepreneurial journey will be riddled with challenges. If you want to have a secondary income, I would advise you to avoid the mistakes I made.

·       While the concept of Franchisor/Franchisee is enticing for newcomers, remember only franchisor will make money.  Unless it’s a reputed brand you would spend most of your energy creating brand awareness (which may not help your outlet directly)

·       Having your own outlet with positive P&L is better than having multiple outlets with negative P&L. One of my friends said he was making more money having 4 juice shops than these franchisors opening 100’s of outlets. The franchisor was betting on the “Valuation game” at the cost of small and new entrepreneurs like me.

·       Get in the game, if you want to stay for long. And try to achieve break even in 12 months. That means there are no shortcuts. You will have to be on the ground with having complete control on all operational aspects, which I didn’t have at my outlet

·       There is no fixed formula. Try & test is only way forward and you should be willing to experiment. Knowing best practices, talking to experienced people will always help. Be it marketing, product decisions or post sale of the product – having complete control with you is a MUST, which is almost impossible in franchise business.

·       If there is no metric to evaluate or if there is pressure to start soon, take a break. Give it a pause. Do a reality check. Speak with similar businesses on how they are managing.  Just don’t look at affordability, check on practical difficulties that others faced and avoid them early

·       Do not get lured by fancy spreadsheets which promise healthy returns.

Beware – Profits could be existing only on fancy spreadsheets

·       When you attempt a new venture, it is natural to face some amount of scepticism from family and friends. Take their comments with a positive outlook and try to find answers to them. This will help you refine your business plan and give you new perspectives. 

Do not be discouraged if things do not work out. There are life lessons learnt. May be at a cost, but that is ok. This experience is what gives you advantage when you think of starting something new again.

Courage to pick up the pieces and moving on is an essential life lesson learnt in ” My entrepreneurial journey”.

Be a Doer!

Rental income earned from immovable property is passive income to a person, as generally, he does not put any effort to earn it.  There is a separate chapter namely “Income from house property” under the Indian Income Tax Act, 1961 which deals with the taxation of such income. The peculiarity of this chapter is that it intends to tax notional income. You may end up paying tax on the income which you have never earned.  Let us try to decipher the nitty gritties in this article.

Typical computation of income from house property is depicted in the table below :

ParticularsAmount
A. Gross Annual Value i.e. expected rent/ actual rent received or receivable whichever is higherxxxx
However, in case of vacancy, expected rent or actual rent received or receivable whichever is lower
B. The amount of rent which could not be realizedxxxx
C. Taxes actually paid and borne by owner to local authorityxxxx
D. Net Annual Value (NAV) ( A – [B+C] )xxxx
E. Deduction allowed under section 24xxxx
F. Standard Deduction @30% of NAVxxxx
G. Interest on borrowed Capitalxxxx
Income Chargeable under the Head “Income from house property” ( D – [E+F+G] )xxxx
Template to calculate income under income from house property

Basics of Taxation of Income from House Property

In this article, I will try to give a broad overview of various provisions under “Income from House Property”. Based on the response from the readers, I will try to explore finer details in the coming days.

Although the heading states “Income from house property”, the provision is extended to income from any building whether residential or commercial and/or Land appurtenant (adjoining) thereto.  The other two conditions for an income to fall under this head are as follows:

            i.  Assessee has to be the owner of such property

            ii. Property must be used for any purpose other than for the purpose of his own business/ profession.

Computation of Gross annual value

Gross Annual value is computed by considering the following four factors:

            1. Actual rent received or receivable

            2. Municipal value (Available only in few states)

            3. Fair rent of property which it is expected to fetch depending on its location and area.

            4. Standard rent (Available only in few states)

Computation of Gross annual value
Arriving at Gross annual value

Unrealised rent & other deductions

In order to deduct the unrealised rent amount, the following rules have to be satisfied:

(a) Tenancy is bonafide

(b) Defaulting tenant has vacated, or steps have been taken to compel him to vacate the property

(c) Defaulting tenant is not in occupation of any other property of the assessee.

(d) Assessee has taken all reasonable steps to institute legal proceedings for the recovery of the unpaid rent or satisfies the assessing officer that legal proceedings would be useless.

Municipal Tax:

In order to claim the deduction of municipal tax, it should have been paid by the assessee to the local body.  It is only on payment basis, irrespective of the year for which it is paid, it is allowed as deduction.

Standard Deduction:

Deduction of 30% of the Net Annual Value will be allowed as Standard Deduction.  This is irrespective of any spending by the assessee as such.

Interest on Borrowed Capital:

When the property has been acquired, constructed, repaired, renewed, or reconditioned with borrowed funds, the amount of interest payable on such borrowings is allowed as deduction.

Here it should be noted that Interest payable for the year is deductible, irrespective of whether it is actually paid or not.

Interest payable till the completion of construction is allowed as a deduction in five equal yearly installments from the year in which the construction of the property is completed.

More basics…

  • In case of self-occupied property, net annual value will be taken as NIL and only interest on housing loan can be claimed from it, subject to a maximum of Rs. 2,00,000/-.
  • Benefit of self-occupation can be claimed only in respect of two properties.
  • Interest on borrowed funds from outside India cannot be deducted unless such interest is subject to withholding tax in India.

In the unprecedented situation of COVID-19, there are many instances of tenants refusing to pay rent taking shelter under force majeure.  However, since the Income Tax statute actually taxes annual value, owners of properties may end up paying taxes on the rent which they are never going to realize.  Keeping in view many extraordinary situations the taxpayer is facing, the Government may have to consider the genuine hardship of the rare breed of the tax-paying population ( less than 10%) of India and come out with some relaxations and clarifications.

The views expressed are based on the statutory provisions as it stands on the date of this article and is intended for general understanding. We suggest the readers to consult their CAs for detailed tax planning.

Retirement Planning is one of the most important and expensive financial goal. An individual can get loans for other financial goals like buying a car, house, kids’ education etc. but he cannot avail any loan for meeting any shortage during his retirement.

I have come across many individuals who had decent earnings during their working years and they did pretty well when it came to saving and investment, however as they approached retirement they had very little retirement corpus and they ended up compromising on  their life style post retirement planning or became financial dependent on kids

Let us understand why an individual generally falls short of his/her retirement goals and the realization happens when he/she is on the verge of retirement.

Let me tell you a story of one Mr. Kumar and his retirement planning or his non-existence of it; He had a happy family with two kids. He had a good earning; he saved and invested his money in a diligent manner. He bought a car and a house by taking loan and dipping into his investments. Then he had an EMI to pay ; any excess savings he could manage on a monthly basis was used prepay the loan. This routine was followed closed to a decade and debt reached a manageable size. Meantime, the next challenge surfaced – carrying a huge price tag – children’s higher education. So Mr. Kumar again dipped into his savings and funded the education. Every Indian parent’s responsibility will not end with funding the education of their kids. A decent wedding is a must and not an option in most cases. Mr. Kumar, the hamster, got back on the wheel and started saving for their marriage and got them married. Mr. Kumar’s clock was ticking with equal speed – he reached a ripe old age, in terms of work life, of 56 years. Now he was barely left with 4 years more of productive work life, during which he has to make enough savings which can support his retirement life of 15-20 Years, which was as impractical a goal as they came. Many of us can relate to the situation of Mr Kumar.

College education can be very expensive

What went wrong in the way Mr. Kumar handled money? Lets analyse a bit;

He was myopic ; He was focusing on his next set of short term goals which came at the cost of long term retirement goals. So many individuals get into this trap, where they try to achieve the next nearest financial goal with all the available financial resources. They feel very comfortable as they keep achieving the goals on hand and finally when they are close to retirement date, they realize they are totally off track from the biggest and most expensive goal of their life.

The realization of not having enough savings and investments came very late. At the end he was left with not so very desirable options :

  • Postpone the retirement date for few more years.
  • Compromise on the life style post retirement
  • Depend on their children for financial support

Mr. Kumar, had he penned down all his financial goals and invested accordingly since initial days, the probability of achieving all of them would have been high. The key factor is having a goal in place and then investing to achieve it – it’s called Goal Based Investing.

Benefits of Goal Based Investing in Retirement Planning

  • Investing with a clear focus on the financial goals (children’s education,marriage, medical emergencies & retirement planning) helps to achieve them in an effective manner.
  • Helps you select suitable Investment Asset Class (Equity, Bonds, Real Estate, Gold) based on the time horizon and nature of goals.
  • Increases awareness on underfunded goals and unfunded goals : This visibility helps an individual to take effective action in bridging the gap during his working years.
  • Even if a goal is not funded, individual will have realistic expectations.

Keep visiting this section – we will continue to post articles to help you plan for your financial goals. If you want us to cover any area specifically, do leave a comment below. Our experts will be happy to cover them in the next articles.

Key Takeaways

Chart out all your financial goals with clear timelines

Create an effective financial plan for achieving the same.

Remember – Investing without goals is like travelling without destination.

In the hub where everyone wants to be an entrepreneur, the idea of exploring beyond a regular corporate job is natural. I was no exception. Like all of us, I also dreamt to start a second venture, with an urge to have a sustainable secondary income and make it primary one day. This thought has taken me on a roller coaster ride in the last few years, and I want to pen down my experiences.

Journey

Like all millennials, my stream in education and profession was not a choice, we all went with the flow of the IT Boom and fascinating stories of traveling abroad, suddenly transforming from a middle class to an upper middle class, etc. Those were really exciting stories; little we did we know that it would not be the case a decade later.

Being an IT graduate and working close to a decade, bored with the routine, regular routine lifestyle; I started exploring various ideas from technology Start-ups to workspaces, from ice cream shops to modern Café’s. While ideas were pouring in, the next step was concluding an idea. That meant doing practical math on my budgets, time I could spare and connect in networks, etc.

While I was clear that I would continue to do my primary job to manage all my existing commitments, possible options that were available were to see a model where operations are taken care of by others, while I focus on marketing, strategy, and sales.  That is when I dwelled more into a Franchise model*

After exploring various franchise models, I decided to go with a food start-up with a vision to cater to the best Indian cuisine from different states and were expanding in Bengaluru with multiple outlets. They also had successful stints in their earlier ventures.

Evaluations, I did, while picking this franchise

·       Their track record in execution

·       Their product mix

·       Checking on operational aspects from other outlets of the same franchise

·       Leadership team

The Business model was simple. They provide all the materials, give the right talent and take care of operations. Based on sales 50% would go to the franchiser for supplying all the materials and with the remaining, we had to manage operational expenses and margins. To summarize I had to take care of the Profit & Loss (P&L) and manage customers as well.

In the Game

With all-stars aligned, the process was quick and within 60 days I was able to set-up a franchise outlet. This was one of the rarest satisfying moments I experienced. Something outside IT, something outside a regular day job. Having your own business was a dream come true which no one in my family ever attempted.

Happy to get a location in a happening mall in Bengaluru, it was all set. Having invested almost 3 years of savings, my next hope was only to recover the invested amount in the next 18 months.

Surprises

After running the outlet for a month, it was time for numbers.  They never matched the expectations.

·       Sales was not great as footfall to that floor in the mall was minimal

·       All the loopholes were showing up, the franchisor was sending more stock which was adding to the cost

·       Rent was high; and also a 18% GST was never included which in turn increased the  operational expenses

·       Fake promises made by the franchisor and the Mall were coming to reality

While this being the scenario, I realized that I had to put more money to keep the outlet operational.  Breakeven looked like a distant dream.  So the immediate focus was to take control of the operational expenses so that I could curtail the losses and increase footfall so that sales can be better.

In the midst of these surprises – I was forced to pump in more cash into the business and break-even point looked more like a mirage. But I thought this is how most of the first time entrepreneurs take off – a little shaky initially and then eventually raking in tons of moolah. I told myself if I worked smart and hard, I would achieve break even one day and profit will follow next. Little did I know that I was fighting against an organized setup.

I will continue my story in the next chapter.

Key Takeaways from Chapter 1

  • Location, Location, Location – the 3L rule of the restaurant business
  • Assess how much of your business is in your hands and how much in the franchisor’s hands.
  • Talk to current franchise holders. If possible – develop a grapevine channel to know the real numbers.
  • Run your financial simulation thoroughly.

Recent Changes in Residential Status

Mr. Ram is an Indian citizen (NRI) living abroad for several years now. He has his extended family, immovable properties and other investments in India. He frequently visits India to meet his family and friends and to manage his investments. During his recent conversation with an Indian friend, he came to know that there have been sweeping changes to the Indian tax laws with respect to residential status of an individual which may result in expanding his tax base in India and he may qualify to be a ‘stateless’ person. Ram is curious to know more about these changes.

So what are these changes? Does it really have far reaching impact on NRIs like Ram? Who is a state less person? Let us understand these in detail.

Hitherto (till 31 March 2020), an Indian citizen or a person of Indian origin living outside India and coming on a visit to India could have stayed in India for a period less than 182 days without triggering residency in India. However, the new rule (applicable from 01 Apr 2020) reduces this threshold to 120 days. Further, the new rule has inserted an income threshold of INR 1.5 million from sources within India in order to trigger residency. So, both the conditions i.e., no. of days and the income level need to be satisfied in order to trigger a residency. In case of Ram, he would be considered as Resident but Not Ordinarily Resident in India provided his stay in India during the relevant tax year exceeds 119 days (but less than 182 days) and his total income from Indian sources exceeds INR 1.5 million.

Stateless person or Deemed resident

A stateless person in the context of taxation means a person who is not liable to tax on his income in any country during the year. It may be possible for an individual to position his affairs in such a manner that he is not liable to tax in any country. In order to curb these kinds of arrangements, the new rules introduced the concept of ‘deemed residential status’.  As per this, an Indian citizen having total income exceeding INR 1.5 million or 15 lacs from sources within India during the relevant year, will be deemed to be a resident of India (RNOR) if he is not liable to pay tax in any country outside India.

So in case of Ram, since he is a resident of foreign country and is a citizen of India, he may be considered as RNOR for India tax purposes provided his total income exceeds INR 1.5 million from sources within India and he is not liable to tax in his country of residence.

For the purpose of above rules, the income from sources within in India includes income arising outside India from a business controlled in India or profession set up in India.

So you are an RNOR. Is your global income taxed, then? uh!

So what happens if an individual qualifies as RNOR? Will his global income be taxed in India?

Definitely NO. In case of an RNOR, in addition to the Income derived from Indian sources, the individual would be taxed on income arising outside India from a business controlled /profession set up in India.

Further, in case an RNOR who is liable to tax on his income arising outside India from a business controlled /profession set up in India, may result in double taxation of income both in India and in his resident country. So in order to mitigate the double taxation implications, one may resort to the Double Taxation Avoidance Agreement (DTAA) that India has entered into with other countries in order to mitigate the possibility of paying taxes in two countries.

The write-up is for general understanding. We suggest the readers to discuss with their CAs before deciding on their residential status and related tax-implications.

In the late 90’s when the Khan trio was making waves at the Box Office, there was one veteran who was dishing out a movie every second month and sometimes more than one in a month, a  trend which continued for over a decade. Mithun Chakraborty did intrigue me then, days when there was no google to check the economics behind this. The material relied on were mostly found in saloons.

“MITHUNOMICS” as I refer to, was possible in that era and practically impossible in the current Multiplex generation.

This went on to prove that one does not need a big star or a big banner to reap in profits while not making any noise at the Box Office.

First things first, Mithun slowly drifted away from Mumbai to Ooty down south, where in he had invested in a few businesses that included hotels and educational institutions.

A three-time national award winner would not want to let go of his acting intentions just because he moved out of Mumbai. This is where Mithun, the businessman played his cards well.

Ooty is a seasonal tourist place. However, during the lean season, tourism starts dwindling and the cascading effect is directly on the Hospitality industry.

Mithun decided to use this lean period to his advantage. He gave probably a 60 day call sheet to the producers, the leading lady would invariably be  Gautami, Shantipriya, Rambha, Ramya Krishnan, thus glorifying the resume of these actresses of having acted in a Bollywood movie. When the budget was slightly higher, an Ayesha Jhulka or a Pooja Batra would step in.

The Directors were mostly from South (TLV Prasad, Rama Rao, K. Bapaiah).

Charanon ki Saugandh
K Bapaiah directed this 1988 flick

A large part of the production cost is the fee of the lead artistes. Mithun had the equipments to shoot a movie and also capitalized on his hotel properties in Ooty, where the elite in the film crew stayed on. These were provided at discounted rates. So, in effect he was cashing in on both “Income from Profession” as well as “Income from Business”.

This tight schedule would minimize the interest rates and limited logistical issues in Ooty, helped in wrapping up the movie in quick time.

The movies were all formulaic, a dozen fights, 5 songs (including a mandatory item song), revenge, triumph of good over evil and finally all’s well that ends well. He sported the same look in all the movies. He went on to reject directors like Maniratnam, as he wanted to retain his look for the dish he was serving at such alarming frequency.

Rangbaaz
TLV Prasad movie

A low budget movie with Mithun could be easily wrapped up under a budget of 70-80 lakhs (50% being his fee and the balance comprising of fee for the others and other production costs). So who were his audiences? Like every dish has its own connoisseur, a Mithun movie had its own set of audience at B & C Centres, a term mostly referred to audiences in Rural India and small towns. The movies were released in these centres and in single screens in the Urban centres.

Distribution centres in India are divided into six territories: Bombay circuit, Eastern circuit, Delhi-U.P. circuit, C.P.-C.I.-Rajasthan circuit, Punjab circuit and the South circuit.

Mithun movies sold for anywhere between 20 to 25 lakhs in each of these territories with a size-able amount of prints being circulated. The movies could see an average occupancy of 75-80% over a 2 to 3 week run. So even a flop movie could bring back the investment and the money would be pumped back in to an other Mithun movie only. The Return on Investment here was far higher than any other bankable star back then. No wonder this made him the highest tax payer at that time.

Every innovation has a shelf life, alas this too had. The digital era and the dwindling single screens spelt doom for this kind of an experiment. The Satellite and digital rights of these movies have further raked in the money much after their shelf life. Even to this day you see these movies while channel surfing.

Key Management lessons from Mithunomics :

  1. Don’t be afraid to create your own niche
  2. Look for diversification of your Income Stream
  3. Create captive customers

Trivia: Ooty was once house to Hindustan Photo films that manufactured photographic films among other related material that once employed over 5,000 people. This too was victim of the Digital Era.

The Government of India has introduced a new Section 115BAC in the Finance Act 2020. The memorandum to Finance Bill 2020 says it is an incentive to Individual and HUF (hereinafter referred to as taxpayers), which are in line with options given to the Corporates under Taxation Law Amendment Act,2019 (TLAA).

The Tax rates under the new regime and the existing regime ( Both are available)

Total Income New Slab RateTotal IncomeExisting Rate
Rs 2.5 lakh to Rs 5 lakh5%Rs 2.5 lakh to Rs 5 lakh5%
Rs 5 lakh to Rs 7.5 lakh10%Rs 5 lakh to Rs 10 lakh20%
Rs 7.5 lakh to Rs 10 lakh15%Above Rs.10 Lakhs30%
Rs 10 lakh to Rs 12.5 lakh20%  
Rs 12.5 lakh to Rs 15 lakh25%  
above Rs 15 lakh30%  
Two easy looking Choices – doesn’t mean easy to choose!

To avail the concessional tax rate a tax payer has to forego the following exemptions, deductions and benefits. There are approximately around 70 exemptions/deductions to which a tax payer is not eligible under the new regime and the most common one are;

  • Standard Deduction of Rs.50,000/- (available to Taxpayers having Salary Income under existing tax regime)
  • Professional Tax paid on employment – (available to Tax Payers having Salary Income under existing tax regime)
  • House Rent Allowance (available to Tax Payers having Salary Income under existing tax regime)
  • Children Education Allowance  (available to Tax Payers having Salary Income under existing tax regime)
  • Special Allowances like Uniform Allowance (available to Tax Payers having Salary Income under existing tax regime)
  • Meal Vouchers (available to Tax Payers having Salary Income under existing tax regime)
  • In the case of tax payer having business income
    1. Additional Depreciation
    2. Allowances for Scientific Research
  • Deduction from Family Pension
  • Interest on Housing Loan for Self occupied property or Vacant Property
  • Chapter VIA Deductions (80C, 80D, 80E and so on)
    1. Life Insurance Premium
    2. Children Tuition Fees
    3. Housing Loan Repayment
    4. Contribution to Provident Fund
    5. Contribution to Equity linked Saving Scheme
    6. Mediclaim (health insurance)
    7. Repayment of Education Loan
    8. Donation

The primary objective of introduction of the new tax regime for Individuals/HUFs was to simplify the tax laws, as tax laws are generally perceived as more complicated legislation, but however a tax payer has to do an herculean exercise to see whether the new tax regime is beneficial to him or not.

The following table gives an indication when the new tax regime is beneficial to him/her; (all in Rs.)

Taxable
Income
Break Even Point 
for
deductions
/exemptions
When is New Tax Regime
Beneficial?
When is Old Tax Regime Beneficial?
Up to
5,00,000
0No differenceNo Difference
5,50,00025,000If deductions/exemptions
are <=Rs 25,000.
If deductions/exemptions
> Rs 25,000.
6,00,00050,000If deductions/exemptions
are <=Rs 50,000.
If deductions/exemptions
> Rs 50,000.
6,50,00075,000If deductions/exemptions
are <=Rs 75,000.
If deductions/exemptions
> Rs 75,000.
7,00,000100,000If deductions/exemptions
are <=Rs 100,000.
If deductions/exemptions
> Rs 100,000.
7,50,000125,000If deductions/exemptions
are <=Rs 125,000.
If deductions/exemptions
> Rs 125,000.
8,00,000137,500If deductions/exemptions
are <=Rs 137,500.
If deductions/exemptions
> Rs 137,500.
8,50,000150,000If deductions/exemptions
are <=Rs 150,000.
If deductions/exemptions
> Rs 150,000.
9,00,000162,500If deductions/exemptions
are <=Rs 162,500.
If deductions/exemptions
> Rs 162,500.
9,50,000175,000If deductions/exemptions
are <=Rs 175,000.
If deductions/exemptions
> Rs 175,000.
10,00,000187,500If deductions/exemptions
are <=Rs 187,500.
If deductions/exemptions
> Rs 187,500.
10,50,000187,500If deductions/exemptions
are <=Rs 187,500.
If deductions/exemptions
> Rs 187,500.
11,00,000187,500If deductions/exemptions
are <=Rs 187,500.
If deductions/exemptions
> Rs 187,500.
11,50,000187,500If deductions/exemptions
are <=Rs 187,500.
If deductions/exemptions
> Rs 187,500.
12,00,000191,670If deductions/exemptions
are <=Rs 191,670.
If deductions/exemptions
> Rs 191,670.
12,50,000208,330If deductions/exemptions
are <=Rs 208,330.
If deductions/exemptions
> Rs 208,330.
13,00,000216,665If deductions/exemptions
are <=Rs 216,665.
If deductions/exemptions
> Rs 216,665.
13,50,000225,000If deductions/exemptions
are <=Rs 225,000.
If deductions/exemptions
> Rs 225,000.
14,00,000233,330If deductions/exemptions
are <=Rs 233,330.
If deductions/exemptions
> Rs 233,330.
14,50,000241,670If deductions/exemptions
are <=Rs 241,670.
If deductions/exemptions
> Rs 241,670.
15,00,000
& Above
250,000If deductions/exemptions
are <=Rs 250,000.
If deductions/exemptions
> Rs 250,000.
Long list of indifference points

How to opt for new tax regime;

  • A tax payer not having income from Business or Profession can opt for the new tax regime at the time of filing the tax returns for the respective assessment year.
  • A tax payer having income from Business or Profession can opt for the new tax regime before the due date for filing the tax returns and once opted same shall apply to subsequent assessment years.

How to exit from the new tax regime;  

  • A tax payer having only Income from Salary, House Property, Capital Gain and Other Sources can choose every year while filing the tax returns
  • A tax payer having income from Business or Profession can opt out of the new regime only once and there after the normal provisions of Income Tax Act will be applicable. He cannot choose the new tax regime as long as he is having Income from Business or Profession.

So how does one choose which regime is better ? To help you decide, we have already provided detailed list of indifference points and along with that following Rules of Thumb can be helpful.

#Tax PayerWhen is new tax regime beneficialRemarks
1Salaried EmployeesThose who have just taken up the employment and whose salary is more than Rs.600,000/- and staying in own house and not made sufficient savings like investment in PF/Insurance Premium during the year.    As the Tax payer has an option to opt for the new tax regime better to evaluate before filing the tax returns every year.
2Having income from business/ProfessionThose who are not paying interest on self-occupied property and not having sufficient savings like investment in PF/Insurance Premium during the yearExtreme caution to be exercised before opting for the new tax regime as there is only one time option to exit from the scheme.
Rules of Thumb for New Tax Regime

The write-up is for general understanding. We suggest the readers to discuss with their CAs before deciding on choosing either of the tax rates.

“Education is the manifestation of perfection already in man”. This has been aptly stated by Swami Vivekananda. Every year thousands of Indian students flock to universities abroad in the hope of experiencing the much-coveted foreign education and leading what is popularly thought to be a luxurious lifestyle. But the reality is quite contrasting to these widespread beliefs.

The point I wish to highlight in this article is about the tremendous difficulties faced by international students while undertaking part time jobs in Australia. Legally, under the terms and conditions of the visa, an international student is permitted to work up to 20 hours per week and 40 hours a fortnight. There is no limit on the number of working hours during vacations (which constitute around 4-5 months in the total study period, assuming two years masters’ degree). On the face of it, this appears to be a very reasonable and generous provision. Students (who often have a massive loan burden), assume they can cover up most of their living expenses coupled with additional spending on travel and leisure.

Australian Dollar

However, a closer look at the Australian legal system and the job sector provides astonishing results. Approximately, only a quarter of formal established companies prefer to take international students for part-time jobs. A callous attitude of employers coupled with distrust towards international students, leads to many of them not being able to find jobs in their preferred interest areas, to gain industry experience.

As a result of this, many are forced to take up casual jobs in fast-food chains, restaurants, and retail stores. The labour laws of Australia (popularly called the Fair Work Ombudsman) prescribe a minimum wage of 22 Australian dollars (AUD) per hour. However, even a cursory look at these wages hints at widespread exploitation of international students, with many being paid as low as AUD 5-10 per hour.

Employers play around this rule by not accounting the overtime work. Let us say an international student works for 40 hours in a restaurant which is more than allowed limit – the employer shows only 20 hours in books and the rest of the 20 hours are not reflected on the records. And the direct consequence of this is that 20 hours never get paid. Thus, making it an effective rate of AUD 11 per hour.

Part-time jobs in Australia

Monthly expenditure for a student in Australia can be broken down into the following segments namely: Groceries (AUD 500), Travel (AUD 200), Rent (AUD 1200) and other miscellaneous charges (AUD 100), which comes to a total of AUD 2000 approximately. The deficit is generally big – which needs constant funding from parents.

The said amount is not sufficient even to meet basic needs such as groceries, let alone being able to pay rent and other allied expenses. Furthermore, in certain circumstances, students are coerced to work beyond the legally permitted hours, which might result in facing the risk of visa cancellation and deportation at the hands of law enforcement officers. 

Moreover, majority of the students in their respective home countries, are not accustomed to taking up casual jobs while undertaking their education. While struggling with an inherently competitive educational system which places incredible emphasis on academic achievements, supporting oneself through casual jobs is a far cry in most instances. Thus, a sudden change in the system of instruction coupled with separation from families puts enormous pressure on many young minds and often proves to be detrimental.

It is worth noting Australia sees around a million new student enrollments every year. It is a hot destination for both undergrad and post-graduation education and comes a close third after US and UK in terms of overall attractiveness – counting reputation of Universities, cost of the program and post education work opportunities. Chinese and Indians form major chunk of these enrollments. With visa restrictions tightening in US – Indians have increasingly looked at Australia to get their higher education credentials.

So, what is the solution? In my opinion, students must be prepared in the “real” sense before planning to move abroad. It is mandatory to do extensive research on local employers and support the same with adequate networking. This can minimize the chances of being exploited in Australia as a student. Finally, it is quintessential to stay strong and not lose hope even in despair situations.

After pondering for a couple of weeks, on what topic to kick start this new column, I finally decided to take you through the economics of movie making on a ‘First Copy’ basis. This concept is unique to the Indian Film Industry.

This is probably the biggest gamble a producer takes, when he ventures into making a movie on a first copy basis. On the other hand, the producer is saved from micro management of the shoot and crew on a day to day basis.

In this method of film making, a producer hands over a fixed amount to a studio (usually owned by the chosen director), who takes center stage, and the studio would be responsible for every penny spent and the responsibility vests on the studio to make sure that the budget (including the director’s own remuneration) does not exceed the fixed amount as inked out in the contract.

The final outcome and quality of the movie is what makes all the difference. A lot of corporates have adopted this methodology, and quite a few have folded up or have stopped making movies altogether.

Directors feel that this increases their creative freedom as there is no frequent interference from the producer or the Production house.

A very recent occurrence is a very good example of how this mechanism can end up in a mess.

The Tamil remake rights of the blockbuster Telugu movie Arjun Reddy was bought by “E4 Entertainment” owned by Mukesh Mehta for around 2 Crores. The production house decided to launch Dhruv Vikram (Son of Chiyaan Vikram) and the chosen director was none other than the National Award winning Bala who made Vikram a star to reckon with. E4 Entertainment signed up a Contract with B Studios (owned by Director Bala) to direct the movie on a First Copy basis for an agreed sum of 12 crores. On completion of the project, when the ‘First Copy’ of this movie titled ‘VARMAA’ was handed over to E4 Entertainment, to their utter shock all they saw was a final product with a run time of two hours (the original had a run time of close to 3 hours). As per the producers, the filming cost apparently could not have exceeded 3 crores, thus the director making nearly 9 crores in this deal.

With a stubborn director who was not ready to tamper with his creativity, the whole project was scrapped and E4 Entertainment went on to make this movie all over again with Dhruv Vikram helmed by a new director and an altogether new crew with an altogether new title ‘ADITHYA VARMA’. However, when the movie released, it tanked at the Box Office. This is the first such instance in the history of Indian Cinema, where the same movie was made twice in the same language. Now the production house, is apparently in talks with OTT platforms to release the first version.

Arjyn Reddy 
Adithya Varma
Varmaa
Poster boys for “First Copy” mess

 Acclaimed actor Aravinnd Iyer, of Kirik Party and Kahi fame, sums up this mechanism;

 “Films are an expensive art form and the business implications play a huge part in green lighting a project. The more number of revenue streams your project caters to (theatre, satellite, OTT, remake, dubbing, music) better the chance of your project being sanctioned.

50 % – 60% of overall budget is spent in production. Around 20% -25% in post-production. 5% – 10% for pre-production. 10% – 20% of the budget is spent on remunerations. These percentages vary completely once a star actor or director, or a big banner is involved.

Collaborations like these play a huge role in reducing the overall cost of making a film. The digital format has made it easy to shoot movies, however it has hugely impacted the process and planning of film making. Most productions bleed for this very reason.”