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S R Tejasvi B.Com, FCA

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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.

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.