Categories
Technical

New Tax Regime Vs. Old Tax Regime – A Comparative Study

The hardest thing in the world is to understand Income Tax.

Albert Einstein

When it comes to income tax there is a whole lot of fuss among individual tax payers. They more often understand a very little and get confused. Let me tell you what made me write this article before you think why I am I late to the Budget 2020 party. I was talking to a friend of mine last day. His tax liability under new regime will be Rs. 1,25,000 for AY 21-22 and he was asking me very genuinely if he can reduce his tax burden to Rs. 50,000 by investing Rs. 75,000 in LIC. He not only mixed up the benefit of old regime with the new regime but also got the calculation completely wrong by deducting the allowable deductions from total tax liability instead of deducting from Gross Total Income.  

Budget 2020 introduced a new personal income tax regime for individual tax payers with more tax slabs and lower tax rates but it came with a catch of removal of all available deductions and exemptions. To add to the confusion, the Finance Minister gave tax payers a choice to choose between new regime and old regime. This in fact made the whole process more complex instead of making it simpler. We will try to understand the current tax system first and then compare it with the new regime.

Current tax system – High tax rates with lot of scope for tax planning

Though tax rates are high here there is a lot of scope to pay reduced tax with proper tax planning. The existing rates are as below:

The income tax law allows the individuals to claim various exemptions and deductions. HRA exemption, Leave travel allowance, standard deduction of Rs. 50,000, Health insurance premium, Interest portion of housing loan, Savings account interest, various deductions under 80C like LIC, PF, ELSS, Principal portion of housing loan etc. being few among them. The tax is calculated on the income after claiming all the available exemptions and deductions.

The taxable income can be reduced in lakhs if he is willing to invest. This scheme encourages the tax payers to make investments and save tax to a great extent.

New Regime – Lower Tax Rates with no deductions

Under new regime, the government has introduced more slabs and low tax rates up to Rs. 15,00,000. This is very simple and plain to calculate as the tax payer can’t claim any deduction from his total income. The tax rates under this regime is as below:

As most of the exemptions and deductions are not applicable, this will benefit the sect who don’t usually claim any deduction or very little deduction. People who opt this model don’t save money and end up spending a lot. This is in fact a bad phenomenon in the long run both for the individual and the investment companies.

New Regime vs Old Regime – A comparative case study

Let’s deep dive into the topic and try to understand this from a practical point of view.

Mr. Smart earns Rs.7,50,000 per annum including HRA of 60,000. He invests Rs. 1,00,000 in LIC (80C). He pays medical insurance premium of Rs. 10,000 per year.

Tax liability of Mr. Smart under new regime will be:

Now, let’s calculate the tax liability under Old regime:

Since Mr. Smart has some allowable deductions. The first step is to calculate his taxable income.

Now it’s the time to calculate the tax liability of Mr. Smart under old regime.

Note: It’s assumed that whole HRA received by the tax payer is allowable under income tax laws.

*Cess is not taken into account while calculating the final tax liability

Now, there is one very interesting point. Say if Mr. Smart is willing to invest 30,000 more in LIC, then his tax liability will be ZERO. This is on account of relief under section 87A. This section gives a tax relief of up to Rs. 12,500 for small tax payers.

It’s crystal clear that Mr. Smart should opt for old regime from the above study.

What if Mr. Smart doesn’t invest in LIC and pay medical insurance?

The tax computation under new regime will remain same as there is no change in his income.

However, the tax computation under old regime will change drastically.

Calculation of Taxable Income

Calculation of Tax Liability:

In this scenario, Mr. Smart should act smart and opt for new regime as its beneficial by Rs. 13,000.

One can save up to Rs. 75,000 (excluding surcharge & cess) opting new regime. A comparative study is as below:

Notes:

-Its assumed that the individual has no applicable deductions/exemptions as per old regime including loss on self-occupied house property.

-Tax liability is calculated excluding cess and surcharge (if any).

-87A relief is applicable for individuals earning up to Rs.5,00,000 and hence no tax.

-Basic exemption income slab in case of a senior citizen and super senior citizen remain at the same 3 lakhs and 5 lakhs respectively.

Conclusion

It’s very clear that the changes introduced doesn’t make things easier for tax payers. One shall choose the regime which is most beneficial for him. New regime will do good to someone who is not intending to invest any money in any tax savings plan.

If you are looking to fulfill your financial obligation, namely- wealth creation through investments in tax saving instruments, paying premium to address your life/health insurance needs, EMI on educational loan, buying a house with home loan etc. the older regime still works in the interest of your financial wellbeing.

Talk to our experts today and plan your tax. Download our Income Tax Planner for FY 2020-21 to plan your taxes yourself

Categories
Technical

Income Tax On Revenue From YouTube

YouTube video blogging, popularly known as vlogging has reached at the peak of its popularity by now. The trend of googling for a content has shifted to you tube search. Many budding vloggers are making money from YouTube. However most of them are not aware of the tax implications. Let’s try to explore this in detail.

Note: The same treatment is applicable for Adsense Revenue from blogging as well.

Why Income from YouTube is Taxed in India?

As per the Income tax laws, if the income is received in India, it’s taxable in India. I am obvious that now you will be thinking why then TDS for the same was not deducted. If you read through the AdSense contract entered between Google and Content creator in India, you will notice that the contracting google entity is Google Asia Pacific Pte. Ltd i.e. Singapore entity. The snippet of the contract is here: 

Now lets see what does the contract specifically say about withholding tax or TDS:

It’s very important to understand that when payment is made by a foreign company, the taxation rules of that particular country along with DTAA provisions will hold good. Double Taxation Avoidance Agreement(DTAA) is signed between countries to avoid taxing the same income in both the countries.  As per Article 7 of DTAA Agreement between India and Singapore, this income shall be taxed in the country in which enterprise is present. I.e. India.

How is AdSense Income treated under Income tax law?

The income from YouTube can be treated as:

  • Income from Business or Profession
  • Income from Other Sources

 Let’s now try to understand the above scenarios:

Income from Business or Profession

If vlogging is your full time activity or main source of income you may offer your income under Income from Business and Profession for taxation. You may run your business as sole proprietor, Partnership Firm, LLP or Private Limited Company.

You will be taxed as sole proprietor unless you register your business as a company, LLP or Partnership. Here, you are effectively running a business and you are eligible to deduct all the expense you incurred to make this income.

Let’s now try to understand this with an example. Mr A earns Rs. 20 lacs during the FY 2019-20 by doing travel vlogs. He incurred following expenditure to earn the income.

1.Marketing Expense – Rs . 1,00,000

2.Advertisement Expense – Rs. 50,000

3.Travelling expenses- Rs. 5,00,000

4.Internet expenses- Rs. 12,000

5.Camera (Capital expenditure) – Rs. 3,00,000

6.Car (Capital expenditure) – Rs.6,00,000

Here , Mr. A need to pay tax only on the Net Profit made during the year. Since assets like camera and car can be used over a period of time, only depreciation (40 % on camera and 15% on car) can be claimed as expenditure as per income tax laws. However, the balance amount can be claimed as expenditure in the coming years.

The total expenses Mr. A can claim is as below:

1.Marketing Expense – Rs .1,00,000

2.Advertisement Expense – Rs. 50,000

3.Travelling expenses- Rs. 5,00,000

4.Internet expenses- Rs. 12,000

5.Camera (Capital expenditure) – Rs.1,20,000 (40%*3,00,000)

6.Car (Capital expenditure) – Rs. 90,000(15%*6,00,000)

The Net Profit made by Mr. A after setting of the above expenditure of 8,72,000 is Rs.11,28,000. Tax should be computed at applicable rates.

If you are making loss, you can carry forward this loss and set off against future profits.

Note: To claim the expenditure, the business should maintain proper documents relating to the same.

Alternatively, individuals/HUF/Resident Firms can make use of Presumptive taxation under section 44AD of income tax act and declare 6% of gross receipts (as receipt is through electronic medium) as Net Profit. Books of accounts need not be maintained if presumptive taxation is opted. This is in fact the best option to save tax if your business makes consistent profit.

Notes:

a. The benefit of this provision can’t be utilized if your gross receipt exceeds Rs.2 crores.

b. If you make loss in any year and opt to file returns under normal provisions, then you can’t use this option for a period of 5 years.

Not to forget, if your gross total income exceeds Rs 1 crore, you must follow all bookkeeping requirements under Rule 6A and get your accounts audited by a Chartered Accountant(CA) under section 44AB of Income Tax Act,1961. However, if you are opting for 44 AD presumptive taxation you are exempted from Audit under section 44AB.

Income from Other Source

If vlogging is your hobby and you are earnings are not huge, you may opt to offer your income under Income from Other Source for taxation. It’s very common these days that people start vlog to earn an additional source of income.

Let’s try to understand this with an example. Mr. B is employed in XYZ Ltd and earns Rs. 40,000 Per month. He is interested in bikes and started a vlog. He started uploading bike review videos on weekends and made 1,00,000 during the FY 19-20.Mr. B incurred an expenses of Rs.30,000 attributable directly for making the videos (excluding capital expenditure). Here, he can show Rs.4,80,000 under Income from salary and Rs. 70,000 from Income from Other Source while filing the Income Tax Return(ITR). Tax shall be computed at applicable rates after considering allowable deductions.

Note: Capital expenditure can’t be claimed as expenditure under section 57 of income tax act. Hence it’s always advisable to offer the income under Income from Business and Profession if there is a capital expenditure like purchase of Camera, Computer etc. exclusively for this purpose.

Is Advance Tax applicable for AdSense Income?

Advance tax shall be paid if the total tab liability is Rs. 10,000 or more in a financial year. Nonpayment of advance tax will attract Interest under section 234B and 234C.

Consequences of non-payment of Tax and non-filing of ITR? 

a. If you don’t pay tax, the income earned will be considered as illegal. This is in fact concealing income to evade tax. A penalty ranging from 100% to 300% of the tax evaded will be charged as per section 271(C)

b. A penalty of minimum 10% and maximum of 90% of undisclosed amount can be charged under section 271AAB based on circumstances.

c. If you don’t file the return on or before the due date, the rate of 1% will be charged every month, or part of the month, on the amount of tax remaining unpaid as per section 234A.

To sum up if your total income from Adsense is less than Rs. 2.5 lac, then you are not required to file ITR. You may read our article Things to keep in mind while filing income tax return to know more about ITR filing.

 

Categories
March

COVID-19 And Its Impact on Financial Reporting

It doesn’t take more than a brief scan of the news to see the devastating impact of coronavirus (COVID-19). The fallout that the virus can and will take on human life is paramount. But beyond the toll this has taken on public health and safety, businesses around the world are also wrestling with how susceptible they have become to any potential volatility. The businesses which are dependent on supply from china or have exposure to the Chinese market are the worst affected.

We are trying to address the difficulties that will be faced by entities while preparing their financial statements for the year

The key challenges are:

  • to capture the potential impact and implications on assets, liabilities and results.
  • to provide appropriate disclosures to the stakeholders in an evolving business scenario in notes to accounts and management discussion and analysis statement for listed companies.

We are going to discuss this in detail below:

IAS 10 – Events after the reporting period (Ind AS 10 Events after the Reporting Period / AS 4 Contingencies & Events occurring after the Balance Sheet Date)

Events occurring after the reporting period /balance sheet date (31st Dec 2019) are those significant events , both favorable and unfavorable  , that occur between the balance sheet date and the date when the financial statements are authorized for issue (Board of directors in case of a company or corresponding approving authority in case of other entity). IAS 10 Events after the reporting period makes a distinction between adjusting and non-adjusting events after the reporting period. The adjusting events are those which provide further evidence of conditions that existed at the balance sheet date and Non adjusting events are those which are indicative of conditions that arose subsequent to the reporting period. The challenge while preparing the Financial statements is to identify which events after the reporting period is to be considered as adjusting events and what disclosures are to be provided for the non-adjusting events.

The coronavirus outbreak occurred at a time close to the reporting date and the condition has continued to evolve throughout the time line crossing 31st Dec 2019. In 2019 end, few cases displaying the symptoms of a “pneumonia of unknown cause” were identified in Wuhan, the capital of China’s Hubei province. On 31st Dec 2019, China alerted the World Health Organization (WHO) of this new virus. On 30th January 2020, the International Health Regulations Emergency Committee of the WHO declared the outbreak a “Public Health Emergency of International Concern”. Since then, more cases have been diagnosed, also in other countries. Measures were taken and policies imposed by China and other countries. Gradually more information became available” The conclusion that the management need to make is whether the coronavirus outbreak is an adjusting event or a non-adjusting event. While making this judgement, the management shall take into consideration all the available data relating to the same including the nature and timeline of the outbreak including the measures taken. Learn more

IAS 1 – Presentation of Financial Statements (Ind AS 1 Presentation of Financial Statement / AS 1 Disclosure of Accounting Policies) – Going Concern

One of the basic fundamental accounting assumptions while preparing the Financial statements is that the entity will continue to operate for a foreseeable future. While preparing Financial statement, an assessment about entities ability to continue as a going concern should be done along with appropriateness of going concern assumption.

In assessing whether the going concern assumption is appropriate, the standard requires that all available information about the future (at least for a period of 12 months) from the end of reporting period should be taken into account. This assessment needs to be performed up to the date on which the financial statements are issued. The entity while making an assessment shall take into consideration the effects of the coronavirus outbreak. Learn more

IFRS 13 – Fair Value Measurement (Ind AS 113 Fair value measurement)

Fair value is a market-based measurement, not an entity-specific measurement. For some assets and liabilities, observable market transactions or market information might be available. For other assets and liabilities, observable market transactions and market information might not be available. However, the objective of a fair value measurement in both cases is the same—to estimate the price at which an orderly transaction to sell the asset or to transfer the liability would take place between market participants at the measurement date under current market conditions i.e.  on the reporting date the available information is taken into account while assessing the market condition. The company may also do some due diligence that are usual and customary while assessing the market condition as on the reporting date. Learn more

IFRS 9 – Expected Credit Loss Assessment (Ind AS 109 – Financial Instruments)

A credit loss is the difference between the cash flows that are due to an entity in accordance with the contract and the cash flows that the entity expects to receive discounted at the original effective interest rate. It is no longer necessary for a credit event to have occurred before credit losses are recognized as per IFRS 9.

The measurement of expected credit losses of a financial instrument should reflect:

a) an unbiased and probability-weighted amount of potential loss that is determined by evaluating a range of possible outcomes;

b) the time value of money; and

c) reasonable and supportable information that is available without undue cost or effort at the reporting date about past events, current conditions and forecasts of future economic conditions.

In assessing the expected credit loss, the management should consider reasonable and supportable information as on the reporting date. The assessment may vary from company to company depending upon the entity’s specific situation and its methodology in assessing ECL. It would particularly be important for the management to consider the effect of COVID-19 on receivable balances from countries that have been most affected by the pandemic. Learn more

IAS 36 – Impairment Assessment (Ind AS 36 Impairment of Assets / AS 28 Impairment of Assets)

The standard prescribes that the assets should be carried at their recoverable value. If the recoverable value is less than the carrying value, the asset shall be impaired to that extend. Recoverable value is higher of Fair value less cost of disposal and Value in use (present value of future cash flow)

The impairment tests are carried out on each reporting period when there is an indication for impairment. Events after the reporting period and information received after the reporting period should be considered in the impairment indicator assessment only if they provide additional evidence of the conditions that existed at the end of the reporting period. Similarly, the determination of the recoverable amount of an asset should only consider the information obtained after the reporting date if such conditions existed as on the reporting period end. This judgmental assessment should be based on the facts and circumstances. Learn more

Various other issues

Apart from the difficulties while preparing the financial statements, the accountants shall keep in mind many more things. We will try to give a glimpse of a handful of events where you should be alert as an accountant to keep things in place:

  • Effect on Revenue Recognition: Due to the lockdown, it may not be possible to get customer approval to invoice and reorganize the revenue. This hits the profit and loss statement of an entity badly if their major customers are in countries like China, Italy, Korea etc.
  • Decrease in collections – The cash flow will be badly affected as this pandemic is uncertain and many countries have called for a shut down. The team shall then focus on the other geographies to get the maximum collection to compensate the effect due to the coronavirus outbreak to keep your cash flow intact.
  • Struggle to get information – Inability to obtain reconciliations and confirmations from suppliers, customers and others. Alternative procedures shall be encouraged to obtain the relevant information.
  • Valuation and Write offs – The disruption in production cycles and supply chain could lead to potential write offs of inventories and other limited life assets. The outbreak will also affect the net realizable value of inventories (IAS 2 Inventories / Ind AS 2 / AS 2 Valuation of inventories)

The coronavirus outbreak is evolving and the management should keep an eye open for guidance published by the relevant accounting body .It is very important that the management shall not just evaluate and prepare to report on the impact of coronavirus on their own instead they shall seek the help of auditors and business consultants to ensure reliable and high quality financial statements. The path ahead may be uncertain, but a company that is diligent can take steps to tackle this tumultuous time and use it for their benefit. Don’t forget every challenge is an opportunity in hindsight.

For more insights on how to mitigate COVID-19, download COVID-19: Impact on your business

Categories
March

Things to keep in mind while filing income tax return (Individuals)

Income tax return filing is a nightmare for many, but its a task that needs to be done by any person liable to pay tax/claim refund. There are certain things which you need to know when you file your ITR, more importantly if you are a first timer. It is not just a penalty and interest that is imposed on you that you need to be mindful about, but there are other consequences as well. Here are some insights on filing your IT return, late filing and related consequences;

1)Who should file an ITR: Any Person with Gross Total Income exceeding 2.5 lacs (before allowing any deductions ) . However the limit is 3 lacs for senior citizens (aged >60 years but less than 80 years) and 5 lacs for super senior citizens ( aged 80 years and above) OR if a person wants to claim income tax refund .

2)When to file an ITR : Every individual has to file ITR before the due date without any late fee or penalty . Tax Payers filing their return beyond such due date will have to pay interest under Section 234A. The due date varies between tax payers . For instance , 31st July is the due date for assesses who are not required to get their books audited .

3)Which form to use to file your ITR : The ITR Form and corresponding incomes are listed below :

ITR 1 – Salary Income , House Propery Income  and Income From Other Sources ( Interest income , Winnings from lottery etc)

ITR 2 – Salary Income, House Property Income (more than one House Property)  , Capital Gain Income , Income From Other Sources , Agricultural income upto Rs .5000

ITR 3 – Salary Income, House Property Income (more than one House Property) , Capital Gain Income , Income From Other Sources , Proprietorship Business Income , Professional income , Partnership income and agricultural income more than Rs.5000

ITR 4 S-  Individuals opted for the presumptive income scheme as per Section 44AD , Section 44 ADA and Section 44AE of the income tax act .

4)How to file an ITR :

  • Self-Assessment: Filing ITR is based on self-assessment. Hence, the onus is on the individuals to disclose all incomes even if it’s an exempted income. Assesse (Individuals) often fails to disclose petty incomes like bank interest (Saving and Fixed deposit ) which often leads to notice from income tax department .
  • Verify Form 26AS : Form 26AS is an annual consolidated income tax credit statement .Individuals should check if all the incomes reflected in Form 26AS is included in ITR . Ignorance of this ends up in mismatch and leads to notice from income tax department, which would become an headache later
  • e-Verify : Once the ITR is filled and submitted , make sure that the return is e verified with in 120 days . You can also send the signed acknowledgement to the income tax CPC office if you are not able to e verify the same  . Your return won’t be processed unless you e verify .The return filed but not e verified will be treated as an invalid return . An invalid return would mean that you have not filed the ITR return for a particular assessment year . However you can file condonation of delay under Section 119 and whether to allow the same or not is at the discretion of the commissioner of income tax .

Note: Every individual shall keep a safe custody of all the documents relating to the deductions claimed to avoid further inconvenience during the proceedings. Such documents include the deductions claimed under Section 80C, Section 80D etc

5)Why you should file on time:

  • File your retun on time without errors to avoid penalty upto Rs.10,000 under secrion 234F.
  • If you don’t file the return on or before the due date, the rate of 1% will be charged every month, or part of the month, on the amount of tax remaining unpaid as per section 234A.
  • Carrying forward of the losses is not allowed if you don’t file the return on or before the due date. You will be deprived of carrying forward your losses for set off against your income in the next years.

Talk to our Tax experts today in order to reduce the risk of non-compliance and ensure a good sleep knowing your return is in safe hands.