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Devolution of taxes and India’s economic recovery

The Centre has decided to release INR 95,082 crore to States as tax devolution amount on 22nd November. So what does tax devolution even mean and what does this decision entail?

Let’s find out:

What is tax devolution?

Let’s start from scratch. India is a quasi-federal country. This means although we have a Centre-State structure, the centre holds more power than the states. This also translates into the economic sphere. The states are dependent on the centre for a large chunk of their financial resources. Devolution is one of the ways through which states receive money from the central government. It is basically the state’s share of taxes from the Gross Tax Revenue.


The 15th finance commission has decided that states will receive 41% from the divisible tax pool for 2021-22 to 2025-26. In other words, states will receive 41% of the Gross Tax Revenue.

Now it must be remembered that devolution of taxes is not the only way through which states receive resources from the centre. States also receive monetary support via various scheme related transfers, grants from the Finance Commission and so on.

What will this transfer mean?


So, the devolution of taxes is usually done via monthly instalments of INR 47, 541 crores. The centre has decided to release another INR 47,541 crore this month so that states have more resources in their hand. This advance payment will be adjusted in March 2022.

A meeting was called upon to discuss India’s economic growth post the pandemic and how to push it towards double digits. In this meeting between the Centre and the state representatives, many states requested the Finance Minister to increase the capital spending capacity for states.

A close collaboration between the centre and states will be instrumental in achieving the goal of double-digit growth figures. And in this mission, an increased amount of resources in the hands of the states would enable them to invest more in infrastructure and growth. This will also allow the states to invest in those sectors which were more affected than others during the pandemic for example the hospitality and tourism sector.

India’s economic recovery post-pandemic

The pandemic was a huge blow not only to the Indian economy but the global economy in general. The Indian economy witnessed a significant fall in its real GDP in 2020. However, since the ebbing of the second wave of the pandemic, India’s economy has been making a steady yet cautious recovery. In the first quarter of 2021, India witnessed a  20.1% increase in its GDP which brought the economy close to its pre-pandemic level. The covid 19 vaccination drive has been one of the major contributors to restoring the growth. And in the latter part of the year, the festive season has been a similar stimulus.

While organisations like Ficci and Ftech have forecasted a robust growth rate for the Indian economy in the near future, it is important to tread cautiously. Agricultural growth and rural demand are having a positive effect on the economy. However, the impact of the pandemic on sectors like hospitality and tourism continues to have a multiplier effect.

There is no doubt about the fact that India is surely on a steady path of recovery. However, it is important for us to take an optimistic yet judicious approach while analysing and understanding this recovery and growth.

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Decoding the Annual Information Statement(AIS)

Heard of the Annual Information Statement (AIS)? It may well replace Form 26AS in the coming future. So what is the Annual Information Statement (AIS)? And how is it going to impact taxpayers? Let’s find out.

What is the Annual Information Statement?

Up until now, Form 26AS served as a consolidated annual tax statement which included details of any TDS that might have been deducted and deposited on your behalf, Advance or Self Assessment Tax paid, as well as records of high-value transactions that you may have made.

The Annual Information Statement on the other hand includes many more categories of information like securities & mutual fund transactions, interests, dividends, foreign remittance information and more. The reported information has been processed to remove duplicate information.
It may contain any other transaction-related information that may be available with the Income Tax Department. Taxpayers will be able to download the AIS in JSON, PDF and CSV format.

Form 26AS will continue to be available on the TRACES portal until the AIS is validated and is completely operational.

What are some of the important features of the AIS?

  1. Taxpayers can submit online feedback on AIS. If the taxpayer feels that any incorrect information has crept in, they can submit that feedback online. Taxpayers can also submit the feedback offline via AIS utility.
  2.  A Simplified Taxpayer Information Summary (TIS) will also be provided to each taxpayer. This will show the a summary of a taxpayer’s incomes as per ITD. If the taxpayer changes any information on the AIS, the derived information in the TIS will get updated in real-time. With the help of TIS, taxpayers can :
    • Tally their security transactions with the broker statement.
    • Cross verify the dividends that they have received in the bank. account with what is mentioned in AIS.
    • Access information related to refund or demand for previous year’s ITR.

What does this mean for taxpayers? 

Taxpayers need to carefully check all the transactions reflected in the AIS and make necessary amends (if any) because this information will be vital for filing ITR.
In case of any mismatch in the TDS/TCS details displayed on Form 26AS and AIS – at present, it is recommended to follow Form 26AS available on TRACES.

How to view AIS?

Users can access the AIS by clicking the link “Annual Information Statement (AIS) under the “Services” tab of the new Income Tax Portal. 

Taxpayers need to check and verify the information shown in the AIS and make amends (if necessary) before filing ITR for the current tax season. However, if the ITR has already been filed and some information has not been included or has been wrongly included, the return may be revised to reflect the correct information. 

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Exemptions for the Schedule Tribe

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Introduction

People classified as Scheduled Tribe as defined in Clause 25 of Article 366 of the Constitution residing in a Sixth Schedule area are exempted from paying income tax under Section 10(26) of the Income Tax Act of 1961.

Simplifying the above statement, the schedule tribes can avail this tax exemption if they reside from the specific regions to which this exemption has been made available. That basically means 0 tax. Intrigued? Lets dig in and understand the scenarios where the above mentioned people are exempted from paying income tax.

Provisions under Income Tax Act 1961

Section 10(26) of Income Tax Act 1961: In the case of a member of a Scheduled Tribe as defined above or in the  States of Arunachal Pradesh, Manipur, Mizoram, Nagaland and Tripura] or in the areas covered by Notification No. TAD R 35 50 109, dated the 23rd February, 1951 , issued by the Governor of Assam under the proviso to sub- paragraph (3) of the said paragraph  as it stood immediately before the commencement of the North- Eastern Areas (Reorganisation) Act, 1971 (18 of 1971 )], any income which accrues or arises to him,-

(a) from any source in the areas 9 or States] aforesaid, or

(b) by way of dividend or interest on securities;

The Explanation

A complex statement always needs an explanation. So here it is:

The above statement means that the exemption is given in relation to income arising from the specified areas to the specific people who satisfy the criteria that are mentioned in the provision can claim this exemption u/s 10(26). We will discuss the criteria in the later stages of this blog.

Also, as per clause (b) mentioned above, a person can receive dividends from companies that are not based from these specific regions. So that would mean that they can not avail this exemption on such income right? Wrong. Dividend and securities though not accrued in the required regions, shall still be available for exemption as per the provisions.

Criteria for claiming Exemption u/s 10(26)

First off, exemption from paying income tax by STs which comes u/s 10(26) of the IT Act 1961 gives three conditions for fulfilment for getting this exemption:

  1. The individual has to belong to a Scheduled tribe
  2. He/she has to be residing in a Sixth Schedule Area
  3. Income should be generated while living in a Sixth Schedule Area

So at the outset it is clear that a majority of the STs living in India (other than locations mentioned above) will not get tax exemption simply because they belong to a scheduled tribe.

Reason for the above is that the primary objective of exemption is to provide protection to the ‘weaker sections’ of society. Members of the Scheduled Tribes who are enterprising and resourceful enough to move out of the seclusion of the tribal areas and successfully compete with their Indian brethren outside those areas and rise to remunerative positions in service or business, cease to be ‘weaker sections’.

How to Avail this Exemption?

The eligible person can claim tax-free income in his ITR, and for non-deduction of TDS, he/she can get a certificate from his Jurisdictional ITO u/s. 197 of IT act.

Conclusion

Recently there have been various attempts by the Income Tax department to spread awareness regarding the specific exemption available to Scheduled Tribe people. Persons fulfilling all the above mentioned criteria can claim the exemption u/s 10(26), however one needs to be careful while claiming the exemption as there have been instances where the exemption is claimed and the same was denied because the criteria weren’t fulfilled satisfactorily. 

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Foreign Income and Taxes

Investments, stocks, portfolios-these seem to be quite the buzzwords on social media these days. And now the option of being able to invest in foreign stocks has made investment an even more alluring choice. Investment in foreign stocks could be a good option to diversify an individual’s portfolio and to get better returns. Keep in mind that RBI guidelines are applicable to individuals if they plan to invest in foreign stocks.

How to buy foreign stocks?

Individuals can acquire foreign stocks either by direct investment or via purchase. You can purchase foreign stocks under the

  • Liberalised Remittance Scheme (LRS).
    It allows all resident individuals to freely remit up to USD 2,50,000 per financial year, subject to RBI and FEMA Guidelines.
  • Investments under the Overseas Direct Investment (ODI) route.
  • Additionally, individuals can also acquire foreign stocks via the Employee Stock Options Plan (ESOP) of the employer.

Taxes on Income from foreign stocks

For ordinary Indian residents, the total income you earn from investing in foreign stocks or your global income so to speak is taxable in India subject to DTAA. However, for NRIs income earned and received outside India is generally not taxable.

A little confused about your Residential status? You can check out the Residential status calculator.

When it comes to Indians investing in foreign stocks, the US clearly wins the race. So let’s talk a bit about the taxability of US stocks in India. An investor gets generally two types of income from foreign stocks:

  1. Dividends
    When an resident individual receives dividend from an US stock, it will be taxed at the rate of 25% , the rest will be given to the shareholder. Now that earning will also be taxed by the Indian government according to the prevailing tax rates. However, owing to the DTAA signed between India and the US, the tax that has been deducted in the US can be claimed as foreign tax credits against the tax liability in India.
  2. Capital Gains
    However, when it comes to capital gain from US shares, no taxes are levied on profit or gain incurred at time of selling stocks in US. But contrary in India, capital gain income will be taxable as per Indian tax laws.

Taxation of Shares Purchased under ESOP

An increasing number of companies are giving stock options to their employees.  Apple, Netflix, Spotify are a few of the companies offering ESOPs

When it comes to ESOP, things are a little bit more nuanced as the taxation happens at two stages:

  1. At the time of allotment of shares
    The income is determined based on the difference of the fair market value (FMV) of shares on the date of allotment and the amount paid to acquire such shares. This income is treated as perquisite and taxed as part of salary income at the applicable slab rates.
  2. At the time of sale of shares
    During the time of sale of shares, the income is taken as the difference between the sale proceeds and the cost of acquisition of shares (i.e. FMV). The individual would need to pay tax on such capital gain.

However, there are other considerations too when it comes to taxation on ESOPs

  • Tax residency of the individual at the time of allotment of shares
  • Tax residency of the individual during the vesting period i.e. grant to vest dates
  • Cost of acquisition
  • Challenges in claiming double-taxation relief/foreign tax credit under a Tax Treaty owing to the differentiation in nature of income from ESOP i.e. as employment income or capital gain

Mode of Tax payment

Tax on salary income in the case of ESOP shares is subject to tax withholding by the employer. For capital gain on foreign shares, the tax needs to be submitted by the individual by way of Advance Tax or Self-assessment Tax.
However, under the LRS scheme, if the amount transferred abroad exceeds INR 7 lakh then TCS @5% on the excess amount is applicable and individuals can get the refund on filing the income tax return in India.

Reporting of foreign incomes

In case of capital gain income during FY 2020-21, individuals need to file Form ITR-2 or ITR-3.
The reporting it in your ITR would be as below for foreign stocks:

  • Schedule CG for Capital gain
  • Schedule OS for Dividend income
  • Schedule FSI and Schedule TR for claiming foreign tax credit in case of double taxation relief
  • Schedule Foreign Assets: Details of holding of foreign shares/securities 

Investing in foreign stocks is a comparatively new phenomenon in India. The taxability when it comes to income from foreign shares often gets complicated. India has different DTAA with different countries and the clauses of the DTAA may also get updated from time to time. To put in other words, not only will taxability on foreign income differ from country to country but it may also differ for the same country from one time period to the other.

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Update: The New IT Portal & Infosys

The New IT portal has been in the news constantly for a lot of reasons. The responsibility to build this portal was given to Infosys through an open tender published on Central Public Procurement.


The New IT Portal was launched on 7th June 2021 and the main promise of this portal was a better and smoother user experience. However, the road to achieving this aim had quite a lot of hiccups  on its way


What were the hiccups?

Right from its launch, taxpayers were witnessing certain difficulties on the portal. While some said they were unable to log in, other faced difficulties while trying to update their personal details on the portal. Taxpayers took to social media platforms to express their grievances. This did not go unnoticed by The Finance Minister who time and again urged Infosys to work on the glitches to provide a smooth user experience to the taxpayers.

On 21st August 2021, the portal went under emergency maintenance and wasn’t accessible to taxpayers for two days. . The Finance Minister summoned Mr Salil Parekh, CEO of Infosys on 23rd August to discuss the glitches on the portal. Post the meeting, Infosys was given a deadline of 15th September to fix all the ongoing glitches.

Considering the fact that this would leave a relatively narrow window for taxpayers to file their ITR, the government has extended the ITR filing due dates. Take a look at the revised dates

What’s the status now?

Infosys has been continually working to bring the New Portal up to pace and there has been a sustained improvement in the portal. Infosys said that over 3 crore users have successfully used the portal to carry out various transactions. Further, ITR filing has also picked up pace with the portal facilitating over 2.5 lakh returns daily. 

Infosys has also stated that several important statutory forms like 15G, 15H, 10IE along with TDS returns are also being filed in large numbers. And as the portal’s capacity continues to increase, these numbers are expected to go up

Infosys has acknowledged that some taxpayers may continue to face glitches on the portal. However, they are actively working to make the portal fully functional for everyone.

With the new IT Portal, ITD has given enhanced capabilities to ERIs as well.

Where do ERIs come in?

ERIs are authorized intermediaries who are eligible to file income tax returns and perform other tax-related services on behalf of taxpayers.
 

What can ERIs do?

Create and manage your Income Tax Profile: You can create and manage your IT profile via ERIs like changing or updating your address, link documents, and so on.

Submit Statutory Forms: You can submit statutory forms like Form 10 IE & more via ERIs.


Manage Refund Bank accounts: You can add and select your bank accounts for receiving refunds through ERIs.

Track IT refund: ERIs make it simple for you to track your IT refund.

Submit refund reissue request: ERIs also helps you submit refund reissue request to the ITD.

E-file and E-verify: Most importantly, ERIs makes it super simple for you to file and verify your ITR.

We at Quicko are committed to making taxes simple for you. So, we are coming up with something exciting that will not only offer these services but much more. So stay tuned!

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