Taxability and non taxability of Income, tax planning

Tax planning, Tax avoidance and Tax Evasion - Dividend stripping, loss harvesting, round tripping, tax holiday schemes

Tax planning, Tax avoidance and Tax Evasion

There are various ways in which assessees try to acheive cutting of tax outflow, some genuine exemptions  are available in tax laws, some loopholes are available for certain period of time. Planning the transaction to minimize tax impact is always possible.

Tax Management

Dividend Stripping - tax planing

As per the Pronouncement of Hon'ble Supreme Court of India, Dividend Stripping is tax planing only. This view has been up held in the case of WALL FORT SHARES & STOCK BROKERS.Gist of the case is as follows:
In the said case, a five members special bench of the Mumbai tribunal held that the subject issue only tax planing(96 ITD 1 (Mum) (SB)) and the Bombay High Court (310 ITR 421 (Bom)). Hence, loss incurred by the assesse cannot be disallwed on the grounds of the Tax planing. This view was up held by the Hon'ble Supreme Court of India and dismissed the SLP filed by the Dept. on 6th, July,2010.
Authors note: This is only informative purpose for full details please go through the text of respective Judgements.

Tax loss harvesting

Tax loss harvesting is an opportunistic way to bolster your post tax returns. It is the act of booking any unrealized loss to reduce the tax outgo on your realized gain before the end of a financial year.
As an investor, if you have any short term capital gains for the year you will have to pay 15% of this as tax. Assuming you have stocks sitting in your portfolio making a short term capital loss, you can book this loss, set it off against the gains, and hence reduce your tax outgo.
So assume you have made Rs 1 lakh in trading profits from your short term equity delivery trades. This would mean your tax liability is Rs 15,000 on this gain. If you had stocks in your portfolio which are making Rs 50,000 in short term losses, you can sell these and book the loss. So now your net profit for the year is Rs 50,000 and hence your tax outgo is Rs 7500 (15%), a saving of Rs 7500.
To make up for the stocks that you just sold to book losses, you can either immediately buy a similar stock or wait till those stocks are delivered from your demat to buy them back again. So if you sold ICICI Bank to book a loss on Monday, you can either buy say a HDFC Bank immediately for the same value or wait for Wednesday to buy back ICICI Bank again. So you continue to hold the same portfolio, but by doing this transaction you would have saved Rs 7500.
As an investor, long term gain is exempt from taxes, and hence you can’t use  long term capital loss to adjust against short term gain. Only short term capital loss can be adjusted against short term capital gain.

Roundtripping through tax heavens like Mauritius ( DTAA optimisation)

"Mauritius and Singapore with their small economies cannot be the sources of such huge investments and it is apparent that the investments are routed through these jurisdictions for avoidance of taxes and/or for concealing the identities from the revenue authorities of the ultimate investors, many of whom could actually be Indian residents, who have invested in their own companies, through a process known as round-tripping."

The modus operandi of this round-tripping process has been laid bare. A database put out by the International Consortium of Investigative Journalists shows that a few hundred Indians are owners of companies registered in offshore financial centres such as the British Virgin Islands and Cayman Islands. While some of these might be for legitimate purposes, others certainly are not. Some centres,  such as Singapore, have cleaned up their act and have enforced stringent conditions such as minimum capital requirements and employment conditions for companies in their jurisdictions. However, it is not clear whether these address the question of tracking down the ultimate beneficial owner. And when the government tries to confront people named in such databases, they seem to be hiding behind the claim that the data were stolen. When the government asks for the data, the banks and intermediaries cite client confidentiality - and if someone gets the data by other means, they cry foul. That leaves only two points for the authorities to check illicit money flows: the point of exit and the point of re-entry.

The government seems to be in better control of the latter. However, offshore financial centres, such as Mauritius, argue that India should intercept black money when it exits the country in the first place, since targeting the re-entry point could deter genuine investments. They also point out that a fund manager who is raising money from around the world cannot become a forensic accountant and go several layers behind the client's money. If he is asked too many questions, he may not raise enough money to invest in India. But that concern could be exaggerated. In any case, India should not relax in its drive against round-tripping or illicit money flows.

Turning Losses into Gains -Tax benefits allowed in cases of losses

No one wants losses. However, profit opportunities come with the risk of losing money. Though these risks cannot be eliminated, you can maximise income by properly accounting for losses while calculating your tax liability. Know the rules to ease your burden of losses.


Income comes under five heads - salary, income from house property, income from business and profession, capital gain and income from other sources. The law allows you to set off losses in one against gains in another, depending upon the various criteria.

First, loss from one source is set off against income from the same source. If the loss is still more than the profit, it can be adjusted against income from other streams. However, there are exceptions. A loss on a capital asset can be adjusted only against a capital gain. But losses from other sources can be adjusted against capital gains.

Any loss on sale of a long-term capital asset (such as house and gold held for three years) can be adjusted only against a long-term capital gain. A loss due to a shortterm capital asset can be adjusted against both long- and short-term capital gains. For such adjustments, the loss/gain can be from any capital asset other than shares.

A loss from business or profession can be set off against all income heads other than salary while losses from a speculative activity or owning/maintaining race horses can be adjusted only against profits under the respective heads.

If an income is tax-exempt, it cannot be adjusted against any loss from an income that is taxable.

Casual income, such as from lottery, horse race and gambling, is fully taxable. "No loss or expense can be set off against income from lottery, crossword puzzle, gambling, etc," says Sudhir Kaushik, cofounder,, a tax intermediary website.


When a loss is more than the income against which it can be adjusted, the net loss is carried forward into the next year. "If the entire loss cannot be adjusted in one financial year, it can be carried forward for up to eight years," says Kaushik.

Losses from speculative activity or owning/maintaining race horses can be carried forwarded for only up to four years.

When a loss is set off in the year it is incurred, it is first adjusted against income from the same source, different sources under the same head or incomes from different heads. In contrast, a rolled over loss cannot be adjusted against income from a different head.


Equity and equity-based 
mutual funds are considered long-term assets when held for at least a year. Though shares are a capital asset, a loss from equity can be adjusted only against income from equity.

As equity trades on exchanges attract securities transaction tax (STT), long-term gains from stocks are tax-free. So, you cannot claim relief for any long-term capital loss.

Short-term capital losses from equities (held for less than 12 months) can be adjusted against short-term gains from stocks.

If you are losing money on an equity holding, you can put it to good use by selling within a year to book short-term capital loss. Even if you are sure about a future recovery, you can do this every year as hedge against a possible loss. Short-term capital gains from equities are taxed at 15%. Here is how it works.

Let us say you buy 100 shares for Rs 1,000. If the price falls to Rs 500 just before a year of the purchase, you can sell the lot and buy an equal number of shares. This short-term loss of Rs 500 can be set off against any short-term gain from shares. Now, you have also made a new investment of Rs 500. In the second year, you sell these shares for Rs 1,500, which translates into a short-term gain of Rs 1,000. You have a total carry-forward short-term loss of Rs 500 if you haven't adjusted it. The effective short-term gain is Rs 500, on which you will have to pay 15% tax. If you had held on to the initial investment, the net gain would have been tax-free, but you would have also taken a higher risk.

You can make a 
long-term equity loss eligible for deduction by transacting outside the exchanges at the existing market rate with simultaneous delivery to the buyer. "A long-term loss on listed equities where STT is paid cannot be adjusted because the income is exempt. If you sell the shares offline without paying STT, the loss can be adjusted against a long-term capital gain," says Kaushik.


Losing money on house property shouldn't bother you much. All houses, let out or not, have an annual value, which is the higher of the actual rent received or the standard rent under the Rent Control Act (in the absence of standard rent, the highest of the actual rent, the fair market rent and municipal value) for taxation purposes. To arrive at a house's net annual value, first municipal taxes are deducted. Then, 30% rental income is deducted for maintenance and other expenses.

Houses bought or constructed on borrowed money are eligible for deduction of loan interest from the net annual value while calculating the income from house property.

The annual value of one selfoccupied house is treated as nil. So, the entire interest paid for it becomes a loss from house property, subject to the Rs 1.5 lakh limit. In case of a let-out (or deemed to be rented out) house, you can deduct the entire interest amount. The interest paid on a loan for reconstruction or modification of an existing house can be deducted up to Rs 30,000. (Home loan principal is deducted separately.)

Any loss in such a case has to be first adjusted against income from other house properties. If the net result is still negative, the remaining has to be adjusted against any other head in the same assessment year. If the entire loss cannot be adjusted, it can be carried forward for eight years, but adjusted against only income from house property.


You can incur losses in business or due to speculation. Business losses cannot be set off against salary, leaving the rest income heads open. However, salary from a business partnership is treated as 'profits and gains of business and profession' and can be adjusted against a loss in business. Business losses can be carried forward and set off in the subsequent years even if the business has been discontinued. Losses from specified businesses that are allowed investment-linked deduction under Section 35AD of the Income Tax Act can be set off against gains from only the specified businesses.

Certain businesses, such as intra-day trading in shares and commodities, are speculative. Losses from speculative businesses can be adjusted against only speculative profits. However, one can adjust nonspeculative losses against gains from speculative businesses.

"Intra-day trading is considered speculative as there is no delivery of the asset. If it can be proved that the transaction was a normal business transaction, income from it can be treated as a non-speculative business income or a short-term capital gain," says Kaushik.

As an exception, trade in derivatives (futures and options of stocks, currencies and commodities) is treated as non-speculative.

If you want to adjust your losses against future income, it is important to file your return within the stipulated time. Losses under the heads 'capital gains' and 'profits or gains of business or profession' cannot be carried forward if you miss the return-filing deadline.
Tax Holiday Schemes in India
100% Tax Deduction U/s 80IAC - Startups
The profit of a startup will get tax deduction u/s 80IAC equal to 100% of the profit earned in 3 out of first five years. So salient rules for claiming deduction u/s 80IAC are as under :
  1. Startup is incorporated on or after the 1st day of April, 2016 but before the 1st day of   20 April, 2019; 
  2. The total turnover of  business of startup does not exceed twenty-five crore rupees in any of the previous years beginning on or after the 1st day of April, 2016 and ending on the 31st day of March, 2021; and
  3. Deduction u/s 80IAC is allowed to eligible startups setup before 01/04/2019 only .
  4. The deduction is for eligible business or professional income.
  5. The deduction of  one hundred per cent. is allowed for three consecutive assessment years.
  6. The assessee can chose the start year of three consecutive years out of first five years . 
  7. Startup should not :
    1. be started by splitting up, or the reconstruction, of a business already in existence.
    2.  it is not formed by the transfer to a new business of machinery or plant previously used for any purpose.
Section 80IAC of the Income Tax Act
80-IAC. (1) Where the gross total income of an assessee, being an eligible start-up, includes any profits and gains derived from eligible business, there shall, in accordance with and subject to the provisions of this section, be allowed, in computing the total income of the assessee, a deduction of an amount equal to one hundred per cent. of the profits and gains derived from such business for three consecutive assessment years.
(2) The deduction specified in sub-section (1) may, at the option of the assessee, be claimed by him for any three consecutive assessment years out of five years beginning from the year in which the eligible start-up is incorporated.
3) This section applies to a start-up which fulfils the following conditions, namely:—
(i) it is not formed by splitting up, or the reconstruction, of a business already in existence: Provided that this condition shall not apply in respect of a start-up which is formed as a result of the re-establishment, reconstruction or revival by the assessee of the business of any such undertaking as referred to in section 33B, in the circumstances and within the period specified in that section;
(ii) it is not formed by the transfer to a new business of machinery or plant previously used for any purpose.
Explanation 1.— For the purposes of this clause, any machinery or plant which was used outside India by any person other than the assessee shall not be regarded as machinery or plant previously used for  any purpose, if all the following conditions are fulfilled, namely:—
(a) such machinery or plant was not, at any time previous to the date of the installation by the assessee, used in India;
(b) such machinery or plant is imported into India;
(c) no deduction on account of depreciation in respect of such machinery or plant has been allowed or is allowable under the provisions of this Act in computing the total income of any person for any period prior to the date of the installation of the machinery or plant by the assessee.                                                                                                                                       
Explanation 2.—Where in the case of a start-up, any machinery or plant or any part thereof previously used for any purpose is transferred to a new business and the total value of the machinery or plant or part so transferred does not exceed twenty per cent. of the total value of the machinery or plant used in the business, then, for the purposes of clause (ii) of this sub-section, the condition specified therein shall be deemed to have   10 been complied with.
(4) The provisions of sub-section (5) and sub-sections (7) to (11) of section 80-IA shall apply to the start-ups for the purpose of allowing deductions under sub-section (1).
Explanation.—For the purposes of this section,—
(i) “eligible business” means a business which involves innovation, development, deployment   or commercialisation of new products, processes or services driven by technology or intellectual property;
(ii) “eligible start-up” means a company engaged in eligible business which fulfils the following conditions, namely:—
(a) it is incorporated on or after the 1st day of April, 2016 but before the 1st day of   20 April, 2019;
(b) the total turnover of its business does not exceed twenty-five crore rupees in any of the previous years beginning on or after the 1st day of April, 2016 and ending on the 31st day of March, 2021; and
(c) it holds a certificate of eligible business from the Inter-Ministerial Board of Certification    as notified in the Official Gazette by the Central Government.’.




The following conditions should be satisfied to claim deduction u/s 10AA :

Condition 1 :  Assessee, being an entrepreneur as referred to in clause (j) of section 2 of the Special Economic Zones Act, 2005. Entrepreneur is a person who has been granted a letter of approval by the Development Commissioner to set a unit in a Special Economic Zone.

Conditions 2 :  The Unit in Special Economic Zone who begins to manufacture or produce articles or things or provide any services during the previous year relevant to any assessment year commencing on or after the 1st day of April, 2006.

Conditions 3 :  It is not formed by the splitting up, or reconstruction, of a business already an existence.

Conditions 4 :  It not formed by the transfer to a new business, of old plant and machinery. However, it can be formed by transfer of old plant or machinery to the extent of 20%.

Condition 5 :   The assessee has income from export of articles or thing or from services from such unit. In other words, the assessee has exported goods or provided services out of India from the Special Economic Zone by land, sea , air, or by any other mode, whether physical or otherwise.

Conditions 6 :  Books of Accounts of the taxpayer should be audited. The Tax payer should submit Audit Report in Form No.56F along with the return of income

Anti-Base Erosion and Profit Shifting (BEPS) Action Plan proposed by the Organization for Economic Cooperation and Development (OECD).

Economic Substance Regulations (ESR) in the UAE

16 August 2020,Sagar Chandiramani, Finance Director,Virtuzone


The Economic Substance Regulations (ESR) was introduced in countries across the globe to seek compliance from major regulatory bodies based in Europe and the United States. These regulations are targeted at jurisdictions that offer minimal tax liabilities to businesses and require certain entities conducting specific types of business activities to demonstrate that they have adequate economic substance in that jurisdiction. 

The regulations highlight the regular recording, tracking and reporting of all the economic activities carried out by legal entities in the UAE, including companies, branches and subsidiaries, as well as those based in any of the free zones in the UAE.

The Council of the European Union has laid out certain criteria that these jurisdictions need to comply with as part of its efforts to promote transparency in cross-border transactions and to restrict harmful tax practices. Should the European Union (EU) consider that a certain country does not have substantial economic substance regulations, then that country will appear on EU's list of non-cooperative jurisdictions for tax purposes, also known as the EU 'tax haven' blacklist.

An assessment carried out by the European Union on the tax framework of the United Arab Emirates resulted in the country being deemed a non-cooperative tax jurisdiction and its inclusion on the EU blacklist. On 30 April 2019, the UAE Cabinet adopted new ESR in response to concerns expressed by the European Union Code of Conduct Group about the tax framework of the UAE and its commitment to the anti-Base Erosion and Profit Shifting (BEPS) Action Plan proposed by the Organization for Economic Cooperation and Development (OECD).

The UAE is now part of the BEPS Inclusive Framework (BEPS IF), which comprises of more than 130 countries and jurisdictions. As an Inclusive Framework member, the UAE is committed to implementing the minimum standards monitored by BEPS IF to increase tax-related transparency, something which the BEPS thrusts upon itself. 

The UAE has complied to implement a set of four minimum standards laid out by BEPS:

  • Countering Harmful Tax Practices
  • Prevention of Granting Tax Treaty Benefits in Inappropriate Circumstances
  • Country-by-Country Reporting
  • Mutual Agreement Procedure

The UAE's ESR requires businesses to assess whether the newly introduced regulations apply to them. Businesses that are able to demonstrate that they are carrying out substantial economic business activities within the region are considered relevant and need to implement strategies in preparing for the notification and reporting requirements prescribed by their relevant Regulatory Authority.

The UAE Ministry of Finance and the various Regulatory Authorities across the UAE have issued an ESR Notification template, which all legal entities must complete, unless as prescribed otherwise by the relevant Licensing Authority, to notify and report to their relevant Regulatory Authority whether or not they undertake and generate income from the list of relevant activities.

Who Needs to Submit an Economic Substance Notification?

A licencee undertaking one or more of the following Relevant and Core Income Generating Activities during the relevant year must file a Notification with the Registration Authority:

  • Banking Business
  • Insurance Business
  • Investment Fund Management Business
  • Lease-Finance Business
  • Headquarter Business
  • Shipping Business
  • Holding Company Business
  • Intellectual Property Business
  • Distribution and Service Centre Business

For further information and explanation on each of the above Relevant Activities, please refer to the Relevant Activities Guide issued by the Ministry of Finance.

What Are the Economic Substance Compliance Requirements Under the Regulations?

All licencees (either onshore, offshore or in a free zone) must comply with the Economic Substance Notification & Return Filing obligations. In order to demonstrate substantial economic substance, a company needs to review its corporate governance structures and operating models and make relevant changes where possible. The compliance requirements imposed on UAE companies under the Regulations are as follows:

  • The company must perform its core income-generating activities (CIGAs) in the UAE;
  • The company must be directed and managed within the UAE in relation to the its business activity, evidencing that company holds board meetings and annual general meetings, with a quorum of directors and shareholders physically present in the UAE;
  • The company is required to have an adequate number of full-time employees, incur operating expenditure, and have physical assets for carrying out the relevant business activities in the UAE; and
  • The company must be able to demonstrate that it controls the execution of activities that have been outsourced to third parties.

Economic Substance Notification & Return Filing

All UAE companies (onshore, offshore or Free Zone) that hold a licence and carry out any of the 'Relevant Activities' during the year, have to file a notification unless as prescribed by the relevant Licensing Authority, as per the template prescribed by the relevant Licensing Authority. 

The Regulation has prescribed what needs to go in the form of a notification, and those are:

  • Whether or not the company carries out relevant activities;
  • A description of the type of relevant activities carried out by the company and the type of income from those activities;
  • Whether the income earned from core income generating activities (CIGAs) is taxable in a jurisdiction outside of the UAE;
  • If the licencee is a tax resident outside of the UAE and if yes, where; and 
  • If at least 51% of the business is owned, directly or indirectly, by the Federal or an Emirate Government, or a UAE Government body or authority;
  • The first reportable financial year the business is subject to.

A company carrying out relevant activities, must submit an Economic Substance Report annually to the Regulatory Authority, in order to evidence that the company satisfies the economic substance requirements. 

The Economic Substance Report should include:

  • The value and type of income earned from the relevant activities;
  • The location of the activities and the property and/or equipment used to conduct the activities;
  • The number of employees, their qualifications, and the number of people responsible for conducting the activities; and
  • A disclosure stating that the company has met the economic substance requirements.

What Are the Penalties for Non-Compliance?

Failure to comply with the ESR or the provision of incomplete or inaccurate information, may result in your business being imposed with an administrative fine of between AED 10,000-50,000 during the first fiscal year. Furthermore, for the subsequent fiscal year of non-compliance, your business can be imposed with an administrative fine of between AED 50,000 and AED 300,000. It is worth noting that the Licencing Authorities may even suspend, revoke or deny renewal of your commercial licence if the fines are unpaid.