sunandaC

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(1) Subject to the provisions of this Act, the total income of any previous year of a person who is a resident includes all income from whatever source derived which-

(a) is received or is deemed to be received in India in such year by or on behalf of such person; or

(b) accrues or arises or is deemed to accrue or arise to him in India during such year; or

(c) accrues or arises to him outside India during such year:
Provided that, in the case of a person not ordinarily resident in India within the meaning of sub-section

(6) of Section 6, the income which accrues or arises to him outside India shall not be so included unless it is derived from a business controlled in or a profession set up in India.

(2) Subject to the provisions of this Act, the total income of any previous year of a person who is a non-resident includes all income from whatever source derived which-

(a) is received or is deemed to be received in India in such year by or on behalf of such person; or

(b) accrues or arises or is deemed to accrue or arise to him in India during such year.

Explanation1.- Income accruing or arising outside India shall not be deemed to be received in India within the meaning of this section by reason only of the fact that it is taken into account in a balance sheet prepared in India.

Explanation2.-For the removal of doubts, it is hereby declared that income which has been included in the total income of a person on the basis that it has accrued or arisen or is deemed to have accrued or arisen to him shall not again be so included on the basis that it is received or deemed to be received by him in India.

The public goods and services provided by the Government are enjoyed, in general, by all persons (both natural and non-natural) living within that country.

Therefore, it is logical for all such persons to contribute towards such public goods and services. This forms the underlying basis of the principle of residence-based taxation of income.

The principle of residence-based taxation asserts that natural persons or individuals are taxable in the country or tax jurisdiction in which they establish their residence or domicile, regardless of the source of income.


In the case of non-natural persons such as companies or firms, the place of incorporation or the place where control or management is exercised is deemed to be the place of residence. In the context of income tax, the ability to pay of the residents of that country is fully measured by their global income.

Therefore, the principle of residence-based taxation of income envisages the taxation of global income. Key reasons for taxing the foreign source income of residents are to achieve horizontal and vertical equity goals and to improve the tax neutrality of investment decisions (efficiency).


However, there are individuals/entities whose "residence" is in one country but their business is actually carried on in another country and their income is earned in the latter country.

In such cases, the principle of residence-based taxation would be inappropriate. This would be especially so in developing countries which attract substantial foreign investments.

Therefore, there is a view that the country which provides the opportunity and facilities to generate income or profits should also have the right to tax the same. This forms the underlying basis of the principle of source-based taxation of income.

This principle is invariably applied to non-residents in a country and envisages the taxation of only such income which is sourced in that country.

The term 'source' is generally not defined in the tax legislation. The common law has developed a number of principles which operate in the absence of statutory provisions

Whether or not the income will be seen to be sourced in a country under the common law principles is a question of fact in the circumstances of a particular case. International practice varies as to the nature and extent of the source rules.

Generally, countries use geographical boundaries, types of income or a mixture of both to determine the extent to which they will seek to tax income sourced in their jurisdiction.

Conceptually, a country may adopt either pure residence based taxation or pure source based taxation.

The pure residence based taxation is supported on the consideration that it promotes economic efficiency since the decision on the location of the investment remains unaffected by the tax rate.


It is neutral to capital export. Further, it is relatively easier to pin down the income unlike in the case of source based taxation. However, the pure residence based taxation is not adopted for three reasons.


First, pure residence based taxation reduces revenues in poor developing countries, who rely heavily on source based taxation, and leans in favour of the rich developed countries where investors reside.


Secondly, residence based taxation is much easier to evade or avoid, by channeling international investments through tax havens.

Thirdly, political and economic considerations do not allow a country to give up the right to collect tax from foreigners doing business within its territory.

Pure source based taxation is an option that has been favoured by some experts.

However, the major problem with this option is that it enables foreign investors to play one country against another or others in order to obtain the lowest source based tax rate.

This leads to aggressive tax competition (race to the bottom) resulting in erosion of revenue base.

In addition, the problems of determining the source of income and of unraveling aggressive transfer pricing that leads to suppression of income would become much more acute in a world of pure source based taxation.


In practice, countries have tended not to stay with the pure application of either principle.

They have applied a mix of residence and source based direct taxation, the former for nationals (including non-natural persons) residing in the country and the latter for income earned within the country by non-residents.


The precise nature of mixes has depended on each taxing jurisdiction's perception of the relative importance of a number of factors, notably the volume of foreign investment that is attracted, the revenue implications, the domestic administrative capabilities, and the degree of cooperation that can be expected from competing jurisdictions.


Under the Code, residence based taxation is applied for residents and source based taxation for non-residents. A resident in India will be liable to tax in India on his world-wide income.

However, a non-resident in India will be liable to tax in India only in respect of accruals and receipts in India (including deemed accruals and receipts).


The total income of a person will also include the income arising to spouse, minor child and other entities in specified circumstances.

However, the Second Schedule enumerates incomes that are exempt from taxation and these incomes will not form part of the total income.
 
(1) Subject to the provisions of this Act, the total income of any previous year of a person who is a resident includes all income from whatever source derived which-

(a) is received or is deemed to be received in India in such year by or on behalf of such person; or

(b) accrues or arises or is deemed to accrue or arise to him in India during such year; or

(c) accrues or arises to him outside India during such year:
Provided that, in the case of a person not ordinarily resident in India within the meaning of sub-section

(6) of Section 6, the income which accrues or arises to him outside India shall not be so included unless it is derived from a business controlled in or a profession set up in India.

(2) Subject to the provisions of this Act, the total income of any previous year of a person who is a non-resident includes all income from whatever source derived which-

(a) is received or is deemed to be received in India in such year by or on behalf of such person; or

(b) accrues or arises or is deemed to accrue or arise to him in India during such year.

Explanation1.- Income accruing or arising outside India shall not be deemed to be received in India within the meaning of this section by reason only of the fact that it is taken into account in a balance sheet prepared in India.

Explanation2.-For the removal of doubts, it is hereby declared that income which has been included in the total income of a person on the basis that it has accrued or arisen or is deemed to have accrued or arisen to him shall not again be so included on the basis that it is received or deemed to be received by him in India.

The public goods and services provided by the Government are enjoyed, in general, by all persons (both natural and non-natural) living within that country.

Therefore, it is logical for all such persons to contribute towards such public goods and services. This forms the underlying basis of the principle of residence-based taxation of income.

The principle of residence-based taxation asserts that natural persons or individuals are taxable in the country or tax jurisdiction in which they establish their residence or domicile, regardless of the source of income.


In the case of non-natural persons such as companies or firms, the place of incorporation or the place where control or management is exercised is deemed to be the place of residence. In the context of income tax, the ability to pay of the residents of that country is fully measured by their global income.

Therefore, the principle of residence-based taxation of income envisages the taxation of global income. Key reasons for taxing the foreign source income of residents are to achieve horizontal and vertical equity goals and to improve the tax neutrality of investment decisions (efficiency).


However, there are individuals/entities whose "residence" is in one country but their business is actually carried on in another country and their income is earned in the latter country.

In such cases, the principle of residence-based taxation would be inappropriate. This would be especially so in developing countries which attract substantial foreign investments.

Therefore, there is a view that the country which provides the opportunity and facilities to generate income or profits should also have the right to tax the same. This forms the underlying basis of the principle of source-based taxation of income.

This principle is invariably applied to non-residents in a country and envisages the taxation of only such income which is sourced in that country.

The term 'source' is generally not defined in the tax legislation. The common law has developed a number of principles which operate in the absence of statutory provisions

Whether or not the income will be seen to be sourced in a country under the common law principles is a question of fact in the circumstances of a particular case. International practice varies as to the nature and extent of the source rules.

Generally, countries use geographical boundaries, types of income or a mixture of both to determine the extent to which they will seek to tax income sourced in their jurisdiction.

Conceptually, a country may adopt either pure residence based taxation or pure source based taxation.

The pure residence based taxation is supported on the consideration that it promotes economic efficiency since the decision on the location of the investment remains unaffected by the tax rate.


It is neutral to capital export. Further, it is relatively easier to pin down the income unlike in the case of source based taxation. However, the pure residence based taxation is not adopted for three reasons.


First, pure residence based taxation reduces revenues in poor developing countries, who rely heavily on source based taxation, and leans in favour of the rich developed countries where investors reside.


Secondly, residence based taxation is much easier to evade or avoid, by channeling international investments through tax havens.

Thirdly, political and economic considerations do not allow a country to give up the right to collect tax from foreigners doing business within its territory.

Pure source based taxation is an option that has been favoured by some experts.

However, the major problem with this option is that it enables foreign investors to play one country against another or others in order to obtain the lowest source based tax rate.

This leads to aggressive tax competition (race to the bottom) resulting in erosion of revenue base.

In addition, the problems of determining the source of income and of unraveling aggressive transfer pricing that leads to suppression of income would become much more acute in a world of pure source based taxation.


In practice, countries have tended not to stay with the pure application of either principle.

They have applied a mix of residence and source based direct taxation, the former for nationals (including non-natural persons) residing in the country and the latter for income earned within the country by non-residents.


The precise nature of mixes has depended on each taxing jurisdiction's perception of the relative importance of a number of factors, notably the volume of foreign investment that is attracted, the revenue implications, the domestic administrative capabilities, and the degree of cooperation that can be expected from competing jurisdictions.


Under the Code, residence based taxation is applied for residents and source based taxation for non-residents. A resident in India will be liable to tax in India on his world-wide income.

However, a non-resident in India will be liable to tax in India only in respect of accruals and receipts in India (including deemed accruals and receipts).


The total income of a person will also include the income arising to spouse, minor child and other entities in specified circumstances.

However, the Second Schedule enumerates incomes that are exempt from taxation and these incomes will not form part of the total income.

Hey sunanda, many thanks for sharing this information and i would really appreciate your work. I am also going to upload a document which will provide a presentation on scope of total income, so please download and check my presentation.
 

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