Tax on certain incomes.
194(1)
Irrespective of anything contained in any other provision of this Act, where the total income of an assessee as mentioned in column B of the Table below, includes income of the nature specified in column C of the said Table, the income-tax payable by such assessee, for a tax year, shall be the aggregate of––
- (a) income-tax calculated on income mentioned in column C, at the rate mentioned in column D, subject to the conditions specified in the Notes relating to the respective serial number; and
- (b) income-tax with which the assessee would have been chargeable had his total income been reduced by income mentioned in column C thereof.
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194(2)
In this section,––
- (a) “carbon credit”, in respect of one unit, means reduction of one tonne of carbon dioxide emissions or emission of its equivalent gases which is validated by the United Nations Framework on Climate Change and which can be traded in market at its prevailing market price;
- (b) “computer resource” shall have the same meaning as assigned to it in section 2(1)(k) of the Information Technology Act, 2000;
- (c) “developed” means at least 75% of the expenditure incurred in India by the eligible assessee for any invention in respect of which patent is granted under the Patents Act, 1970 (herein referred to as the Patents Act);
- (d) “horse race” shall have the meaning assigned to it in section 115;
- (e) “internet” means the combination of computer facilities and electromagnetic transmission media including related equipment and software, comprising the interconnected worldwide network of computer networks that transmits information based on a protocol for controlling such transmission;
- (f) “invention” shall have the same meaning as assigned to it in section 2(1)(j) of the Patents Act;
- (g) “lump sum” includes an advance payment on account of such royalties which is not returnable;
- (h) “online game” means a game that is offered on the internet and is accessible by a user through a computer resource including any telecommunication device;
- (i) “patent” shall have the meaning assigned to it in section 2(1)(m) of the Patents Act;
- (j) “patented article” and “patented process” shall have the meanings as respectively assigned to them in section 2(1)(o) of the Patents Act;
- (k) “patentee” means the person, being the true and first inventor of the invention, whose name is entered on the patent register as the patentee, as per the Patents Act, and includes every such person, being the true and first inventor of the invention, where more than one person is registered as patentee under that Act in respect of that patent;
- (l) “royalty”, in respect of a patent, means consideration (including any lump sum consideration but excluding any consideration which would be the income of the recipient chargeable under the head “Capital gains” or consideration for sale of product manufactured with the use of patented process or the patented article for commercial use) for the— (i) transfer of all or any rights (including the granting of a licence) in respect of a patent; or (ii) imparting of any information concerning the working of, or the use of, a patent; or (iii) use of any patent; or (iv) rendering of any services in connection with the activities referred to in sub-clauses (i) to (iii);
- (m) “true and first inventor” shall have the same meaning as assigned to it in section 2(1)(y) of the Patents Act; and
- (n) for the purposes of sub-section (1)(Table: Sl. No. 4), the term “transfer” as defined in section 2(109), shall apply to any virtual digital asset, whether capital asset or not.
Explanation
Section Summary:
Section 194(1) of the Income Tax Act specifies how income tax is calculated when an assessee's total income includes specific types of income listed in a table (Column C). The tax payable is the sum of:
- Tax calculated on the specific income (Column C) at the rate mentioned in Column D, and
- Tax calculated on the remaining income after excluding the specific income (Column C).
Section 194(2) defines key terms used in this section, such as "carbon credit," "royalty," "patent," and "online game," among others. These definitions are crucial for understanding the applicability of the tax provisions.
Key Changes:
- Introduction of Specific Tax Rates for Certain Incomes: Section 194(1) introduces a mechanism to calculate tax on specific types of income (listed in Column C of the table) separately, at rates specified in Column D. This is a departure from the general practice of taxing all income under a single slab rate.
- Expanded Definitions: Section 194(2) provides detailed definitions for terms like "carbon credit," "royalty," "patent," and "online game," which were either not previously defined or were defined differently in other sections of the law.
- Inclusion of Virtual Digital Assets: The section explicitly includes virtual digital assets under the definition of "transfer," aligning with the growing recognition of digital assets in tax laws.
Practical Implications:
- Taxpayers with Specific Incomes: Taxpayers earning income from sources like royalties, carbon credits, or online games will need to calculate their tax liability separately for these incomes, as per the rates specified in the table.
- Compliance for Businesses: Businesses dealing with patents, carbon credits, or online games must ensure proper documentation and reporting of these incomes to comply with the new tax calculation method.
- Virtual Digital Assets: Individuals or entities dealing with virtual digital assets (e.g., cryptocurrencies) must now consider these assets under the definition of "transfer," which may impact their tax reporting and liability.
Critical Concepts:
- Carbon Credit: A unit representing the reduction of one tonne of carbon dioxide emissions, validated by the United Nations Framework on Climate Change, and tradable in the market.
- Royalty: Payments received for the transfer of patent rights, use of patents, or services related to patents. It excludes capital gains or payments for the sale of products made using patented processes.
- Virtual Digital Assets: Includes cryptocurrencies and other digital assets, which are now explicitly covered under the definition of "transfer."
- Patent-Related Terms: Definitions like "patented article," "patented process," and "true and first inventor" are aligned with the Patents Act, 1970, ensuring consistency across laws.
Compliance Steps:
- Identify Specific Incomes: Determine if your income includes any of the types listed in Column C of the table (e.g., royalties, carbon credits, online games).
- Calculate Tax Separately: Compute tax on the specific income at the rate mentioned in Column D.
- Calculate Tax on Remaining Income: Compute tax on the total income after excluding the specific income.
- Aggregate Taxes: Add the two amounts to arrive at the total tax liability.
- Maintain Documentation: Keep records of income from patents, carbon credits, or online games, as well as any transactions involving virtual digital assets.
Examples:
- Royalty Income: Suppose an inventor earns ₹10 lakh from patent royalties and ₹20 lakh from other sources. The tax on the ₹10 lakh royalty income will be calculated at the rate specified in Column D, while the remaining ₹20 lakh will be taxed under the regular slab rates. The total tax payable will be the sum of these two amounts.
- Carbon Credits: A company earns ₹5 lakh from selling carbon credits and ₹15 lakh from its regular business. The ₹5 lakh will be taxed at the rate specified in Column D, and the ₹15 lakh will be taxed under the regular slab rates.
- Virtual Digital Assets: An individual sells Bitcoin for ₹8 lakh. This transaction is now considered a "transfer" under Section 194(1), and the income will be taxed as per the applicable rate in Column D.
This section ensures clarity in taxing specific incomes and aligns with modern economic activities like digital assets and environmental credits.