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Taxation of Corporates
Company whether Indian or foreign is liable to taxation, under the Income Tax Act,1961. Corporation tax is a
tax which is levied on the incomes of registered companies and corporations.
A Company means :
Any Indian company,or Any corporate body, incorporated by or under the laws of a country outside India,or Any institution, association or a body which was assessed as a company for any
assessment year under the Income Tax Act,1922 or was assessed under this Act as a company for any
assessment year commencing on or before April 1, 1970,or Any institution, association, or body, whether incorporated or not and whether
Indian or Non-Indian, which is declared by a general or special order of the Central Board of Direct Taxes
to be a company.
Companies in India, whether public or private are governed by the Companies Act, 1956. The registrar of
companies and the company law board administers the provisions of the Act.
However, for the purpose of taxation, companies are broadly classified as :
Domestic company [Section 2(22A)]: means an Indian company (i.e. a company
formed and registered under the Companies Act,1956) or any other company which, in respect of its income
liable to tax, under the Income Tax Act, has made the prescribed arrangement for declaration and payments
within India, of the dividends payable out of such income. A domestic company may be a public company or a
private company. Foreign company [Section 2(23A)]: means a company whose control and
management are situated wholly outside India, and which has not made the prescribed arrangements for
declaration and payment of dividends within India.
Provision relating to taxation of a Company
Indian companies are taxable in India on their worldwide income, irrespective of its source and origin. Foreign
companies are taxed only on income which arises from operations carried out in India or, in certain cases, on
income which is deemed to have arisen in India. The later includes royalty, fees for technical services,
interest, gains from sale of capital assets situated in India (including gains from sale of shares in an Indian
company) and dividends from Indian companies. Thus, the tax-liability on income of a company depends upon the
residential status of the company.
A Company is said to be resident in India during any relevant previous year if :
It is an Indian Company;or The control and management of its affairs is situated wholly in india. In
case of Resident Companies, the total income liable to tax includes [section 5(1)]:
Any income which is received or is deemed to be received in India in
the relevant previous year by or on behalf of such company Any income which accrues or arises or is deemed to accrue or arise
in India during the relevant previous year Any income which accrues or arises outside India during the relevant
previous year.
Similarly, a Company is said to be non-resident during any relevant previous year if :
It is not an Indian company,and The control and management of its affairs is situated wholly/partially
outside India. In case of Non-Resident Companies, the total income liable to tax includes
[section 5(2)]:
Any income which is received or is deemed to be received in India
during the relevant previous year by or on behalf of such company Any income which accrues or arises or is deemed to accrue or arise
to it in India during the relevant previous year.
As a result a situation may arise where the same income becomes taxable in the hands of the same company in one
or more countries,leading to 'Double Taxation'. The problem of double taxation may arise on account of any of
the following reasons :
A company(or a person) may be resident of one country but may derive income from
other country as well,thus he becomes taxable in both the countries. A company/person may be subjected to tax on his world income in two or more
countries, which is known as concurrent full liability to tax.One country may tax on the basis of
nationality of tax-payer and another on the basis of his residence within its border.Thus, a person
domiciled in one country and residing in another may become liable to tax in both the countries in respect
of his world income. A company/person who is non-resident in both the countries may be subjected to tax
in each one of them on income derived from one of them.for example,a non-resident person has a Permanent
establishment in one country and through it he derives income from the other country.
In India the relief against double taxation has been provide under Section 90 and Section 91 of the Income Tax
Act.
Section 90 of the Income Tax Act relates to bilateral relief. Under it, the Central
Government has entered into an agreement with the Government of any country outside India. These agreements
called as "double taxation avoidance agreements (DTAA's)", provide for the following :
Granting of relief in respect of :
Income on which income tax has been paid both in India and in that
country or Income tax chargeable in India and under the corresponding law in
force in that country to promote mutual economic relations, trade and investment, or
The type of income which shall be chargeable to tax in either country so
that there is avoidance of double taxation of income under this Act and under the corresponding law
in force in that country
In addition the Central Government may enter into an agreement to provide :
For exchange of information for the prevention of evasion or avoidance of
income tax chargeable under the Act or under the corresponding law in force in that country, or
investigation of cases of such evasion or avoidance, or For recovery of income tax under the Act and under the corresponding law in
force in that country.
India has entered into DTAA with 65 countries including countries like U.S.A., U.K., Japan, France, Germany,
etc. In case of countries with which India has double taxation avoidance agreements, the tax rates are
determined by such agreements.
Under the section, the assessee is given relief by credit/refund in a particular manner even though he is
taxed in both the countries. Relief may be in the form of credit for tax payable in another country or by
charging tax at lower rate.The steps involved in granting such a bilateral relief are:- (a) Compute the
total income of person liable to pay tax in India in accordance with the provisions of the Income Tax Act
(b) Allow relief as per the terms of the tax treaty entered into with the other contracting company, where
the taxation has suffered double taxation.
The liability to tax arising under the Income Tax Act are subject to provisions of the double taxation
avoidance agreements between India and foreign country. Thus the treaty provisions shall prevail over the
income tax provisions.
The types of agreements under DTAA's can be majorly categorised as :
Comprehensive Agreements : These are elaborated documents which puts
forward in detail that how incomes under various heads may be dealt with. Limited Agreements : These are entered into to avoid double taxation
related to the income derived from operation of aircrafts,ships,carriage of cargo and freight. Other Agreements : including double taxation relief rules.
Section 91 of the Income Tax Act relates to unilateral relief. Under it, if
any person/company is resident in India in any previous year and paid the income,which accrued to him in
India, to any country with which there is no agreement (under Section 90) for relief from double taxation,
he shall be entitled to deduction from the Indian Income-tax payable by him of a sum calculated on such
doubly taxed income at the average Indian rate of tax or the average rate of tax of said country, whichever
is lower,or at the Indian rate of tax if both the rates are equal.
The steps involved in calculating relief under this section are : (a)Calculate tax on total income
(including foreign income) and claim relief applicable on it (b)Add surcharge and education cess after
claiming rebate under the Section 88E (c)Compute average rate of tax by dividing the tax computed in
previous step with the total income (d)calculate average rate of tax of foreign country by dividing
income-tax actually paid in the said country after deduction of all relief due (e)Claim the relief from the
tax payable in India at the rate computed in previous two steps on the basis of whichever is less.
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Computation of taxable income of a Company
Ascertain the 'total income' of the company by aggregating incomes falling under following four heads :
Income from House Property, whether residential or commercial,let-out or
self-occupied. However,house property used for purpose of company's business does not fall under this
head. Profits and Gains of Business or Profession. Capital Gains. Income from other sources including interest on securities, winnings from lotteries,
races,puzzles,etc. Also, income of other persons may be included in the income of the company. But,
income under the head 'Salary' is not included under company.
To the total income so obtained, 'current and brought forward losses' should be adjusted for set off in
subsequent assessment years to arrive at the gross total Income. Thus the total income so computed is the
'gross total income'. The 'set off ' means, adjustment of certain losses against the incomes under other
sources/heads( Section 79 ).This section applies to all losses including losses under the head 'Capital Gains'.
From the gross total income, prescribed 'deductions' under Chapter VI A are made to get the 'net income'.
Generally, all expenses incurred for business purposes are deductible from taxable
income, given that the expenses must be wholly and exclusively incurred for business purposes and also that
the expenses must be incurred/paid during the previous year and supported by relevant papers and records.
But expenses of personal or of capital nature are not deductible. Capital expenditure are deductible only through depreciation or as the basis of
property in determining capital gains/losses. Deductions shall also be allowed in respect of depreciation,
as per Section 32 of Income Tax Act, of tangible assets such as machinery, buildings, etc and non-tangible
assets such as know-how, patents, etc, which are owned by assessee and used for the purpose of
business/profession. Depreciation is deducted from the written-down value of the block of assets mentioned
under Section 43 of the Act. However,where an asset is acquired by assessee during the previous year and is
put to use for business/profession purpose for a period of less than 180 days,the deduction in respect of
such assets shall be restricted to 50% of the normal value prescribed for all block of assets. But no deduction shall be allowed in respect of any expenditure incurred in relation
to income which does not form part of total income.
Tax liability is computed on the 'net income' that is chargeable to tax. It is done either on accrual basis or
on receipt basis (whichever is earlier). However if an income is taxed on accrual basis,it shall not be taxed
on receipt basis.
From the tax so computed, tax rebates or tax credit are deducted.
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Different kinds of taxes relating to a Company
Fringe Benefit Tax (FBT)
The Finance Act,2005 had introduced a new levy, namely Fringe Benefit Tax (FBT). The provisions relating to
levy of this tax are contained in Chapter XIIH(Sections 115W to 115WL)of the income-Tax Act,1961.
Fringe Benefit Tax (FBT) is an additional income tax payable by the employers on value of fringe benefits
provided or deemed to have been provided to the employees. The FBT is payable by an employer who is a company;a
firm;an association of persons excluding trusts/a body of individuals;a local authority;a sole trader, or an
artificial juridical person. This tax is payable even where employer does not otherwise have taxable income.
Fringe Benefits are defined as any privilege, service, facility or amenity directly or indirectly provided by
an employer to his employees (including former employees) by reason of their employment and includes expenses
or payments on certain specified heads.
The benefit does not have to be provided directly in order to attract FBT. It may still be applied if the
benefit is provided by a third party or an associate of employer or by under an agreement with the employer.
The value of fringe benefits is computed as per provisions under Section 115WC. FBT is payable at prescribed
percentage on the taxable value of fringe benefits. Besides, surcharge in case of both domestic and foreign
companies shall be leviable on the amount of FBT. On these amounts,education cess shall also be payable.
Every company shall file return of fringe benefits to the Assessing Officer in the prescribed form by 31st
october of the assessment year as per provisions of Section 115WD. If the employer fails to file return within
specified time limit specified under the said section, he will have to bear penalty as per Section 271FB.
Minimum Alternative Tax (MAT)
A company is liable to pay tax on the income computed according to the provisions of the Income Tax Act, but
the profit and loss account of the company is prepared as per provisions of the Companies Act.
Provision of MAT has been introduced for the companies popularly known as the 'Zero Tax Companies'. These are
the companies, which are showing book profits and declaring dividends to the shareholders, but are not paying
any income tax. Book profit, means the net profit as shown in the profit and loss account. The company shall
furnish a report in Form 29B after certifying it by Chartered Accountant that book profits have been computed
in accordance with the said section.
Under MAT, wherever the income tax payable on the total income of a company, in respect of any previous year,
is less than the 'prescribed percentage of its book profits', such book profit shall be deemed to be the total
income of the company and the tax payable on such total income shall be at the 'prescribed percentage of book
profits', plus surcharge and education cess.
Tax Credit for MAT : As per Section 115JAA, a tax credit is allowed,where a company pays MAT, against tax
payable at normal rates in any of the prescribed subsequent assessment years. It shall be allowed on the
difference between the tax on the total income and the MAT which would have been payable for that assessment
year.
Provision of MAT is not applicable to :
Income from the business of developing, maintaining, and operating certain
infrastructure facilities Income from units in specified zones or specified backward districts Income of certain loss-making companies Export profits
Dividend Distribution Tax (DDT) or Tax on Distributed Profits of domestic companies
Under Section 115-O of the Income Tax Act, any amount declared, distributed or paid by a domestic company by
way of dividend shall be chargeable to dividend tax. Only a domestic company (not a foreign company) is liable
for the tax. Tax on distributed profit is in addition to income tax chargeable in respect of total income. It
is applicable whether the dividend is interim or otherwise. Also, it is applicable whether such dividend is
paid out of current profits or accumulated profits.
The tax shall be deposited within 14 days from the date of declaration, distribution or payment of dividend,
whichever is earliest. Failing to this deposition will require payment of stipulated interest for every month
of delay under Section115-P of the Act.
Wealth Tax on Companies
Wealth tax is a direct tax, which is charged on the 'net wealth' of the 'assessee' under the Wealth Tax Act.
All companies (public or private) are liable to wealth-tax if their taxable 'net wealth' exceeds the prescribed
limits. All the companies have thus been brought at par with other wealth-tax assesses.
Net wealth of a company is the excess of the 'aggregate value of specified assets' belonging to the company on
the valuation date over the 'aggregate value of debts owned by the company' that are incurred in relation to
the said assets.
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