1:33 pm - Wednesday March 20, 2019

Taxation

Taxation of Corporates

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 :

    1. It is an Indian Company;or

    2. 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 :

    1. It is not an Indian company,and

    2. 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'.

  • Unabsorbed depreciation may be carried-forward for set-off indefinitely. But carry back of losses or depreciation is not permitted. However,business losses can be carried forward for eight consecutive financial years and can be set off against the profits of subsequent years.

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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Other Categories

Taxation
Taxation of Individuals
Who is liable to pay income tax
Sources of Income
Income from Salaries
Income from Capital Gains
Income from House property
Income from Profits & gains of business or profession
Income from other sources
Taxation of Partnerships
Customs Duties (Import Duty and Export Tax)
Wealth Tax
Taxation of Corporates
Taxation of Agents
Excise Duty
Permanent Account Number (PAN)
Taxation of other forms of business entities
Taxation of Trusts
Taxation of Small Scale Industries
Joint Venture Companies
Cooperative Societies
Taxation of Representative offices
Service Tax
TDS,TCS,TAN
Value Added Tax (VAT)


Introduction

India has a well developed tax structure. The power to levy taxes and duties is distributed among the three
tiers of Government, in accordance with the provisions of the Indian Constitution. The main taxes/duties that
the Union Government is empowered to levy are:- Income Tax (except tax on agricultural income,
which the State Governments can levy), Customs duties, Central Excise and Sales Tax and Service Tax. The principal taxes levied by the State Governments are:- Sales Tax (tax on intra-State sale of goods), Stamp Duty (duty on transfer of property), State Excise (duty on manufacture of alcohol), Land Revenue (levy on land used for agricultural/non-agricultural purposes), Duty on Entertainment and Tax on Professions & Callings. The Local Bodies are empowered to levy tax on properties (buildings, etc.), Octroi (tax on entry of goods for use/consumption within areas of the Local Bodies), Tax on Markets and Tax/User Charges for utilities like water supply, drainage, etc.

In the wake of economic reforms, the tax system in India has under gone a radical change, in line with the
liberal policy. Some of the changes include:- rationalization of tax structure; progressive reduction in peak
rates of customs duty; reduction in corporate tax rate; customs duties to be aligned with ASEAN levels;
introduction of value added tax; widening of the tax base; tax laws have been simplified to ensure better compliance. Tax policy in India provides tax holidays in the form of concessions for various types of investments. These include incentives to priority sectors and to industries located in special area/ regions. Tax incentives are available also for those engaged in development of infrastructure.