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Joint Venture Companies
Joint Venture(JV) is defined as a contractual agreement formed between two or more parties, with each party
contributing their equity share, in order to undertake an economic activity which is subjected to joint control.
In such an agreement all parties agree to share expenses, revenue, etc and govern various financial and operating
policies for the benefit of the enterprise. In other words, no single venturer is in a position to unilaterally
control the activity.
Joint Ventures Companies are generally formed under Indian Companies Act. These Companies may be a private
limited or a public limited.
A very common method used by foreign companies entering the Indian market is to work on a joint venture with an
Indian company. Joint Venture can provide following advantages for a foreign investor :
Established distribution/marketing set up of the Indian Partner is available. Easy availability of financial resource of the Indian partner. Established contacts of Indian partners which help to smoothen out the process of
setting up of operations by foreign investor.
It is possible to start such a joint venture either with an existing company or to start it anew with an Indian
partner. In either case, the Indian company needs to exist and it has to approach the Foreign Investment
Promotion Board (FIPB) or the Reserve Bank of India with a request for allowing foreign investment in the
company.
Provisions relating to taxation of Joint Ventures
A joint venture is subjected to taxation under the provisions of Income Tax Act, 1961. It is the umbrella Act
for all the matters relating to income tax and empowers the Central Board of Direct Taxes (CBDT) to formulate
rules (The Income Tax Rules, 1962) for implementing the provisions of the Act. The CBDT is a part of Department
of Revenue in the Ministry of Finance. It has been charged with all the matters relating to various direct
taxes in India and is responsible for administration of direct tax laws through the Income Tax Department. The
Income Tax Act is subjected to annual amendments by the Finance Act, which mentions the 'rates' of income tax
and other taxes for the corresponding year.
Taxation of a joint venture, depends upon the agreement between the parties, forming the joint venture. If the
joint venture is established in the form of a partnership firm or as a company, it is taxed accordingly i.e. as
a partnership or as a company. But in all other cases, a joint venture is treated as an association of persons
(AOP) or a body of individuals(BOI).
An Association of Persons (AOP) means two or more persons who join for a common purpose with a view to earn an
income. The term 'person' includes any company or association or body of individuals, whether incorporated or
not. The association need not be on the basis of a contract. Therefore, if two or more persons join hands to
carry on a business but do not constitute a partnership they may be assessed as an AOP. But, an AOP does not
mean any and every combination of persons. It is only when they associate themselves in an income-producing
activity that they become an association of persons.
Body of Individuals (BOI) means a conglomeration of individuals who carry on some activity with the objective
of earning some income. It would consist only of individuals. Entities like companies or firms cannot be
members of a body of individuals. Income tax shall not be payable by an assessee in respect of the receipt of
share of income by him from BOI and on which the tax has already been paid by such BOI.
Compute the taxable income of AOP/BOI
Compute the total income under the different heads i.e. income from house property, profits or gains of business
or profession, capital gains, and income from other sources, ignoring the prescribed incomes exemptions. Thus,
"gross total income" is obtained.
From the gross total income, prescribed deductions under Section 80A of Chapter VIA are made. The balance
amount is the taxable income.
Interest paid by the AOP/BOI to a member is not allowed as deduction from the income
of the AOP/BOI [Section 40(ba) of the Act]. Any salary, bonus, commission or remuneration (by whatever name called), paid by the
AOP/BOI to a member is not allowed as deduction from the income of the AOP/BOI.
The total income of the AOP/BOI is taxable, either at the rates applicable to an individual, or at the maximum
marginal rate or at a rate higher than maximum marginal rate. The tax incidence on AOP/BOI depends upon whether
or not the individual shares of members in the whole or in any part of the income of the AOP/BOI are
determinate :
Where shares of the members are determinate (under Section 67A)
The total income of an AOP/BOI wherein the shares of the members are determinate and known shall be
computed as follows :
Any interest, salary, bonus or remuneration paid to any member of AOP shall
be deducted from their total income. The balance income (either profit or loss) shall be apportioned to the
members, to which salary, interest, etc. shall be added.This income shall be treated as member's
share in income of AOP. The member's share so ascertained shall be apportioned under various heads
of income in the same manner as it is done for AOP. Any interest paid by member on capital borrowings for investment purposes in
AOP shall be deducted from member's share while computing his income under the head profits and
gains of business/profession.
The tax is chargeable on the total income of an AOP/BOI at the same rate as is applicable in the case of an
individual.
But, when the total income of any member of the AOP/BOI for the previous year (excluding his share from the
AOP/BOI) exceeds the maximum amount which is not chargeable to tax in the case of that member under the
Finance Act of the relevant year, tax is charged on the total income of the AOP/BOI at the maximum marginal
rate (i.e. the highest slab applicable to an individual).
And, where, the total income of any member of the AOB/BOI (whether or not it exceeds the maximum amount not
chargeable to tax in the case of an individual) is chargeable to tax at a rate higher than the maximum
marginal rate, tax shall be charged on that portion of the total income of the AOP/BOI which is relatable
to such member at a higher rate and the balance of the total income of the AOP/BOI shall be taxed at the
maximum marginal rate.
Where shares of members are indeterminate(under Section 167B)
The tax is charged on the total income of the AOP/BOI at the maximum marginal rate, which is the rate of
tax (including surcharge, if any) applicable in relation to the highest slab of income in the case of an
individual as specified in the Finance Act of the relevant year. However when any member is charged at a
higher rate than maximum marginal rate,the income shall be taxed at a higher rate.
Tax Provisions Relating to Share of a Member in the Income of the AOP/BOI
The share of a member in the income of an AOP/BOI is treated in three different ways
Where the association or body is chargeable to tax at the maximum marginal rate or
at a rate higher than the maximum marginal rate, the share of a member therein shall not be included in his
total income at all(Section 86). Where the association or body is chargeable to tax at the normal rates applicable to
individuals, etc, the share of a member therein shall be included in his total income, but a rebate shall
be given on the same. Where no income tax is chargeable on the total income of the association or body,
the share of a member therein shall be fully chargeable to tax as part of his total income and no rebate
shall be given thereon. Thus, where an AOP/BOI is taxable at the normal rates applicable to individuals,
etc, but has income below taxable limit so that no income tax is chargeable on the total income of the
AOP/BOI, the share of a member in such association or body shall be fully taxable in his own assessment.
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