8:26 am - Wednesday July 17, 2019

Taxation

Joint Venture Companies

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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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.