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Companies - Taxation
Company whether Indian or foreign is liable to taxation, under the Income Tax Act, 1961.
A Company means
- Any Indian company, or
- Any corporate body, incorporated by or under the laws of a country outside India
Classification of companies for the purpose of taxation
- Domestic company
It 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
It 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. The tax-liability on income of a company depends upon its residential status.
- 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 :-
- 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:-
- 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'. In order to address the said situation, India has entered into Double Taxation Avoidance Agreements (DTAA) with around 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.
Tax Rates
Domestic Company
- Income-tax: 30% of total income.
- Surcharge: The amount of income tax as computed in accordance with above rates, and after being reduced by the amount of tax rebate shall be increased by a surcharge at the rate of 10% of such income tax, provided that the total income exceeds Rs. 1 crore.
- Education Cess: 3% of the total of Income-tax and Surcharge.
Company other than a Domestic Company
- Income-tax:
- @ 50% of on so much of the total income as consist of (a) royalties received from Government or an Indian concern in pursuance of an agreement made by it with the Government or the Indian concern after the 31st day of March, 1961 but before the 1st day of April, 1976; or (b) fees for rendering technical services received from Government or an Indian concern in pursuance of an agreement made by it with the Government or the Indian concern after the 29th day of February, 1964 but before the 1st day of April, 1976, and where such agreement has, in either case, been approved by the Central Government;
- @ 40% of the balance
- Surcharge:
The amount of income tax as computed in accordance with above rates, and after being reduced by the amount of tax rebate shall be increased by a surcharge at the rate of 2.5% of such income tax, provided that the total income exceeds Rs. 1 crore.
- Education Cess:
3% of the total of Income-tax and Surcharge.
Tax Computation
The tax liability of the Company on its taxable income is computed in the following manner:
- 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. The total income so computed is the 'gross total income'.
- From the gross total income, prescribed 'deductions' under Chapter VI A of the Income Tax Act 1961 shall be 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. 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.
Different Kinds of Taxes on Company
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 income is arrived as per the profit and loss account of the company, prepared as per provisions of the Companies Act.
At times companies are showing book profits (net profit as shown in the profit and loss account) and declaring dividends to the shareholders, but are not paying any income tax. The company shall furnish a report in prescribed format after certifying it by Chartered Accountant that book profits have been computed in accordance with the said section.
In order to plug the aforesaid gap, the concept of MAT was introduced, whereby 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.
Companies who pays MAT are allowed Tax credit 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)
Under the Income Tax Act, any amount declared, distributed or paid by a domestic company by way of dividend shall be chargeable to dividend 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.
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 are liable to pay wealth-tax if their taxable 'net wealth' exceeds Rs 15 lacs. Tax rate is 1% on amount by which ‘net wealth’ exceeds Rs 15 Lacs. No surcharge or education cess is payable
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.
Source: www.business.gov.in
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