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1. Corporate Tax ( MEANING & CONCEPT)

 

 

1.     Corporate Tax ( MEANING & CONCEPT)

Corporate Taxes which are payable annually on the Income of a Body Corporate operating in India.

 

For the purpose of Tax Liability of Companies, Companies are classified into .. (a) Domestic Companies and (b) Foreign Companies. OR in other words Resident or Non-Resident Companies. Depending on their residence they are subjected to different tax treatment.

1.1. Sec. 2(26) : DEFINITION OF AN INDIAN COMPANY

"Indian company" means a company formed and registered under the Companies Act, 1956, and includes-

(i) a company formed and registered under any law relating to companies formerly in force in any part of India (other than the State of Jammu and Kashmir [and the Union territories specified in sub-clause (iii) of this clause]);

(ia)      a corporation established by or under a Central, State or Provincial Act;

(ib)      any institution, association or body which is declared by the Board to be a company under section 2(17);

(ii) in the case of the State of Jammu and Kashmir, a company formed and registered under any law for the time being in force in that State;

(iii) in the case of any of the Union territories of Dadra andNagar Haveli, Goa, Daman and Diu, and Pondicherry, a company formed and registered under any law for the time being in force in that Union territory:

Provided that the registered or principal office of the company, corporation, institution, association or body, in all cases is in India.

 

Section 6(3). Residential Status of an Indian Company

Indian companies are always treated as Resident in India whether Control and Management is in India or outside India.

 

 

1.2. Sec. 2(23A) : DEFINITION OF A FOREIGN COMPANY

It means a company which is not a domestic company, i.e. a company registered outside India in any other foreign country.

The Foreign Company may be treated as Domestic Company if such company makes prescribed arrangement in India as per Rule 27.

Rule 27. Prescribed arrangement for declaration and payment of dividends within India.

The arrangements referred to in sections 194 and 236 to be made by a company for the declaration and payment of dividends ( including dividends on preference shares) within India shall be as follows :

    1. The share-register of the company for all shareholders shall be regularly maintained at its principal place of business within India, in respect of any assessment year from a date not later than the 1st day of April of such year.

    2. The general meeting for passing the accounts of the previous years relevant to the assessment year and for declaring any dividends in respect thereof shall be held only at a place within India.

    3. The Dividend declared , if any, shall be payable only within India to all shareholders.

Sec.6(3), Residential Status of foreign Company

Foreign Company is treated as Resident in India if its Control and Management is located wholly in India.

Foreign Company is treated as Non-Resident in India if its Control and Management located wholly / partially Outside India.

Sections applicable to Foreign Company are 44BBB, 44D, 115A, 195 etc.

1.3. Definition Of A Domestic Company

A Domestic Company means an Indian Company or any other company with respect to its income, liable to tax under the Income-Tax Act, has made the prescribed arrangements for the declaration and payment within India, of the dividends (including dividends on preference shares) payable out of such income.

Thus, all Indian Company are treated as Domestic Company but all Domestic Company are not Indian Company.

If a Foreign Company makes prescribed arrangements for payment of dividends in India it shall be treated as Domestic Company.

 

1.4. Sec.2(18): Company Of Substantially Interest To The Public

It includes :

(i)         Government Company :      A company owned by the Government or the Reserve Bank of India

(ii)        A Company having Govt. participation : A Company  in which not less than 40% of the shares are held (whether singly or taken together) by the Government or the Reserve Bank of India or a corporation owned by RBI. (i.e. at least 40% of holding should be held by Govt. or RBI)

(iii)       Section 25 Companies :     Companies registered under section 25 of the Indian Companies Act, 1956. These are companies which are promoted with special object to promote commerce, art, science, charity or religion or any other useful object (these companies lose the status of a company in which the public are substantially interested at any time they declare dividend).

(iv)       A Company declared by the CBDT : It is a company without share capital and which having regard to its object, nature and composition of its membership or other relevant consideration is declared by the Board to be a company in which public are substantially interested for the relevant AY.

(v)        Mutual Benefit finance Company : Where principal business of the company is acceptance of deposits from its members and which has been declared by the Central Government to be a Nidhi or  Mutual Benefit Society.

(vi)       A Company having Co-operative Society participation :It is a company in which at least 50% or more equity shares have been held by one or more co-operative societies throughout the PY.

(vii)      A Company is deemed to be a Public Company if it is not a Private Company as defined by the Companies Act, 1956 and is fulfilling either of the following two conditions :

    • A listed Public Company : Its equity share were listed on a recognized stock exchange, as on the last day of the relevant PY ; or

    • Any other Public Company :          Its equity shares carrying at least 50% of the voting power ( in the case of an industrial company the limit is 40%) were beneficially held throughout the relevant PY by Government, a statutory corporation, a company in which the public are substantially interested or a wholly owned subsidiary of such a company.

Widely Held Company :      The Company in which the public are substantially interested is also known as wholly held Company.

Closely Held Company : It is a Company in which the public are NOT substantially interested . This type of company is referred in Sec.2(22)(e) and Sec. 79.

 

KEY PROVISIONS

  • A domestic/ resident company is taxed on . . .
    • 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 Yea

  • A Foreign/non-resident company is taxed on . . .
    • 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

    A domestic/ resident company would be subjected to an additional tax called dividend tax on the amount of dividend declared, distributed or paid. Dividends tax is charged on the company and not charged on the hands of the shareholders. Such tax must be paid within 14 days of declaration or distribution, whichever is earlier. Any deduction on account of such tax is not allowed to the company
  • Companies with more than INR 10 million total incomes are subjected to a surcharge on their taxes. Domestic companies pay a surcharge of 5% as against foreign companies that pay a surcharge of only 2%.
  • Withholding tax is applicable on payments made to foreign companies operating in India without permanent establishment.
  • Capital gains are subjected to tax.

1.5. CORPORATE TAX RATES :

 

Company with total income exceeding INR 10 million

Company with total income less than INR 10 million

Domestic Company

32.445% (30% basic rate  plus surcharge of 5% plus education cess of 3%)

30.9% (30% direct tax plus education cess of 3%)

Foreign Company

42.024% (40% plus surcharge of 2.5% and education cess of 3%)

41.2% (40% plus and education cess of 3%)

 

In addition to the basic corporate tax rate the following important taxes are applicable

  • Minimum Alternate Tax rate of 18.5% (plus applicable surcharge and cess)

  • Dividend Distribution Tax of 16.22% is charged on domestic companies

  • Foreign dividends received by an Indian company currently are taxed at a rate of 30% (plus the surcharge and cess). To encourage Indian companies to repatriate funds, it is proposed that where the total income of an Indian company includes any dividend declared, distributed or paid by a foreign subsidiary company, the dividends will be taxed at 15% on a gross basis. No deduction in respect of any expenditure or allowance will be allowed in computing the dividend income.

  • Wealth tax is charged @ 1% of the amount by which the net wealth exceeds Rs.3 Million

  • Fringe benefits are taxable at 30% tax rate and additional 3% education cess on the total tax amount. For corporate with turnover of over INR 10 million, there is additional 10% surcharge on the 30% tax.

  • Short term capital gains are taxed at normal basic income tax rate and Long term capital gains are charged 10% -20%. Short term gains on sale transactions of equity shares / unit of an equity oriented fund attract 15% tax rate while long term tax gained on similar transaction is exempted from tax.

  • Withholding Tax
    Current rates for withholding tax for payment to non-residents are as follows :

 

Interest

20% *

Dividends (Domestic Companies)

Nil

Royalties

20%

Technical services

10%

Any other services

40% of the income

 

  •  Note: Applicable to Non-resident belonging to countries that are not party to DTAA with India. Rates will be competitive for DTAA partner countries.

  • *In order to augment long-term, low cost funds from abroad for the infrastructure sector interest received by a non-resident from an infrastructure debt fund set up in accordance with guidelines to be prescribed and notified by the central government will be taxed at a rate of 5% (plus the applicable surcharge and education cess) on the gross amount

  • In addition several other taxes will be charged as indirect charges CENVAT, VAT, Service Tax, Custom’s duty etc

1.6. COMPUTATION OF TAX

All incomes
Less: Losses, expenses, & Allowable Exemptions
______________________________
Gross Total Income
Less: Allowable Deductions
_____________________________

Tax: Total Income * Tax rate
Less: Relief & Rebates
_____________________________

= Tax Payable

1.7. GROSS TOTAL INCOME

For the purpose of tax computation total gross income is the aggregate of the income from various sources, after excluding qualifying exemptions, grouped under the following heads:

  • Income from house/property
  • Capital gains
  • Profits and gains of business or profession
  • Income from other sources such as foreign dividends, interests etc. Income from other sources including interest on securities, winnings from lotteries, and also, income of other persons may be included in the income of the company.

 

The income is adjusted for ‘current and brought forward losses’ and qualifying exemptions to arrive at the Gross Total Income. which should be adjusted allowable deductions to arrive at the net income

1.8. ALLOWABLE DEDUCTIONS

In computing taxable total income, Gross Total Income should be adjusted for allowable deductions to arrive at the net income, several deductions are allowed which include the following.

  • Capital Allowances – expenses on R&D, mergers & acquisitions qualify for deduction
  • Depreciation – available at specific percentage depending on the nature of the asset and depreciation not set off against current year’s income can be carried forward for set off against any future income for an unlimited period.
  • Stock/Inventory – valuation at market value or cost whichever is lower
  • Interest – Interest paid on the borrowings
  • Losses – can be set off against any other income in the same Assessment Year and against business profits in subsequent assessment years subject to certain conditions.

The net income thus arrived is the chargeable income which is subjected to tax  to determine the tax accrued from which the tax rebates and credits are deducted to arrive at the actual tax payable.

1.9. TAX REBATES AVAILABLE FOR CORPORATE TAX:
  • Domestic companies are allowed to deduct dividend received from other Domestic Companies in certain cases
  • Special Provisions apply to Venture Fund and Venture Capital companies
  • Subject to certain conditions Deductions are allowed to Exports and new undertakings
  • Special Deductions for developing, maintaining, and operating new infrastructure and power facilities
  • Business Losses can be carried over for eight years
  • Interest, Dividends and Long-Term Capital Gain income earned by an Infrastructure Fund from investments in shares or long-term finance in enterprises carrying on the business of developing, monitoring and operating specified infrastructure facilities or in units of Mutual Funds involved with the infrastructure of power sector are to be tax exempt.

1.10. PAYMENT OF TAX

After calculating the income tax, tax can be paid through Online deposit or through Nationalized banks.

1.11. ADVANCE TAX PAYMENT

Liability for payment of advance tax arises where the amount of tax payable by the assessee for the year is Rs. 10,000 or more. It can be paid in installments in the previous year. Deferred payment of tax will attract penal interest.

1.12. FILING OF INCOME TAX RETURNS

Income Tax Act requires that every company to furnish return of income. The due date for filing of return is 30 September of the Assessment year. Assessment Year is the year in which the salary earned in the Previous Year is taxable. Any financial year begins from 1st of April of every year and ends on 31st of March of the subsequent year.

1.13. FORMS FOR FILING CORPORATE TAX

ITR 5

For Firms, Association Of Persons and Body of Individuals

ITR 6

For Companies other than companies claiming exemption under section 11

ITR 7

For persons including companies required to furnish return under section 139(4A) or section 139(4B) or section 139(4C) or section 139(4D)

ITR 8

Return for Fringe Benefits

 

Except form ITR-7, which is in respect of charitable/religious trusts, political parties and other non-profit organizations, all the forms can be electronically filed.

The consequences of late submission range from penal interest, penalty, deprival of privilege for certain deduction, and in case of losses reported few losses cannot be carried forward.

In the return the details of high value transactions need to be compulsorily stated, which are ordinarily reported through the annual information return (AIR) and these details are cross checked and matched with the data in the AIR.

The form must be verified and endorsed by the following persons, as applicable.

  • Resident company: Managing Director or, where there is no Managing Director or he is not able to sign and verify the return due to any unavoidable reason, by any director thereof.
  • Non-Resident company: The return may be signed and verified by a person holding a valid Power of Attorney from the Company, which should be attached to the return

A company has two ways of filing tax return

  • furnishing the return electronically under digital signature;
  • transmitting the data in the return electronically and thereafter submitting the verification of the return in Form ITR-V.
  • The collection of acknowledgement completes the filing process. An assessee will have to produce documents, if required by the Assessing Officer to complete the assessment.
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