Taxation
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This article is written by Anil Kumar, pursuing a Certificate Course in Advanced Corporate Taxation from LawSikho.

Introduction

There are two types of taxes in India:

  • Direct tax
  • Indirect tax

If we talk about direct tax, it is levied on the income that different types of business entities earn in a financial year. In India there are different types of taxpayer registered with the income tax department and they pay tax at different rates, for example individual pay tax at slab rate and company pay tax at flat rate.

Subdivision of income tax:

Income tax: this tax is paid by the taxpayer which is not a company (not registered under company law) at a slab rate.

Corporate tax: corporate tax is paid by the company (registered under company law) at flat rate.

Definitions

Company: Section 2(17) of the income tax Act, stipulate that company means:

  1. An Indian company;
  2. Body corporate incorporated outside India under the law of a foreign country; 
  3. Any institution, association or body whether incorporated or not and whether Indian or non-Indian, which is declared by general or special order of the board to be a company.

Domestic company: Section 2(22A) of the Income Tax Act stipulate that domestic company means:

  1. An Indian company;
  2. Any other company which is liable to pay tax under Income Tax Act, has made the prescribed arrangement for the declaration and payment, within India of the dividends ( including dividends on preference share) payable out of such income.

Foreign company: as per section 2(23A) of the Income Tax Act, foreign company means a company which is not a domestic company.

Residential status of company

Section

Company

Residential status

6(3)(i)

Indian company

Always resident in India.

6(3)(ii)

A foreign company (whose turnover/ gross receipt in the previous year is more than 50crore) 

It will be resident in India if its place of effective management(POEM) during the relevant previous year as in India.

6(3)(iii)

A foreign company (whose turnover/ gross receipt in the previous year is 50crore or less)

Always non- resident in India.

Types of income 

Resident

Non-resident

Income arising in India 

Taxable in India

Taxable in India

Income arising outside India

Taxable in India

Not taxable in India

Place of effective management (POEM)

Clause (ii) of section 6(3) (i.e. a company other than an Indian company shall be resident in India in any previous year its place of effective management in that year is in India) shall not apply to a company having turnover or gross receipt of rupees 50crore or less in a financial year therefore, the guidelines for determining POEM as given in circular dated 24.01.2017 shall apply to a company having turnover or gross receipt exceeding rupees 50crores in that financial year.

POEM is deemed to be outside India if:

  • Active business outside India; and
  • More than 50% board meetings conducted outside India.

If above both the conditions are satisfied then POEM shall be deemed to be outside India

Note:

A company shall be said to be engaged in “Active business outside India” if the following four conditions are satisfied:

  1. Passive income is not more than 50% of its total income; and
  2. Less than 50% of its total assets are situated in India; and
  3. Less than 50% of total number of employees are situated in India or resident in India; and
  4. Total payroll expenditure incurred on such an employee is less than 50% of its payroll expenditure.

The average of data of the previous year and two preceding years shall be taken where the company is in existence for a shorter period, then data for a shorter period is to be considered.

Passive income aggregate of:

  • Income from the transaction where both the purchase and sale of goods is from/to its associate enterprise.
  • Income by way of royalty, dividend, capital gain, interest, or rental income.

Tax rates in case of company

Particulars

A/Y 21-22

Income between 1 crore to 10 crore 

Above 10 crore

Cess (after surcharge and marginal relief)

If turnover/gross receipt during p/y 2016-2017 up to 250 crore.

25%

7%

12%

 

4%

If turnover/gross receipt during p/y 2017-2018 does not exceed 400 crore

amended Finance Act 2019

25%

7%

12%

 

4%

If turnover/gross receipt in the p/y 2017-18 is more than 400 crore.

30%

7%

12%

 

4%

Foreign company

40%

2%

5%

 

4%

Special rates of income tax

Section

Nature of income

Rate of tax

111A

Short term capital gains from transfer of securities on which securities transaction tax has been charged.

15%

112

Long term capital gain

20%/10%

112A

On long term capital gain (listed share/unit)

exempt up to INR 1 lakh excess taxable @10%

115BB

Casual income

30%

115BBE

Unexplained amounts are treated as income under section 68, 69, 69A, 69B, 69C and 69D of the Act.

60%

Minimum Alternate Tax section 115JB

Objective of levying MAT

A taxpayer, being a company, may have generated income during the year but by taking the advantage of various provisions of income tax law (like exemptions, deductions, depreciation etc.), it may have reduced its tax liability or may not have paid any tax. Due to the increase in such zero tax paying companies MAT was introduced by the Finance Act, 1987.

The objective of introducing MAT is to bring zero tax companies into the tax net which despite having earned substantial book profits and paid handsome dividends do not pay any tax due to various tax concessions and incentives provided under the income tax law.

Applicability of MAT

Applicable to all companies including foreign company except the following three cases:

  • The assessee is a resident of a country or a specified territory with which India has DTAA under section 90/90A and the assessee does not have permanent establishment in India (PE).
  • The assessee is a resident of a country with which India does not have DTAA and the assessee is not required to register under any law.
  • If foreign company avails the benefit of section 44B/44Bb/44BBA/44BBB then such foreign company shall not be liable to pay MAT.

Tax payable to government

In case of domestic company, income tax payable shall be higher of the following:

  • Tax on total income computed as per the normal provisions of the income tax Act by changing special rates and normal rates applicable as increased by:
  • Surcharge of 7% where total income exceeds INR 1 crore minus marginal relief plus health and education [email protected]%.
  • Surcharge of 12% where total income exceeds INR 10 crore minus marginal relief plus health and education [email protected]%.
  • 15% of book profit as increased by:
  • 7% surcharge where book profits exceeds INR1 crore minus marginal relief plus health and education [email protected]%.
  • Surcharge of 12% where book profits exceeds INR10 crore minus marginal relief plus health and education [email protected]%.

In case of foreign company, the income tax payable shall be higher of the following:

(i) Tax on total income computed as per the normal provision of the income tax Act as increased by:

  • Surcharge of 2% where total income exceeds INR 1 crore minus marginal relief plus health and education [email protected]%.
  • Surcharge of 5% where total income exceeds INR 10 crore minus marginal relief plus health and education [email protected]%.

(ii) 15% of the book profits as increased by:

  • Surcharge of 2% where book profits exceed INR 1 crore minus marginal relief plus health and education [email protected]%.
  • Surcharge of 5% where book profits exceeds INR 10 crore minus marginal relief plus health and education [email protected]%.

MAT credit 

If MAT is less than normal tax.

No MAT credit is available.

If MAT is equal to normal tax.

No MAT credit is available.

If MAT is more than normal tax.

MAT credit is available.

Note: MAT credit can be carried forward for the next 15 assessment years, after 15 years if there is any balance of MAT credit then it will become a dead loss (no treatment).

Computation of book profit for MAT

Net profit as per profit and loss account (i.e. Companies Act, 2013.)             xxxx

Add: 

  • Income tax
  • Provisions of income tax
  • Interest under income tax
  • Surcharge/cess
  • CDT/DDT
  • Transfer to reserve
  • Proposed dividend / final dividend
  • Loss of subsidiary company
  • Provision for unascertained liability
  • Deferred tax
  • Expenditure related to section 10/11/12
  • Expenditure related to section 86
  • Expenditure related to 112A,111A,115A but only in case of foreign companies.
  • Expenditure related to section 115BBF
  • Notional loss under section 47
  • Depreciation 
  • Provision for diminution of value assets
  • Amount standing in revaluation reserve
  • Amount of gain transfer of unit under section 47

Less: 

  • Amount withdrawn from any reserve
  • Income exempt under section 10/11/12
  • Depreciation except revaluation
  • Amount withdrawn from revaluation reserve to the extent of depreciation
  • Income exempt under section 86
  • Income taxable under section 112A,111A,115A,in case of foreign company
  • Notional profit under section 47
  • Income from royalty under section 115BBF
  • Brought forward loss and unabsorbed depreciation sick company
  • Brought forward loss or unabsorbed depreciation whichever is less
  • Profit of sick company
  • Deferred tax 

Book profit                                                           XXXX

Assessment of company

RETURN OF INCOME

The principal officer of the company is required to file a return of total income of the company on or before 31st October of the assessment year.

RATE OF TAX

  • Flat rate of income tax instead of slab rate
  • A company does not enjoy any exemption limit.

How to compute marginal relief 

Step 1: Computation of tax liability on given income 

Tax on given income                          xxxx                

Add: surcharge as case may be                         xxxx

Step 2:  Computation of tax liability on 1crore/10crore (depends on the basis of step1)

Tax liability on 1cr/10cr                                  xxxx

Add: surcharge 7%/12%/2%/5%                            xxxx

Step 3: Computation of tax increment

Tax liability under step 1        xxxx

Less: tax liability under step 2       xxxx

Tax increment                                 xxxx

Step 4: Computation of income increment

Income given in step 1                  xxxx

Less: income given in step 2          xxxx

Income increment                         xxxx

Step 5: computation of marginal relief

Tax increment step 3                        xxxx

Less: income increment step 4         xxxx

Marginal relief                                          xxxx

Step 6: computation of final Tax liability

Tax on step 1                                          xxxx

Less: marginal relief under step 5            xxxx

Add: cess                                                     xxxx

Final tax                                                       xxxx

Conclusion

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.


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