The tax collected from thecompanies ( as defined underthe Inome tax Act, 1961 ) iscalled ‘ company tax ’ or ‘corporate tax ’. A companyincorporated in India or havingits entire control andmanagement in India is treatedas a resident company and istaxed on its global income.
It accrues or arises in Indiaor it is deemed to accrue orarise in India or it isreceived in India.It is interesting to note thatthe proceeds of corporate taxare retained by the centralGovernment and are not sharedwith state governments.
CORPORATE TAX PLANNING Corporate tax planning provides significant opportunities for comparisons to manage and increase cash flows through minimization or deferral of taxes on corporate earnings. It is so because corporate tax represents a significant part of overhead cost for these companies. The key objective in “ Corporate tax planning “ is to identify the main factors in the organization’s structure that dictate the opportunities for tax efficiencies / savings . Thus, corporate tax planning aims to structure a business in such a way as to minimize both its current and future income tax liabilities.
BENEFITS OF CORPORATE TAXPLANNING Reduction in Tax liability. Minimization of litigation. Healthy growth business. Healthy growth of nation. A sources of working capital. Increase in distributable profits. Enables to face competition from Multinationals. Maximizing market valuation.
INCIDENCE OF TAX- SCOPE OFTOTAL INCOMEResident : U/S 5(1) the total income of resident shall include: Any income, which is received or deemed to be received in India during relevant previous year ; Any income , which accrues or arises or is deemed to accrue or arise in India during relevant previous year ; Any income, which accrues and is received outside India during relevant previous year.Non- Resident . U /s 5(2) the total income of a non-resident shall include : Any income, which is received or is deemed to be received in India during relevant previous year Any income, which accrues or arises or is deemed to accrue or arise in India during relevant previous year.
TYPES OF INCOMESIncome received in India: The source of income may be situated , anywhere in the world but if its first receipt is in India, it is taxable for all.Deemed to be received in India: These incomes are actually not received by assessee instead these are credited to his account to be paid at a later date or are appropriated against future liability e.g. Employer’s contribution to provident fund. Interest accrued on provident fund balance Interest accrued on N.S.C VIII issue Tax deducted at sourceIncome accruing or arising in India: The terms accrue or arise have same meaning i.e to grow , to originate. Incomes accrues where source is situated . salary accrues where service is rendered. If source of any of these incomes is situated in India then income from these sources will be accruing in India.
………………….Income deemed to accrue or arise in India: These incomes actually accrue outside India but U /S 9 these are deemed to accrue in India. These incomes are :- Salary paid by government to its employees posted abroad, Pension paid outside India but for services rendered in India , Income from a capital asset located in India although transaction has taken place outside India, Dividend paid by Indian company outside India. Apportionment of profit Income from shooting of a film in India by a non-resident shall not be deemed to accrue in India , hence taxable only for residents.Any income accruing and receiving outside IndiaPast untaxed Income
COMPUTATION OF GROSSS TOTALINCOME OF COMPANY1.Head wise calculation The income of company is to be computed under following five heads of income under various provisions of the Income tax Act 1961. The heads of incomes are as follows : Income under the head “ House Property “ ( as per sec 22 to 27 ) Income under the head “ profits and Gains of Business and Profession “ (as per sec 28 to 44) Income under the head “ Capital gains “ ( as per sec 45 to 55) Income under the head “ Income from other sources “ (as per sec 56 to 59 )2. Agricultural income of a company Agricultural income of a company is totally exempt under section 10 (1)
RATES OF TAX FOR COMPANIES FORASSESSMENT YEAR 2012-13
A. In case of domestic companyIncome On short term Capital gain on equity shares or units of equity oriented fund where such transaction is chargeable to securities Transaction Tax (STT) [ U / S 111-A On long term capital gain On long term capital gain computed without claiming deduction of indexed cost in respect of listed securities or units of UTI or mutual fund (whether listed or not) On Income from units purchased in foreign exchange or capital gain from their transaction (sec 115 AB) On winning from lotteries, races, crossword puzzles, card games and other games of any sort , gambling, or betting of any form or nature [sec 115 BB] On any other income On profits declared, paid or distributed as dividend U/S 115-0 Surcharge : 5 % of tax as calculated above provided the total income of such companies exceeds Rs. 1 crore Education cess: 2% of tax and surcharge Secondary and higher education cess (SHEC ) : 1% Of tax and surcharge
SPECIAL PROVISIONS FOR PAYMENT OF INCOMETAX BY CERTAIN COMPANIESORMINIUMUM ALTERNATE TAX [ MAT] ONCOMPANIES [ SEC. 115 JB]
…………………Applicability : Sec. 115JB is applicable on companies (including foreign companies) with effect from Assessment year 2001-02
Scheme of MAT : In case of an assessee, being a company, if the income tax payable on the total income as computed under this Act (normal provision ) is less than 18.5% of such book profits- [sec 115 JB (1)]
The total income of company maycomprise of :- As we all know that a company is liable to pay income tax on its total income. Income under the head “ House Property “ ( as per sec 22 to 27 ) Income under the head “ profits and Gains of Business and Profession “ (as per sec 28 to 44) Income under the head “ Capital gains “ ( as per sec 45 to 55) Income under the head “ Income from other sources “ (as per sec 56 to 59 ) The total of income under all the above four heads, after applying the provision of set off & carry forward of losses etc is called Gross total income. Out of this Gross total income, deductions are allowed under section 80 of income tax act. The amount so arrived at is called Total income of the company and company is liable to pay tax on the total income at prescribed rates.
115JB (1):an overridingsection Provides a specific tax rate on a specific figure of total income for every company . It provides a new concept of ‘Book profits’ which is to be treated as total income of the company. The Book profit are the profits shown in the company’s statutory profit and loss account which is prepared as per the provision’s of the company’s Act, 1956 and on this figure of Book profits, Tax is required to be calculated at 18.5% . This tax is called ‘ Minimum Alternate Tax’.
ULTIMATE TAX LIABILTY OFCOMPANY Tax on total income of company as computed as per normal provisions of Income Tax Act; or Tax @ 18.5 % on Book profits ; Whichever is higher Note : while calculating tax under point i and ii above , surcharge and education cess is also be taken into account , if applicable for relevant assessment year.
Example Rs. Tax on total income of Rs. 2,00,000 60000 [ @ 30% (as per point i)] Add : surcharge Nil ( Total income does not exceed Rs. 1 crore) Tax and surcharge 60000 Add : Education cess @ 2% of tax surcharge 1200 61200 Add : Secondary and higher education cess (SHEC)@ 1% of tax and surcharge 600 Total tax as per normal provision 61800 Tax as per MAT Tax @ 18.5% on Book profits of Rs. 15,00,000 277500 Add : surcharge Nil Tax and surcharge 277500 Add : Education Cess @ 2% of Tax and surcharge 5550 283050 Add : Secondary and higher education cess (SHEC)@ 1% of tax and surcharge 2775 Tax liability under MAT 285825
……………….. In the above case company will have to pay tax under MAT i.e. 285825 and not 61800.i. Tax on total income at normal rate of tax (including surcharge and Education cess ) orii. Tax @ 18.5% of Book profits (including surcharge and education cess); whichever is higher But if the amount of income tax payable on total income [as per point (i)] is more than the amount of income tax on Book profits @ 18.5%, then the company is liable to pay income tax on its total income.
Question The total income of XYZ ltd. , a domestic company , computed under the normal provisions of Income Tax Act is Rs. 250000. However, the Book profits of the company (calculated as per sec 115JB) amount to Rs. 12,25000. Calculate the tax liability of company for Assessment year 2012-13.
SolutionComputation of tax liability of the company for Assessment year 2012-13.: Tax on total income at normal rate of tax (including surcharge ) Rs. Total income 2,50,000 Tax @ 30 % of Rs. 2,50,000 75000 Add : surcharge Nil Tax and surcharge 75000 Add : Education Cess @ 2% of Tax and surcharge 1500 76500 Add : Secondary and higher education cess (SHEC)@ 1% of tax and surcharge 750 77250
……………….Tax under MAT Book Profit = Rs. 12,25,000 Tax @ 18.5% of Book Profits 2,26,625 Add : Surcharge Nil Tax and surcharge 226625 Add : Education Cess @ 2% of Tax and surcharge 4533 2,31,158 Add : Secondary and higher education cess (SHEC)@ 1% of tax and surcharge 2,266 Total tax liability under MAT 2,33,424Tax under MAT (section 115JB) is more than normal tax on total income . As such tax payable by co. shall be Rs. 2,33,424 rounded off to 2,33,420 .
Points to be kept in mind whilepreparing annual accounts by thecompanies : policies , The accounting The accounting standards followed for preparing such accounts including profit and loss account, The method and rates adopted for calculating the depreciation, shall be the same as have been adopted for the purpose of preparing such accounts including profit and loss account and laid before the shareholders of the company in its annual general meetings accordance with the provision of section 210 of the companies Act, 1956.
Calculation of Book profits[explanation to sec 115JB(2)] For the purpose of MAT , Book profit means the net profit as shown in the profit & loss account for the relevant previous year prepared under sub-sec (2) above; and
1. As increased by – [ifdebited earlier] The amount of income tax paid or payable, and the provision therefore; or The amount carried to any reserves, by whatever name called, other than a reserve specified u/s 33AC; or The amounts or amounts set aside to provision made for meeting liabilities other than ascertained liabilities, or The amount by way of provision for losses of subsidiary companies ; The amount of dividends paid or proposed; or The amount or amounts of expenditure relatable to any income to which section 10 or section 11 or section 12 apply. Note : however any expenditure relating to long term capital gain or transfer of shares through a recognized stock exchange as referred to in section 10 (38) shall not be added back to net profit while calculating ‘ Book profits ’ The amount of depreciation debited to the profit & loss accounts (w.e.f A.Y 2007- 08) The amount of deferred tax and provision thereof. The amount or amounts set aside as provision for diminution in the value of any asset
2. As reduced by – [ifcredited earlier ] The amount withdrawn from any reserve or provision ; The amount of income to which any of the provision of section 10(excluding the income referred to in section 10 (38) ) or 11 or sec 12 apply The amount of depreciation debited to profit & loss account (excluding the depreciation on account of revaluation of assets ) or ; The amount of withdrawn from revaluation reserve and credited to the profit and loss account to the extent it does not exceed the amount of depreciation on account of revaluation of assets referred to in clause (ii a) ; or The amount of loss brought forward or unabsorbed depreciation whichever is less as per Books of accounts, The amount of profit of such industrial company for the assessment year commencing on and from assessment relevant to previous year in which the said company became a sick industrial company and ending with the assessment year during which the entire net-worth of such company becomes equal to or exceed the accumulated losses. The term ‘ Net worth’ shall have the meaning assigned to it in clause (ga) of sub section (1) of the section 3 of the sick industrial companies (special provision ) Act , 1985 The amount of profit derived by a tonnage tax company (sec 115VC ) The amount of deferred tax , if an such amount is credited to profit and loss account
The above scheme of calculation of “ Bookprofits can be summarized as follows : Take balance [Net profit or Net Loss] as per P&L account (+) or (-) xxxxx Add : Statutory Addition (if already debited to P&L A/c ) (9 items) (+) xxxx Total xxxxx Less: statutory deduction (8 items) (-)xxxx Book Profit for MAT xxxxx
Explanation of certain itemsof Statutory Additions
a. Income tax paid or payable or anyprovision thereof . The amount of incometax shall include the following : Any tax on distributed profits U/S 115-0 or on distributed income U/S 115R; Any interest charged under this Act; Surcharge , if any, as levied by central Acts from time to time ; Education cess on income tax , if any, as levied by the central Acts from time to time
b. Transfer to any reserve ; Thus following transfer are to be added back if debited : Transfer to sinking fund ; Transfer to general reserve ; Transfer to dividend equalization reserves and other transfer ; Transfer to Bad debt reserve Transfer to special reserve u/s 36 (1)(viii) by certain financial corporations. Transfer to reserve as per the provisions of section 801A(6) or 10AA. However, if any reserve is made to shipping reserve specified under section 33 AC, then it is not to be added to Net profit.
c. Provision forunascertained liabilities Any provision made for any unascertained liability is also to be added to Net profit while calculating “ Book profits ”
An ascertained liability :- A liability is said tobe ascertained liability if it is determined orfixed or imposed under some contract, law orother such act : For example , a provisionmade for compensation payable to thewidow of an employee who died in the courseof employment , where the saidcompensation is definitely to be paid as percourt order.
An unascertained liability is that liability ,which is not determined / fixed and aprovision is created for such anticipatedliability then it is to be added to net profit.
1. Withdrawal from any reserve or provisions.[sec115JB (2)(i) explanation ] Case A : if reserve are created before 1-4-97 : By debiting to profit and loss account : in such a case if any amount is withdrawn from such reserve and is credited to profit and loss account then such amount is to be reduced from ‘ Net Profit’ . Case B : if reserves was created on or after 1-4-97 : In such a case, any amount withdrawn from such reserves shall be reduced from ‘ Book Profit ‘ only if, in the year of creation of such reserve/provision , the net profit was increased by the amount of reserve created, while calculating Book Profits.
2. B/F loss or unabsorbeddepreciation , Sec 115JB(2)(iii)(explanation ) provides for a deduction of loss brought forward or unabsorbed depreciation, whichever is less, as per books of accounts. Brought forward loss shall not include brought forward unabsorbed depreciation.
MAT provisions not to affect carry forward & setoff provisions provided under Income Tax Act : Sec 115JB (1) shall not affect in any way the following amounts to be carried forward to the subsequent year or years as provided under Income Tax Act , 1961 :-1. Brought forward unabsorbed depreciation as provided u/s 32 (2)2. Investment allowance as provided u/s 32A (3)3. Business loss as provided u/s 72(1)(iii) ;4. Losses in speculation business as provided u/s 735. Losses under the head “ capital Gains ” (short term and long term )as provided under u/s 746. Losses from activity of owning & maintaining of race horses as provided u/s 74A (3)These amount can be carry forward & set off against future year or years as per provisions contained in respective sections.
Credit of Tax paid under MAT[section 115JAA (1A)]
Amount of tax credit =MAT – Tax payable on totalincome computed as pernormal provision of IncomeTax Act
Year in which tax credit shall beavailable [sec 115JAA (4)]. Tax credit is available in previous year in which tax as per normal provisions of Income Tax Act is more than the tax payable under MAT Period for which tax credit is available [sec 115JAA(3A)] with effect from assessment year 2007- 08 , the amount tax credit shall be carried forward and set off upto seventh Assessment year (upto tenth assessment year w.e.f 1-4-2010 ) immediately succeeding the assessment year in which tax credit become allowable under section 115JAA (1A)Note : No interest shall be payable on the tax credit allowed under subsection (1A)of sec 115JAA.
SPECIAL PROVISIONS RELATING TO TAXON DISTRIBUTED PROFITS (DIVIDENDTAX) [SEC. 115-0]
1.Tax on distributed profitsof companies [sec 115-0] (1) In addition to income tax chargeable on the total income of a domestic company, where such company has declared, distributed or paid some amount by way of dividends [whether interim or final]on or after 1-6-1997 but before 1.4.2002 and again from 1.4.2003 onwards whether out of current or accumulated profits, it had to pay additional income tax at the on amount of dividend so declared, distributed or paid. Such tax shall be known as tax on distributed profits.
2. Treatment of dividend received by a domestic companyfrom its subsidiary company [sector 115-0 (1A)] inserted bythe finance Act , 2008 w.e.f A.Y 2008-09 ] Any dividend received by a domestic from its subsidiary company shall be reduced from the amount of dividend declared, distributed or paid by such domestic company during the year if :a. Such dividend is received from its subsidiary :b. The subsidiary has paid tax under sec 115-0 on such dividend; andc. The domestic company is not a subsidiary of any other company.
In other words : Dividend subject to ‘ dividend distribution tax ’ = dividend declared , Distributed or paid During the financial year - dividend received by domestic company from its subsidiary during the F.Y Note : (i) the same amount of dividend shall not be taken into account for reduction more than once. (ii)for the purpose of section 115-0 (1A) , a company shall be a subsidiary of another company , if such other company holds more than half in nominal value of the equity share capital of the company.
3. Responsibility to deposittax [sec 115-0 (3)] The principal officer of such domestic company shall be liable to deposit tax on distributed profits to the credit of central government within 14 days of the date of declaration or distribution or payment of dividend, which ever is earlier.
4. Final payment [section115-0 (4)] The amount of tax on distributed profits deposited as per above shall be considered as final and no further credit shall be claimed by such domestic company or any other person.
5. No deduction [section115-0] The company or any shareholder of such company shall not have any right to claim any deduction for the amount of tax paid under this section .