CORPORATE TAX PLANNING
PROF. ASIYA CHAUDHARY
D/O COMMERCE , AMU , ALIGARH
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 TAX PLANNING
▪ 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 OF TOTAL INCOME
Resident : 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 INCOMES
Income 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 source
Income 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.
Cont……….
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 India
Past untaxed Income
COMPUTATION OF GROSSS TOTAL INCOME OF COMPANY
1.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)
A. In case of domestic company
Domestic company is 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.
Income
▪ 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
Assessment of Domestic Company:
▪ For the Assessment Year 2019-20, a domestic company is taxable at 30%.
▪ However, for Assessment year 2019-20, tax rate is 25% if turnover or gross receipt of the company does not exceed Rs. 250 crore in the PY.
Add:
▪ a) Surcharge: The amount of income-tax shall be increased by a surcharge at the rate of 7% of such tax, where total income exceeds one crore rupees but not exceeding ten crore rupees and at the rate of 12% of such tax, where total income exceeds ten crore rupees. However, the surcharge shall be subject to marginal relief, which shall be as under:
▪ (i) Where income exceeds one crore rupees but not exceeding ten crore rupees, the total amount payable as income-tax and surcharge shall not exceed total amount payable as income-tax on total income of one crore rupees by more than the amount of income that exceeds one crore rupees.
▪ (ii) Where income exceeds ten crore rupees, the total amount payable as income- tax and surcharge shall not exceed total amount payable as income-tax on total income of ten crore rupees by more than the amount of income that exceeds ten crore rupees.
▪ b) Health & Education Cess
Health and Education Cess is computed at 4% of the total of Income Tax and Surcharge.
Foreign Company
▪ Royalty received from Government or an Indian concern in pursuance of an agreement made with the Indian concern after March 31, 1961, but before April 1, 1976, or fees for rendering technical services in pursuance of an agreement made after February 29, 1964 but before April 1, 1976 and where such agreement has, in either case, been approved by
the Central Government 50%
▪ Any other income 40%
Add:
▪ a) Surcharge: The amount of income-tax shall be increased by a surcharge at the rate of 2% of such tax, where total income exceeds one crore rupees but not exceeding ten crore rupees and at the rate of 5% of such tax, where total income exceeds ten crore rupees.
However, the surcharge shall be subject to marginal relief, which shall be as under:
▪ (i) Where income exceeds one crore rupees but not exceeding ten crore rupees, the total amount payable as income-tax and surcharge shall not exceed total amount payable as income-tax on total income of one crore rupees by more than the amount of income that exceeds one crore rupees.
▪ (ii) Where income exceeds ten crore rupees, the total amount payable as income-tax and surcharge shall not exceed total amount payable as income-tax on total income of ten crore rupees by more than the amount of income that exceeds ten crore rupees.
▪ b) Health & Education Cess
Health and Education Cess is computed at 4% of the total of Income Tax and Surcharge.
Marginal Relief in Surcharge
▪ When an assessee's taxable income exceeds Rs. 1 crore, he is liable to pay Surcharge at prescribed rates mentioned above on Income Tax payable by him.
However, the amount of Income Tax and Surcharge shall not increase the
amount of income tax payable on a taxable income of Rs. 1 crore by more than the amount of increase in taxable income.
Example
▪ In case of an individual assesseee (< 60 years) having taxable income of Rs.
1,00,01,000/-
1.Income Tax Rs. 28,25,300 2.Surcharge @12% of Income Tax Rs. 3,39,036 3.Income Tax on income of Rs. 1 crore Rs. 28,25,000
4.Maximum Surcharge payable (Income over Rs. 1 crore less income tax on income over Rs. 1 crore) Rs. 700/- (1000 - 300)
5.Income Tax + Surcharge payable Rs. 28,26,000
6.Marginal Relief in Surcharge Rs. 3,38,336/- (339036 - 700)
Due Date for Company Tax Return Filing
All companies registered in India are required to file income tax return on or before the 30th of September. Companies
incorporated between January – March can file MCA annual return after 18 months in the first year. However, the same type of exemption is not available under the Income Tax Act. Hence, even companies registered from January – March must file
income tax return on or before 30th September of the same calendar year.
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S ection 115BA in assessment of companies:
▪ In order to provide relief to newly setup domestic companies engaged solely in thebusiness of manufacture or production of article or thing, a new section 115BA has been inserted in the Income Tax Act 1962, which provide option to domestic company to pay tax @25% for any previous year relevant to the assessment year beginning on or after the 1st day of April, 2017.
Provided following conditions are fulfilled :
1. the company has been setup and registered on or after 1st day of March, 2016;
2. the company is engaged in the business of manufacture or production of any article or thing and is not engaged in any other business;
3. the company while computing its total income has not claimed any benefit under section 10AA , benefit of accelerated depreciation, benefit of additional depreciation, investment allowance, expenditure on scientific research and any deduction in respect of certain income under Part-C of Chapter-VI-A other than the provisions of section 80JJAA; and
4. the option is furnished in the prescribed manner before the due date of furnishing of income.
▪ Note: In the case of a company other than a domestic company, the rates of
tax are the same as those specified for the financial year 2015-16.
Amendment to [ Section-115BA ] w.e.f. Assessment Year 2019-2020 under Income Tax Act:
Section 115BA provides that subject to the fulfilment of conditions specified therein, the total income of certain newly set-up domestic companies shall, at their option, be taxed at the rate of 25%. However, the rate of 25% is not
applicable in the case of income covered by section 111A or 112 of Chapter XII (income covered by these sections will be taxable at the rate specified in these sections).
Amendment –
Section 115BA has been amended (with effect from the assessment year 2017-18) to provide that the provisions of this section shall be subject to the other
provisions of the said Chapter XII instead of only sections 111A and 112. If a domestic company (which has opted for 25% tax rate under section115BA by
uploading Form No. 10-IB) has incomes taxable under other provisions of Chapter XII (i.e., sections 110 to 115BBG), then tax on such other incomes will be
calculated as per the rate specified by these sections.
MAT- Sec.115JB
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)]
(Note1:-On 20-Sep-2019 Finance Minister slashed MAT rate to provide relief to companies which continue to avail exemptions/incentives, the government has reduced the rate of Minimum Alternate Tax or MAT to 15%, from 18.5%)
(Note2:- MAT is levied at the rate of 9% (plus surcharge and cess as applicable) in case of a
company, being a unit of an International Financial Services Centre and deriving its income
solely in convertible foreign exchange)
M A T
A MAT was introduced for the first time in the AY 1988-89. It was felt that due to various concession provided in Tax Laws big corporate groups become zero tax companies. Therefore, to counter this, as system of MAT was introduced.
The there is a difference between Two Profits i.e. Regular Profit and Book Profit.
1 Regular Profit is the profit computed by applying the provisions of Tax Laws. Whereas Book Profit is computed on the basis of Schedule VI of the Companies Act, 1956.
2 Rate of Depreciation is different in Tax Law and Companies Act.
3 In Tax Laws real income is computed, whereas in Companies Act, deductions are allowed for provisions and reserves also which leads to computation of not real income but conservation income.
4 Tax Laws allowed various incentives and deductions from Profits like deduction u/s 80IA , 80IB. This is not so in computation of Book Profit under the Companies Act.
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115JB (1):an overriding section
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’.
Provision of MAT ( Minimum Alternate Tax) for payment of Tax by certain Companies [Section 115JB]
Tax payable for any Assessment year Cannot be Less than 18.5% of Book Profit:
Where in the case of a company, the income-tax payable on the total income as computed under the Income-tax Act, in respect of previous year relevant to the assessment year 2012-13 or thereafter is less than 18.5% of its book profit, such book profit shall be deemed to be the total income of the assessee and the tax payable by the assessee on such total income (book profit) shall be the amount of the income-tax at the rate of 18.5%.
Thus in case of a company income tax payable shall be higher of the following two amounts:
1 Tax on total income computed as per the normal provisions of the Act by charging applicable normal rates and special rates if any income included in the total income of the company is taxable at special rates.
2 18.5% of book profit
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MAT Rate to be 9% instead of 18.5% in case of a Unit Located in an International Financial Services Center [Section 115JB(7)]
Notwithstanding anything contained in section 115JB(1), where the assessee referred to therein, is a unit located in an International Financial Services Center and derives its income solely in convertible foreign exchange, the provisions of section 115JB(1) shall have the effect as if for the words "eighteen and one-half per cent" wherever occurring in that sub-section, the words "nine per cent" had been substituted.
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Provisions of Section-115JB not to apply in certain cases..
The provisions of section 115JB shall not apply in case of the following:
1 Any income accruing or arising to a company from life insurance business referred to in section 115B [Section 115JB(5A)].
2 A foreign company, if—
i the assessee is a resident of a country or a specified
territory with which India has an agreement referred to in section 90(1) or the Central Government has adopted any agreement under section 90A(1) and the assessee does not have a permanent establishment in India in accordance with the provisions of such agreement; or
ii the assessee is a resident of a country with which India does
not have an agreement of the nature referred to in clause (i) and the assessee is not required to seek registration under any law for the time being in force relating to companies.
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ULTIMATE TAX LIABILTY OF COMPANY
▪ 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 60000.00 Add : Education cess @ 2% of tax surcharge 1200.00 61200.00 Add : Secondary and higher education cess (SHEC)@ 1% of tax and surcharge 600.00 Total tax as per normal provision 61,800.00
Tax as per MAT
Tax @ 18.5% on Book profits of Rs. 15,00,000 277500.00 Add : surcharge Nil Tax and surcharge 277500.00
Add : Education Cess @ 2% of Tax and surcharge 5550.00 283050.00 Add : Secondary and higher education cess (SHEC)@ 1% of tax and surcharge 2775.00 Tax liability under MAT 2,85,825.00
………..
In the above case company will have to pay tax under MAT i.e. 2,85,825 and not 61, 800.
i. Tax on total income at normal rate of tax (including surcharge and Education cess ) or ii. 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.
Points to be kept in mind while preparing annual accounts by the companies :
▪ The accounting policies ,
▪ 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 – [if debited 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 – [if credited 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 “ Book profits 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 items
of Statutory Additions
a. Income tax paid or payable or any provision thereof . The amount of income tax 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 for unascertained 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 to be ascertained liability if it is determined or fixed or imposed under some contract, law or other such act : For example , a provision made for compensation payable to the widow of an employee who died in the course of employment , where the said
compensation is definitely to be paid as per
court order.
An unascertained liability:
It is that liability , which is not determined / fixed
and a provision is created for such anticipated
liability then it is to be added to net profit.
Treatment of certain statutory deductions
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 unabsorbed depreciation
▪ 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 & set off 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 73
5. Losses under the head “ capital Gains ” (short term and long term )as provided under u/s 74
6. 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.
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Amount of tax credit = MAT – Tax payable on total income computed as per normal provision of Income Tax Act
Credit of Tax paid under
MAT [section 115JAA (1A)]
Year in which tax credit shall be available [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.
Cont……
A company has to pay higher of normal tax liability or liability as per MAT provisions. If in any year the company pays liability as per MAT, then it is entitled to claim credit of MAT paid over and above the normal tax liability in the subsequent year(s).The provisions relating to carry forward and adjustment of MAT credit are given in Section 115JAA.
Provided that where the amount of Foreign Tax Credit “FTC” (i.e.
Income Tax paid in any country outside India) allowed against the MAT exceeds the amount of such FTC admissible against the tax payable by the assessee under normal provisions of the Income-Tax Act, then, while computing the amount of FTC under this sub- Section, such excess amount shall be ignored.
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Carry forward and adjustment of MAT credit
The credit of MAT can be utilized by the company in the subsequent year(s). The credit can be adjusted in the year in which the liability of the company as per the normal provisions is more than the MAT liability. The set off in respect of brought forward MAT credit shall be allowed in the subsequent year(s) to the extent of the difference between the tax on its total income as per the normal provisions and as per the MAT provisions.
As discussed earlier, the company can carry forward the MAT credit for adjustment in subsequent year(s), however, the MAT credit can be carried forward only for a period of 15 years after which it will lapse.
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For Instance…….
ABC Ltd has the taxable income as per normal provisions of the income tax Act Rs 40 lakhs and Book profits of Rs 75 lakhs for the FY 2019-20.
• Tax payable will be higher of the following two:
Rs 40, 00,000 @ 30 % plus 4% = 12,48, 000
• Tax liability as per MAT provisions will be :
Rs 75, 00,000 @ 18.5 % plus 4% = Rs 14,43,000
Hence Tax payable by the company will be Rs 14,43,000.
MAT CREDIT: Rs 14,43,000 – Rs 12, 48,000 = Rs 1,95,000
Such tax credit shall be carried forward for 15 Assessment Years immediately succeeding the assessment year in which such credit has become allowable. This is with effect from AY 2018-19 prior to which MAT could be carried forward only for a period of 10 AYs. For instance, if the excess tax is paid is in FY 2016-17, then the credit of such tax can be carried forward from in FY 2017-18
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