Complete ctp unit 1

Corporate Tax Planning
Mr. Basavaraj M. Naik, M.com
Teaching Assistant
Dept. of Studies in Commerce
RCU PGC, Jamkhandi

Content:
• Income Tax, Corporate Tax; Assesse; Assessment
Year; Previous Year;
• Company - Different kinds of Companies: Indian
Company, Foreign Company, Widely Held Company,
Closely Held Company, Domestic Company and
• Incidence of Tax.

Corporation Tax in India
● Corporate tax is applicable on those entities which have a separate legal entity from its
founders and have been formed under the Companies Act, 2013 or any previous
Companies Act.
● Currently the companies with turnover upto ₹ 250 crores have to pay corporate tax @
25%. Whereas, the companies with a turnover above ₹ 250 crores have to pay corporate
tax @ 30%.
● The corporate tax rate for foreign companies depends upon the tax agreement between
India and the origin country of the concerned company.
● Companies hire professionals for effective Corporate Tax Planning. These
professionals strategize company financials to reduce the tax and increase profit well
within the tax and financial laws.

Income Tax
• An income tax is a tax levied on the financial income of
persons, corporations, or other legal entities. Various income
tax systems exist, with varying degrees of tax incidence.
Income taxation can be progressive, proportional, or
regressive.
When the tax is levied on the income of companies, it is often
called a corporate tax, corporate income tax, or profit tax.
Individual income taxes often tax the total income of the
individual (with some deductions permitted),

while corporate income taxes often tax net income (the difference
between gross receipts, expenses, and additional write-offs). Every
country generates income from ‘Income Tax’ in the form of direct tax
levied by government. Income tax plays a vital role in the economy
of every country in the world. Income tax Act was enacted in the
year 1961.

Historical Background of Income Tax
• Income tax in India was imposed by Sir James Wilson of
British Government in the year 1860, to recover from
losses of 1857’s revolution. Another act was made in the
year 1886, which can be treated as permanent base for
Income tax system in India. This was amended several
times in 1863, 1867, 1871, 1873 and 1878.
In the year 1922, ‘Central Revenue Board’ was
established and Income Tax Act, 1922 was implemented
with the help of this board. Direct Taxes Administration
Enquiry Committee was appointed in the year 1958. In the
year 1961, parliament announced new Income Tax Act,
which came into enforcement from April, 1962. This act
was based on report submitted by Mahavir Tyagi in 1959.

• Types of Taxes:
1.Direct Taxes: Income Tax, Wealth Tax, Gift Tax etc.
2. Indirect Taxes: Excise, Customs duty, Sales tax etc.
However, Gift- Tax was removed from 30th September, 1998 and Estate
Duty was removed from the assessment year 1986-87

Importance of Income Tax
• The importance of income tax is enumerated as below:
• 1.Income tax is the prime source of fund to the government.
• 2. It helps in removing inequalities of income levels among
people.
• 3. It helps in eradication of poverty, as the government spends
the amount collected through Income tax, for welfare of poor
people

Overview of Income Tax Law in India
• Income tax is a tax levied on the total income of the
previous year of every person.
A person includes an individual, Hindu Undivided Family
(HUF), Association of Persons (AOP), Body of Individuals
(BOI), a firm, a company etc. Income tax is the most
significant direct tax.

• Income tax Act: The levy of income tax in India is governed
by the Income tax Act, 1961. This Act came into force on 1st
April, 1962. The Act contains 298 sections and XIV schedules.
These undergo change every year with additions and deletions
brought about by the Finance Act passed by Parliament. In
pursuance of the power given by the Income tax Act, 1961 rules
have been framed to facilitate proper administration of the
Income tax Act.

• Finance Act: Every year, the Finance Minister of the Government of
India presents the Budget to the Parliament. Part A of the budget
speech contains the proposed policies of the Government in fiscal
areas. Part B of the budget speech contains the detailed tax
proposals.
• In order to implement the above proposals, the Finance Bill is
introduced in the Parliament. Once the Finance Bill is approved by
the Parliament and gets the assent of the President, it becomes the
Finance Act.

• Income tax Rules: The administration of direct taxes is
looked after by the Central Board of Direct Taxes (CBDT). The
CBDT is empowered to make rules for carrying out the purposes
of the Act. For the proper administration of the Income tax
Act, the CBDT frames rules from time to time. These rules are
collectively called Income tax Rules, 1962. It is important
to keep in mind that along with the Income tax Act, 1961,
these rules should also be studied.

Basic Concepts of Income Tax
• Section 2 of the Act gives definitions of the various terms
and expressions used therein. In order to understand the
provisions of the Act, one must have a thorough knowledge of
the meanings of certain key terms like ‘person’, ‘assesse’,
‘income’, etc.

• Assesse’ means a person by whom any tax or any other
sources of money is payable under this act, and includes:
(a) every person in respect of whom any proceedings under
this act have been taken for the assessment.
(i) of his income or of the income of any other person in
respect of which he is assessable; or
(ii)of the loss sustained by him or by such other person; or
(iii)of the amount of refund due to him or to such other
person;
• (b)every person who is deemed to be an assesse under any
provision of this Act.
• (c) every person who is deemed to be an assesse in
default under any provisions of this act.

Residential Status :
Resident A resident taxpayer is an individual who satisfies any one of the following
conditions:
· Resides in India for a minimum of 182 days in a year, or
· Resided in India for a minimum of 365 days in the immediately preceding four
years and for a minimum of 60 days in the current financial year.
For example, consider the case of Mr. D, who is business head for Asia Pacific
regions for a private firm. Mr. D was born and brought up in India. He has to travel to
various locations of the continent for business purposes. He has spent 200 days
travelling in the current financial year. Also, he has been travelling abroad from the
past two years and has stayed out of India for about 400 days in this period.

Let us evaluate whether Mr. D was resident in India for the current
financial year. Condition I (Resides in India for a minimum of 182
days in a year) – Not satisfied
To figure out the resident status of Mr. D, you will understand that
he has only spent 165 days in India during the current financial
year. Hence, he does not satisfy the first condition.
Condition II (Resides in India for a minimum of 365 days in the
immediately preceding four years and for a minimum of 60 days in the
current financial year) – Satisfied

However, It is given that Mr. D has been travelling only
from the past two years. Also, it is said that he has
travelled for 400 days in the past two years. That means, in
the past four years, Mr. D has stayed in India for more than
365 days (1061 days).
Hence, Mr. D has resided for atleast 60 days in the current
financial year and for more than 365 days in the immediately
preceding four financial years. Therefore, Mr. D satisfies
the second condition.
Hence, if any one of the above two condition is satisfied he is a resident taxpayer.

Resident and Ordinarily Resident (ROR) and
Resident but Not Ordinarily Resident (RNOR) There is a further classification
under the resident status – Resident and Ordinarily Resident (ROR) and
Resident but Not Ordinarily Resident (RNOR).
In addition to the basic conditions, if both the below conditions are met, he
will be a ROR:
· He has resided in India for at least 2 out of 10 immediate
previous years.
· He has resided in India for at least 730 days in seven
immediately previous years.

In above example Mr. D has satisfed as resident of India. Let us further classify whether Mr. D is ROR or RNOR
If both the additional conditions are satisfied then Mr. D is ROR
Considering the example, Mr. D was travelling out of India since
past 2 years only. Hence, the first condition is satisfied as he
resided in India for atleast 2 years out of the immediate previous
10 years. Also, he has fulfilled the criteria of residing for at
least 730 days in seven immediately preceding years. Therefore, he
can be considered as Resident Ordinarily Resident.
If any one of the additional conditions is satisfied then Mr. D is
RNOR.
Alternatively, consider that he had to work from the headquarters
of his firm, located in Kota Kinabalu, Malaysia for the past six
years. He has only visited his parents for a week, twice a year
during this time. That means, he has resided in India for 449 days
(365 days + 84 days) in the past six years and the same applies for
the current financial year too. In this case, first condition is
satisfied but not the second. Therefore, Mr. D is Resident Not
Ordinarily Resident.

Non-Resident:
An individual who does not satisfy the basic conditions of resident
can be considered as a non-resident.
For example, Ms. G went to London to join a reputed university for a
graduation course (three years). While studying there, her professor
suggested her to join a post-graduate course at the same university
(two years). She had to get an internship certificate to complete
the course. Upon completion, the firm offered her a permanent
position. She has been an employee there for the past four years.
That is, Ms G has stayed out of India for nine years now. She
receives rental income from the property that she inherited from her
parents. Both the basic condition are not satisfied. That makes Ms.
G a non-resident.

Note:
The condition of minimum 60 days stay in the current financial year
will get extended to 182 days in all the cases if:
· A person is a citizen of India and he leaves India for
the purpose of employment during the current financial year.
· A person who stays outside India, being a citizen of
India or a Person of Indian Origin (PIO), and comes on a visit
to India during the year.

What is Corporate Tax?
The tax is levied in India based on two approaches, direct tax and indirect tax. The direct tax
is levied on all types of assesses, that’s why it is divided into two parts: Income tax and
corporate tax.
The Corporate tax is the tax paid by the registered companies under the Companies Act,
2013 on the profit earned by them in a financial year. The profit of these businesses is taxed
at a specified rate which is subject to change as per the discretion (option) of the
government.

Corporate Tax in India:
In India, corporate tax is levied on both domestic and foreign companies. As
like individuals are required to pay income tax based on income, they earn in a
ﬁnancial year, similarly companies are also required to pay tax on their
income, which is covered under the corporate tax. Some other popular names
of corporate tax are; corporation tax, company tax, etc.

Deﬁnition of Corporate:
A corporate is an entity which has a separate legal identity from its
founders or shareholders. The Companies Act 2013 deﬁnes the
company as an entity which is incorporated under this Act or any
previous company law. The income earned from the business by the
company is assessed and computed differently than the computation
of income for individuals.

Types of corporate:
The companies or corporate in India are classiﬁed into two categories:
· Domestic Corporate: A company that is formed under any of the Indian
Company Law is termed as a domestic company. In addition, a foreign
company whose control and management are wholly situated in India is also
termed as a domestic company. (SBI, Bharat Petroleum, Central Bank of India)
· Foreign Corporate: A company who does not have its origin in India and
have some or whole part of control and management situated outside India is
called a foreign company. ( Micro soft- US, etc)

Corporation Tax Rates in India for Domestic Companies
Gross Turnover Tax Rate
Upto ₹ 250 Crore 25%
More than ₹ 250 crore 30%
The domestic company or corporate is the entity whose management is situated wholly in India. The corporate
tax applicable to the domestic companies for the A.Y. 2019-20 is charged based on turnover in a ﬁnancial year.
The rates are:

● In a ﬁnancial year, if the annual revenue of a company exceeds ₹ 1 crore, then a surcharge
(Surcharge is a tax on tax. It is levied on the tax payable, and not on the income generated. For
example, if you have an income of Rs 100 on which the tax is Rs 30, the surcharge would be 10% of
Rs 30 or Rs 3. ... In case of companies, it is levied if the income is more than Rs. 1 Crore.) of 7% is
levied on such corporations. If the revenue exceeds ₹ 10 crores the surcharge is 12%
● In addition, a Health and Education Cess of 4% is applicable along with a corporate tax on domestic
companies.
● In case a domestic company has an overseas branch, then the same rate would be charged on the
total earnings of the company, including domestic and overseas. Thus, it is to be noted that
corporate tax laws in India take the abroad earnings of domestic companies into consideration as
well.

Corporate Tax for Foreign Companies
A company who's not of the Indian origin and its management is situated wholly outside
India. Such corporations are not registered under the Companies Act, 2013. Therefore, the
taxation system for such companies is different from domestic companies. The taxation
system in case of foreign corporates depends upon the tax agreement between India and the
origin country of such foreign company.

A surcharge of 2% is levied if the income is between ₹ 1 crore to ₹ 10 crores. In case it exceeds ₹ 10 crores
then the applicable surcharge is 5%.

Corporate Tax Rebates
There are various provisions in the income tax law which provides rebates and deductions to the companies in the
process of calculating their income for corporate tax. Some of the key rebates and deductions are:
➔ ·Some interest income received by domestic companies is deductible from the proﬁt calculated for
corporate tax.
➔ In case the company has set up new infrastructure or sources of power, then those are subject to deduction.
➔ The company can carry forward the losses incurred for a maximum of 8 years.
➔ In case a domestic company receives a dividend from another domestic company.
➔ The capital gain earned by corporate entities is not taxed.
➔ In case of export and new undertakings, deductions are allowed in some cases.

Corporation Tax Planning
Corporate Tax Planning means strategizing the ﬁnancials of the
corporation to minimize tax outgo and maximize proﬁts. This objective is
achieved by better utilizing the available exemptions, rebates and
deductions. Effective tax planning is tricky and sometimes risky as well;
that is why corporates hire professionals for this task. These
professionals are well-tuned with various provisions of the tax, and they
keep themselves updated with the latest developments with regards to
rules and regulation of the corporate tax.

An important aspect to understand here is, tax planning is not tax evasion.
Tax evasion is against the law while tax planning is about strategizing the
financials of the company in such a way that the resultant tax payable is less
and profit is more within the frame of tax laws. Thus, the corporation must be
in line with the tax laws and well versed with financial laws and rules set up by
the Indian Government.

Dividend Distribution Tax
A dividend is the distribution of profits by the company to its shareholders.
Dividend Distribution Tax (DDT) is charged on the distributions of such profits.
The profits are distributed by the corporate after deducting the corporate tax,
which is levied on the net profit of the company. Currently, the dividend
distribution tax is payable in the hands of the company at an effective rate of
17.65%
The Dividend Distribution tax is to be removed from F.Y. 2022. Thus the
current assessment year is the last year for the applicability of Dividend
Distribution Tax.

1. What is Financial Year?
A Financial Year (FY) is the period between 1 April and 31 March – the year in which you earn an income.
2. What is Assessment Year?
The assessment year (AY) is the year that comes after the FY. This is the time in which the income earned
during FY is assessed and taxed. Both FY and AY start on 1 April and end on 31 March. For instance, FY
2019-20 and AY 2020-21 are one and the same.

Types of Companies under Income Tax Act.
1. Company: As per section 2(17), Company means:
2. A Company in which the Public are substantially interested (Section 2(18) :
3. Widely held company:
4. Closely held company:
5. Indian company [Section 2(26)]:
6. Domestic company [Section 2(22A)]:
7. Foreign company [Section 2(23A)]:
8. Investment Company:
9. Residence of a Company [Section 6(3)]

1. Company: As per section 2(17), Company means:
1. any Indian company, or
2. any body corporate incorporated by or under the laws of a country outside India,
or
3. any institution, association or body which was assessed as a company for any
assessment year under the Income-tax Act, 1922 or was assessed under this Act
as a company for any assessment year commencing on or before 1.4.1970, or
4. Any institution, association or body, whether incorporated or not and whether
Indian or Non Indian, which is declared by a general or special order of CBDT to be
a company.

2. A Company in which the public are substantially interested (Section 2(18) :
Section 2(18) of the Income-tax Act, has defined "a company in which the public are substantially interested". It
includes:
1. A company owned by Government or Reserve Bank of India.
2. A company having Govt. participation i.e. A company in which not less than 40% of the shares are held by
Government or the RBI or a corporation owned by the RBI.

3. Companies registered under section 25 of the Indian Companies Act, 1956: Companies registered under
section 25 of the Companies Act, 1956 are companies which are promoted with special object such as to
promote commerce, art, science, charity or religion or any other useful object and these companies do not
have profit motive. However, if at any time these companies declare dividend they would loose the status of a
company in which the public are substantially interested.
4. 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.

5. 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 a Mutual Benefit Society.
6. 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.
7. A public limited company: A company is deemed to be a public limited 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. Its equity shares were listed on a recognised stock exchange, as on the last day of the relevant previous year; or
b. 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 previous year by Government, a statutory corporation, a company
in which the public is substantially interested or a wholly owned subsidiary of such a company.

3. Widely held company:
It is a company in which the public are substantially interested.
4. Closely held company:
It is a company in which the public are not substantially interested.

5. Indian company [Section 2(26)]:
'Indian Company' means a company formed and registered under the Companies Act, 1956 and
includes—
1. 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;
i.a corporation established by or under a Central, State or Provincial Act;
ii.any institution, association or body which is declared by the Board to be a
company;
2. 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;
3.In the case of any of the Union territories of Dadra and Nagar 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, as the case may be, principal office of the company,
corporation, institution, association or body, in all cases is in India.

6. Domestic company [Section 2(22A)]:
A domestic company means an Indian company or any other company which in respect of 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.
7. Foreign company [Section 2(23A)]:
Foreign company means a company which is not a domestic company.
8. Investment company:
Investment company means a company whose gross total income consists mainly of income which is chargeable
under the heads Income from house property, Capital gains and Income from other sources.

9. Residence of a Company [Section 6(3)]
When is a company said to be Resident in India?
A company is said to be Resident in India in any previous year, if—
1. it is an Indian company; or
2. its place of effective management, in that year, is in India.
2. When is a company said to be Non-Resident in India ?
Provisions applicable from assessment year 2017-18
1. A Company will be a Non-Resident in any previous year if:
1. it is not an Indian company and
2. its place of effective management, in that year, is not in India.

Tax incidence
Tax incidence refers to how the burden of a tax is distributed between firms and consumers (or between
employer and employee). The tax incidence depends upon the relative elasticity of demand and supply.
● The consumer burden of a tax increase reflects the amount by which the market price rises.
● The producer burden is the decline in revenue firms face after paying the tax.

Complete ctp unit 1

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