Tax Benefits of Companies: How to Save Taxes in Companies?

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Tax Benefits of Companies: How to Save Taxes in Companies?

Registering a company for your business certainly brings a lot of advantages. Apart from the benefits like limited liabilities, organised structure, fund raising etc., one of the peculiar benefits is that it entails a lot of tax benefits to companies in India. The income tax law has put in place certain tax incentives in India, that are exclusively available to the companies. Here, we have covered all such provisions that provide tax benefits to the companies apart from the normal business expenditures.

Applicable Tax Rates

The income tax rate applicable to companies is 25% if the turnover or gross receipts does not exceed Rs. 400 crores in the FY 2018-19. This is against the 30% tax rate for partnership firms, limited liability partnerships as well as individuals falling in the income slab above 10 lakhs. To provide further benefits, Section 115BAA and Section 115BAB were introduced in the Income Tax Act, 1961. Following are the benefits of the above two sections:

  • Presumptive tax rate under Section 115BAA: All the domestic companies can pay income tax at the rate of 22% + Surcharge @ 10% + Cess @ 4%. The basic tax rate has been reduced from 30% / 25%, as the case may be, to 22% while the effective tax rate comes out as 25.168%. However, the companies need to comply with certain conditions as prescribed in Section 115BAA for availing the benefit of this concessional tax rate.
  • Presumptive tax rate under Section 115BAB: This is primarily focused on providing tax incentives for manufacturing companies in India. A domestic company engaged in the manufacturing or production of any article or thing and set up or registered after 1st October 2019 and commenced manufacturing or production of article or thing on or before 31st March 2023 shall be allowed to pay tax at the rate of 15% + Surcharge @ 10% + Cess @ 4%. Here, the basic tax rate has been reduced from 30% / 25%, as the case may be, to 15% while the effective tax rate comes out to 17.16%. However, like Section 115BAA, the companies will need to comply with certain conditions in order to pay tax at the concessional rate.

MAT Not Applicable to Certain Companies

Minimum Alternate Tax (MAT) requires companies to pay a minimum tax @ 15% on the book profits calculated as per the provisions of Section 115JB of the Income Tax Act, 1961. However, in certain cases, MAT will not be applicable to the companies. This includes:

  • Foreign company if such company is a resident of a country or specified territory with which India has entered into a Double Taxation Avoidance Agreement (DTAA) (as referred to in section 90(1) or section 90A(1)) and it does not have a permanent establishment in India.
  • Foreign company if such company is a resident of a country or specified territory with which India does not have DTAA agreement and such company is not required to obtain registration under any law relating to the companies
  • Foreign company if the total income of such company solely includes the profits and gains from the shipping business (Section 44B), exploration etc. of mineral oils (Section 44BB), operation of aircrafts (Section 44BBA), civil construction etc. in certain turnkey projects (Section 44BBB) and such income is taxable at the rates as specified in such sections.

Beneficial Provisions for Capital Gains

Capital gains tax arises if a certain transaction is treated as a transfer as per the definition of transfer u/s 2(47). However, for companies, certain transactions have been specified under Section 47 that shall not be treated as a transfer of capital assets. These transactions include:

  • Transfer of capital assets by a holding company to its wholly owned Indian subsidiary company
  • Transfer of capital assets by a wholly owned subsidiary company to its Indian holding company
  • Transfer of capital assets by an amalgamating company to the Indian amalgamated company under a scheme of amalgamation
  • Allotment of shares of Indian amalgamated company to the shareholders of the amalgamating company under the scheme of amalgamation
  • Transfer of capital asset by a demerged company to an Indian resulting company under a scheme of demerger
  • Transfer of capital assets by a private limited company or an unlisted public company to an LLP under the scheme of conversion 

As these transactions are not treated as a transfer of capital assets, therefore no capital gains tax arises upon undertaking the above transactions.

Deduction of Expenses in Relation to the Setting Up of Business

Expenses incurred in relation to the establishment and setting up of business, also known as preliminary expenditure, are also allowed as deductions under Section 35D of the income tax act. The deduction is allowed as 1/5th of the expenditure over a period of 5 years. This acts as a significant tax benefit for companies in India as they usually incur significant expenses in the initial stages of setting up.

Deduction for Expenses in case of Amalgamation or Demerger
If an Indian company incurs expenditure wholly and exclusively for the purpose of amalgamation or demerger of an undertaking, then the company can claim the deduction for such expenditure under Section 35DD of the income tax act. The company shall claim 1/5th of such expenditure as the deduction for each of the financial year for 5 successive years beginning from the previous year in which the amalgamation or demerger took place. 

Contributions to the Political Parties
An Indian company contributing any sums to the political party or the electoral trusts shall be allowed a deduction of the sum so contributed under section 80GGB of the income tax act. However, the deduction shall be allowed only if the contribution is made in any mode other than cash.

Deductions for Inter-Corporate Dividends
In case the gross total income of a domestic company includes the income by way of receipt of a dividend from any other domestic company, a foreign company or business trust, then the amount equal to such dividend shall be allowed as a deduction under Section 80M of the Income Tax Act, 1961 to the domestic company receiving such dividend. However, the amount of deduction shall not exceed the dividend distributed by the above companies or trust on or before one month prior to the due date for furnishing a return of income under section 139(1).

Above were some of the significant tax advantages for companies in India. For instance, if you have obtained private limited company registration, then the tax benefits on capital gains can be a significant tax benefit for private limited company in case it decides to merge, demerge or convert in the future. Are you claiming the benefit of the above tax advantages? If not, then contact your eAuditors now!
 


Author : Dipen

Date     : 13-Jul-2022


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