Taxation and Corporations

By Sri Y.Srinivasa Rao, Prl. Senior Civil Judge, Tirupati.

Introduction:-

Article 265 of the Constitution which states that “No tax shall be levied or collected except by the authority of law”. The “Direct Taxes Code Bill” was introduced in the Parliament on 30 August 2010 by the then Finance Minister to replace the Income Tax Act, 1961 and Wealth Tax Act. Taxes in India are levied by the Central Government and the State governments. Some minor taxes are also levied by the local authorities such as the Municipality and the Corporations Like VUDA, HUDA etc. Two type taxes in India are one is Direct Taxes and other is Indirect Taxes. Talking about direct taxes, it is levied on the income that different types of business entities earn in a financial year. There are different types of taxpayers registered with Income tax department and they pay taxes at different rates. Levying tax on an individual income and income of a Comapny is different. In fact, an individual and a company both should pay tax but they, being a taxpayer, are not taxed at the same rate. Because of this reason, Direct Taxes are again subdivided as: Income tax and Corporate tax. There are various penalties & fees which can be levied as per the Income Tax Act, 1961.

In 2015, the Wealth tax Act, 1957 was repealed in India. Earlier, in our country, ”Direct Taxes” were governed by two major legislations such as Income tax Act, 1961 and the Wealth Tax Act, 1956. After repealing Wealth Tax Act, 1956 and dropping the proposal for Direct Tax Code , now, Income Tax Act, 1961 is in existence.
Income Tax: Income tax is paid by the taxpayers other than companies registered under company law in India on the income earned by them. They are taxed on the basis of slabs at different rates. Agricultural income is exempt from tax as per section 10(1) of the Act. Income in respect of the below mentioned activities is initially computed as if it is business income and after considering permissible deductions. Thereafter, 40,35 or 25 percent of the income as the case may be, is treated as business income, and the rest is treated as agricultural income. The general rule is that the total income of an assessee for the previous year is taxable in the relevant assessment year. However, income tax is recovered from the assessee in the previous year itself by way of TDS.


Corporate Tax:

This tax is paid by the companies registered under company law in India on the net profit that it makes from businesses. It is taxed at a specific rate as prescribed by the income tax act subject to the changes in the rates every year by the Income Tax department.
A detailed study on Corporate tax and Income tax is necessary to understand the concept of taxation in India.


Corporate tax:-

Domestic as well as foreign companies are liable to pay corporate tax under the Income-tax Act. While a domestic company is taxed on its universal income, a foreign company is only taxed on the income earned within India i.e. is being accrued or received in India.


For the purpose of calculation of taxes under Income tax act, the types of companies can be defined as under :


Domestic Company:

Domestic company is one which is registered under the Companies Act of India and also includes the company registered in the foreign countries having control and management wholly situated in India. A domestic company includes private as well as public companies.


Foreign Company:

Foreign company is one which is not registered under the companies act of India and has control & management located outside India.
Before understanding about the rate of taxes and how will the tax be calculated on income of the companies, we should learn about the types of income which a company earns. Here it is :

  1. Profits earned from the business
  2. Capital Gains
  3. Income from renting property
  4. Income from other sources like dividend, interest etc.

Companies for the purpose of Income Tax include Indian companies, body corporates incorporated under the laws of a countries outside India, body corporates / institutions being assessed as companies as per the earlier laws in force, body corporates – Indian or not, incorporated or not, declared as a company by general or special order of the Board, for the period specified in such declaration/ order.
Further, Companies that are not domestic companies, are termed as foreign companies for Income Tax purposes.


As we are aware, Companies, having separate legal identity being an artificial person created by law, are also included in the definition of a ‘person’ for Income Tax purposes. Such that, any provisions which is applicable to a person would be applicable to a company as well unless specifically excluded.
Companies for the purpose of Income Tax include Indian companies, body corporates incorporated under the laws of a countries outside India, body corporates / institutions being assessed as companies as per the earlier laws in force, body corporates – Indian or not, incorporated or not, declared as a company by general or special order of the Board, for the period specified in such declaration/ order.
Further, Companies that are not domestic companies, are termed as foreign companies for Income Tax purposes.


As we are aware, Companies, having separate legal identity being an artificial person created by law, are also included in the definition of a ‘person’ for Income Tax purposes. Such that, any provisions which is applicable to a person would be applicable to a company as well unless specifically excluded.
Section 54 benefit increased from one residential house to two residential house for a taxpayer having capital gains up to Rs. 2 Crore.This exemption will be allowed once in lifetime of the individual assessee.
In India, the Central Sales Tax, 1956, which imposes sales tax on goods sold in inter-state trade or commerce in Indisale of property situated within the state whereas the Central Excise Act, 1944, which imposes a duty of excise on goods manufactured or produced in India. Art. 246 of the Constitution distributes legislative powers including taxation, between the Parliament and the State Legislature. It is very important to consider that in Indian, under the Constitution, List – I entailing the areas on which only the parliament is competent to make laws; List – II entailing the areas on which only the state legislature can make laws, and List – III listing the areas on which both the Parliament and the State Legislature can make laws upon concurrently. Separate heads of taxation are no head of taxation in the Concurrent List (Union and the States have no concurrent power of taxation).


Income-tax:-

Under Union List, as per Entry 82, the Central Government has power to levy a tax on any income other than agricultural income, a fortiori, it is defined in Section 10(1) of the Income Tax Act, 1961. The Income Tax Law consists of Income Tax Act 1961, Income Tax Rules 1962, Notifications and Circulars issued by Central Board of Direct Taes (CBDT), Annual Finance Acts and judicial pronouncements by the Supreme Court and High Courts.

Conclusion:-

The government imposes a tax on taxable income of all persons who are individuals, Hindu Undivided Families (HUF’s), companies, firms, LLP, association of persons, body of individuals, local authority and any other artificial juridical person. Levy of tax on a person depends upon his residential status. The CBDT administers the Income Tax Department, which is a part of the Department of Revenue under the Ministry of Finance, Govt. of India. Income tax is a key source of funds that the government uses to fund its activities and serve the public. Because a corporation is a separate legal entity from its owners, the company itself is taxed on all profits that it cannot deduct as business expenses. Generally, taxable profits consist of money kept in the company to cover expenses or expansion (called “retained earnings”) and profits that are distributed to the owners (shareholders) as dividends.
In India, the Central Excise Act, 1944 imposes a duty of excise on goods manufactured or produced in India.

Tax Law

Leave a Reply Cancel reply