In India, the assessment of companies for tax purposes is governed by various provisions under the Income Tax Act, 1961. These provisions ensure that companies comply with tax laws and contribute their fair share to the national exchequer.
Minimum Alternate Tax (MAT):
MAT is a provision aimed at bringing zero-tax companies into the tax net. Even if a company’s taxable income as per normal provisions is low or nil, it is required to pay a minimum tax based on its book profits.
- Section 115JB:
Companies must pay MAT if their income tax computed under regular provisions is less than 15% (plus surcharge and cess) of their book profit.
- Book Profit:
It is calculated by making specified adjustments to the net profit as per the profit and loss account.
Carry Forward and Set Off of MAT Credit:
If a company pays MAT, it can carry forward the MAT credit and set it off against regular tax liability in future years, subject to certain conditions.
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Section 115JAA:
MAT credit can be carried forward for 15 assessment years.
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Set Off Conditions:
MAT credit can only be set off to the extent of the difference between regular tax and MAT payable in future years.
Dividend Distribution Tax (DDT):
Although abolished by the Finance Act, 2020, DDT was a significant provision where companies distributing dividends were required to pay tax on the distributed amount.
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Before Abolition:
Companies paid DDT at a rate of 15% (plus surcharge and cess) on the gross amount of dividends.
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Post Abolition:
Now, dividends are taxed in the hands of shareholders.
Income Computation and Disclosure Standards (ICDS):
ICDS are accounting standards for computing taxable income. They are mandatory for companies following the mercantile system of accounting.
- Objective:
Align taxable income with accounting income to reduce tax avoidance.
- Compliance:
Companies must adhere to these standards while computing income under the heads “Profit and Gains of Business or Profession” and “Income from Other Sources”.
Transfer Pricing Regulations:
These provisions ensure that international and certain domestic transactions between related parties are conducted at arm’s length prices to prevent profit shifting.
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Section 92 to 92F:
Detailed guidelines on maintaining documentation, determining arm’s length price, and penalties for non-compliance.
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Arm’s Length Price:
Price that would be charged between unrelated parties in uncontrolled conditions.
Advance Pricing Agreements (APA):
APAs provide certainty to companies regarding their transfer pricing policies over a fixed period, thus reducing litigation.
- Types:
Unilateral, Bilateral, and Multilateral.
- Validity:
APAs can cover a period of up to 5 consecutive years in the future and can be rolled back for 4 preceding years.
Corporate Tax Rates:
Corporate tax rates vary based on the type and size of the company.
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Domestic Companies:
Generally taxed at 30%. However, concessional rates are available under certain conditions.
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New Manufacturing Companies:
Benefit from a reduced tax rate of 15% if they commence production by a specified date.
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Foreign Companies:
Taxed at 40% on income earned within India.
Tax on Distributed Profits of Domestic Companies:
Section 115-O provides for the taxation of distributed profits of domestic companies.
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Tax Rate:
Before abolition, it was 15% plus surcharge and cess.
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Current Scenario:
Post-abolition of DDT, dividends are taxable in the hands of shareholders.
Special Provisions for Startups:
Recognizing the importance of startups, specific provisions provide tax benefits to promote their growth.
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Section 80-IAC:
Eligible startups can claim a 100% tax deduction on profits for any three consecutive assessment years out of the first ten years since incorporation.
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Eligibility Criteria:
The startup must be recognized by the Department for Promotion of Industry and Internal Trade (DPIIT).
Faceless Assessment Scheme:
To promote transparency and efficiency, the faceless assessment scheme was introduced.
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Key Features:
No physical interface, team-based assessment, and random allocation of cases.
- Objective:
Eliminate human interface to reduce the possibility of corruption and ensure a fair and transparent assessment process.
Tax on Buyback of Shares:
To curb the practice of avoiding dividend distribution tax, tax on buyback of shares was introduced.
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Section 115QA:
Tax at 20% on the distributed income of companies on buyback of shares, applicable to listed and unlisted companies.
Assessment Procedures and Penalties:
The assessment of companies involves several steps and compliance requirements, including filing of returns, scrutiny assessments, and payment of advance tax.
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Scrutiny Assessment:
Detailed examination of the return filed by the company to ensure accuracy and compliance with tax laws.
- Penalties:
For non-compliance, misreporting, or underreporting of income, stringent penalties are imposed.