Incidence of Tax for a Company
The incidence of tax refers to the final burden or impact of a tax, which can be borne by different parties involved. In the case of a company, the incidence of tax can be divided into two main categories: statutory incidence and economic incidence.
Statutory Incidence:
Statutory incidence refers to the legal responsibility of paying a particular tax. For example, a company may be required by law to collect and remit sales tax on behalf of the government. In this case, the company acts as an agent to collect the tax from customers and is legally responsible for remitting it to the government. The statutory incidence, in this case, falls directly on the company as it is legally obligated to pay the tax.
Economic Incidence:
Economic incidence refers to the actual burden of the tax and who bears the economic cost. Although the legal responsibility may lie with the company, the economic burden can be passed on to various stakeholders, including customers, employees, and shareholders. The way the burden is distributed depends on the elasticity of demand and supply in the market, as well as the specific circumstances of the company.
- Customers: If the company operates in a competitive market with elastic demand, it may choose to shift the burden of certain taxes onto customers by increasing prices. The customers, in this case, bear a portion of the tax burden through higher prices.
- Employees: In some cases, a company may not be able to fully pass on the tax burden to customers due to competitive pressures. As a result, the company may absorb some of the tax by reducing profit margins. This can affect the company’s ability to pay higher wages or offer other benefits to employees.
- Shareholders: The economic incidence of taxes can also affect shareholders. If a company’s profits decrease due to tax obligations, shareholders may experience a reduction in dividends or the value of their shares.
Incomes exempt from Tax
In India, the specific incomes exempt from tax for a company can vary based on the provisions of the Income Tax Act, 1961, and other relevant tax regulations. Here are some common examples of incomes that are often exempt from tax for companies in India:
- Dividends: Dividends received by a domestic company from another domestic company are generally exempt from tax. However, dividends received from foreign companies may be subject to tax.
- Long-Term Capital Gains: If a company sells a long-term capital asset, such as shares, securities, or immovable property, and holds it for a specified period (usually more than 24 months), any resulting long-term capital gains may be eligible for exemption under certain conditions.
- Export Income: Income derived from the export of goods or services is eligible for various tax incentives and exemptions under the Export Promotion Schemes provided by the government.
- Special Economic Zone (SEZ) Income: Companies operating within designated SEZs in India are entitled to certain tax benefits, including exemption from income tax on the profits and gains derived from eligible business activities conducted within the SEZ.
- Interest Income from Certain Bonds and Securities: Interest earned on specified bonds, such as infrastructure bonds, notified by the government may be exempt from tax.
- Agricultural Income: Agricultural income earned by a company from agricultural activities carried out in India is generally exempt from tax.