The Government of India enacted the Income Tax Act, 1961 (the IT Act) for levy of Income Tax (being Direct tax) in India. The Income Tax Rules, 1962 (IT Rules) lay down the procedures to be followed in compliance with the provisions of the IT Act. These rules are administered by the Central Board of Direct Taxes (CBDT), which operates under the Central Finance Ministry.
Below are some factors to be considered to understand the direct tax provisions of newly setup Companies in India.
Indian tax registration number/ Permanent Account Number (PAN)
As per the domestic tax laws, all the resident Companies are mandatorily required to obtain a tax registration number/PAN in India. Further, non-residents earning taxable income from India are also required to obtain PAN in India. PAN needs to be quoted on various compliance filings and transactions such as Annual Income return, withholding tax returns, etc.
Tax Year/ Financial year & Tax returns
India follows tax year/ financial year which begins from 01st April and end on 31st March of the immediate subsequent year. Companies are required to file their return of income in India for a particular year as per the due dates set out below:
Nature of Company
Due date to file return of income
Companies who are required to submit a transfer pricing certificate (with respect to international transactions or specified domestic transactions) in Form 3CEB
30th November of subsequent year
31st October of subsequent year
Scope of taxable income for a company
The taxable income is called ‘Total Income’, which is computed after adding certain disallowances, such as loss on sale of assets and miscellaneous expenditure written off and the reduction of certain allowances/benefits from the book profits.
Domestic Company (Resident Company in India)
A Company which is resident in India is liable to tax on its worldwide Income in India. The Company is considered as Resident in India if it is incorporated in India or its place of effective management (POEM) is in India.
A Company (resident outside India) is liable to tax for the following:
- Income Accruing and arising or deemed to accrue or arise in India.
- Income received or deemed to be received in India.
Income deemed to accrue or arise in India has been defined as income accruing from an asset or source of income in India (salary, interest, royalty, fees for technical services, business connection in India or capital asset situated in India). The term ‘business connection’ is used in Indian Income tax laws is akin to Permanent Establishment (PE), as provided under tax treaties, to tax profits from business.
Corporate Tax Rates
Broadly, the corporate tax rates for new entities ranges from 15% to 40%.
Some other key considerations
I. A Company’s taxable income is divided into the following categories or heads of income:
- Income from Profit and gains of business and profession
- Income from House Property
- Income from Capital Gains
- Income from Other sources
II.Books of accounts and tax audit
Every Company engaged in business and profession is required to maintain books of accounts and get them audited by an accountant of its total sales, turnover or gross receipts exceed INR 10 million during the year.
III.Business Losses and unabsorbed depreciation
Business losses for a year are allowed to be carried forward for eight subsequent tax years, to be setoff against business income earned in those years. However, the Unabsorbed depreciation can be carried forward indefinitely and can be setoff against taxable income of subsequent years.
Iv.Some Tax deductions and Incentives Available to the Taxpayers
Deduction for employment of new employees
Additional deduction of 30% of employee cost incurred on new employees.
Deduction for specified businesses such as:
1. Setting up and operating a Cold storage facility.
2. Setting up and operating a warehousing facility for storage of agricultural produce.
3. Cross-country natural gas oil or distribution and infrastructure-related facilities.
4. Building and Operating a hotel of two-star or above category.
5. Building and operating, a hospital with at least one hundred beds for patients
100% of the capital expenditure.
Deduction for Scientific Research and development expenditure
100% of revenue and capital expenditure
(Excluding cost of land and building)
Amortisation of certain Preliminary expenditure
1/5th of expenditure for subsequent five previous years.
Start-up businesses (company or LLP) engaged in innovation, development or improvement of products, processes, services or a scalable business model with a high potential for employment generation or wealth creation
100% of the deduction for profit and gains for three consecutive year out of ten years beginning from the year in which eligible startup is incorporated.
*subject to specified considerations
Further, on 1st July 2017, the Government of India implemented the Goods and Services Tax (‘GST’) to replace the earlier indirect tax structures. The GST is a consumption-based tax. Thus, revenue for a transaction accrues, based on rules of the consumption or destination state, unlike under the past Indirect Tax regime, wherein revenue only accrued to the supplying state.
A supplier of goods and/or services is required to obtain GST registration in every state to which it supplies goods and/or services. GST registration is not required if the aggregate turnover of a supplier is less than the threshold limit for GST Registration, or if the person is exclusively engaged in supplying GST-exempt goods and/or services. Currently, in case of supplier of goods, the threshold limits is INR 4 Million (INR 2 Million, in case of special category state).
In case of supplier of service, the threshold limit is INR 2 million for service providers (INR 1 million in case of special category states). However, specified categories of persons (such as non-resident taxable persons or those liable to pay tax under representation) are mandatorily required to obtain GST registration even if their annual turnover is less than the prescribed threshold.
Liability to pay GST
Generally, a supplier of goods or services bears the liability to pay GST.
GST Tax Return
A supplier of goods and services is required to file multiple returns within a month on a state-wise basis for each registration