A discourse on Corporate Tax Planning

Prabhat Nigam

12 Apr, 2022

Introduction  

It is the right of every taxpayer to maximise its profits and reduce the tax burden making the best use of the policies of the government without indulging in the acts of tax evasion. Even companies also indulge in such types of acts. As the profits of a company increase, so does their tax liabilities. As a result, it becomes imperative for them to devote enough time on tax planning to reduce the tax liabilities. Proper corporate tax^[1] planning can reduce the burden of direct tax and indirect tax during the times of inflation. It also assists in proper planning of expenses, capital budget and sales and marketing costs. 

What is meant by Corporate Tax Planning?

Corporate Tax planning is the process of development of a strategy to maximise profits and reduce the burden of tax on the company. In furtherance of such strategy, the companies hire tax professionals who are well versed with the rules and regulations related to the laws related to taxes. It is important that every company does tax planning which would protect it from legal, financial and fiscal risks and help in smooth functioning of its business operations.

Difference between corporate tax planning and tax evasion  

It is important to point out the difference between two different concepts viz. Corporate tax planning and tax evasion. In the concept of tax evasion, the company indulges in non-payment of tax which is a punishable offence in law whereas corporate tax planning talks about increasing the profit percentage of the company and reducing the percentage of taxes within the boundaries of law and in a fully legal manner. Therefore, for successful corporate tax planning, the company must avail the services of professionals who understand not just the legal and fiscal system by also the financial rules set up of India.

Indicators of good corporate tax planning practice  

A good corporate tax planning is a result of the following:

• Make correct disclosures to the relevant Income Tax department.
• Being aware of the latest tax related laws, rules and regulations and court judgements.
• Tax planning should be done within the ambit of law.
• Tax planning should be done keeping in mind the business objectives with a view for flexibility to incorporate possible changes in the future.

How is corporate tax planning done

Before levying of tax and beginning the process of tax planning, it is necessary to determine which kind of corporates would be liable to be taxed according to the Indian legal system.

In India, corporations can be divided into two categories:

• Domestic corporations: a company whose control and management is entirely situated in India and the company is incorporated under the Companies Act, 1956 or Companies Act, 2013. Similarly, if an Indian arm of a foreign corporation is wholly managed and controlled within India, then it is also deemed as an Indian company.
• Foreign corporations: A company which is based outside India and has a portion of its operations managed and controlled outside India’s borders, then it is referred to as a foreign corporation.

Corporate tax is imposed on both these types of corporations on the net profit gained through avenues such as capital gains, dividends, interest or from business itself.

Once the income has been determined, then deductions are applied which have been legally provided by the government. Minimization of payable taxes can be done by making deductions, rebates, exemptions and also by appropriate management and financial reporting of the company’s expenses. Such deductions include the following:

• Capital gains can be either be taxed at a flat rate of 15% or 20% or such capital gains can be exempt under sections 54D, 54G, 54GA, 54EC etc.
• According to section 80G, donations made to charitable organisations may be 50-100% tax exempt subject to terms and conditions.
• Dividends which may be available for rebates under certain circumstances.
• According to section 32 of the Income Tax Act, 1961 Deductions on depreciations may be allowed i.e. 15% of deduction is allowed for depreciation on the cost of old assets such as machinery and an additional deduction of 20% on the purchase of new assets in the business of manufacturing or production of an article or a thing in the business of generation, transmission or distribution of power.
• Under section 80JJAA of the Income Tax Act, 1961 deduction in respect of employment of a new employee.

After the calculation of taxable income is done after deductions, taxation takes place in the following manner:

• IT applicable on companies with turnover or gross receipts up to Rupees 400 crore is 25% and more than Rupees 400 crore is 30% for the domestic companies along with surcharge and cess.
• IT applicable on foreign companies irrespective of their turnover are taxed at the rate of 40%.

Note: The government has extended to increase the timeline for Minimum Alternative Tax (MAT) at the rate of 15% for the newly incorporated manufacturing companies.  

Conclusion 

Corporate tax planning is primarily done for the objectives of reduction in the tax liability, economic stability, minimisation of litigation and making productive investment. It can be done for attaining a specific objective in mind, done within the ambit of law and can also be done for long and short term objectives. Therefore, it is necessary that a corporate engages the services of an experienced professional to execute the task in the best possible manner.

Read our Article:Impact of G7 Corporate Tax Deal on India