Managing the Taxable Income of Corporates

[Manish Gupta]

Direct Tax levied on the income of a corporate can be a considerable amount of money that has to be paid by the assessee to the government every year. But if the business is conducted keeping in mind various exemptions and deductions available for corporates under the Income Tax Act, 1961, the tax liability of the business can be reduced significantly. Some of such tax-saving strategies are listed below –

1.  Tax Rates applicable for Corporates

i. 15% (Section 115BAB)

Domestic manufacturing companies set up and registered on or after 1st October 2019 and commencing business before 31st March 2023 can exercise option u/s 115BAB, wherein the income would be taxable at the rate of 15%.

ii. 22% (Section 115BAA)

Other domestic companies can exercise option u/s 115BAA, wherein the income would be taxable at the rate of 22%.

The total income of the companies opting for above-mentioned sections would be computed without giving effect to various deductions such as deduction u/s 10AA, 32AD, 33AB, 33ABA, etc., additional depreciation, without set-off of brought forward loss and unabsorbed depreciation, etc. For such companies, surcharge would be applicable at the rate of 10% and health and education cess at 4%.

iii. 25%

If total turnover or gross receipts of a company in P.Y. 2018-19 was less than ₹ 400 crores, then, in FY 2020-21, such company would be taxed at the rate of 25% along with applicable surcharge and health and education cess.

iv. 30%

Companies not falling under any of the categories mentioned above would be taxable at the rate of 30% plus applicable surcharge and health and education cess.

However, unabsorbed depreciation would be allowed to be carried forward even if the ITR is filed after due date.

2.  Deductions

There are many deductions available to a company for various regular expenses incurred by it, such as rent paid for building, repairing charges paid for plant & machinery, commission paid to employees, etc.

Deduction for General Expenses u/s 37

As per section 37, any expenditure incurred shall be allowed as deduction if the following conditions are satisfied –

1. Expenses should be incurred wholly and exclusively for the purpose of business or profession.

2. Expenses should be revenue in nature.

3. Expenses should be legal.

Along with the deductions for these miscellaneous expenses, there are certain special deductions also that are available for corporates, some of which are mentioned as below –

1. Additional depreciation u/s 32(1)(iia)

2. Additional depreciation is available on plant & machinery only.

3. The assessee must be engaged in the business of manufacturing or generation, distribution or transmission of power to claim deduction under this section.

4. Such additional depreciation is available only in the year of installation of the asset at the rate of 20% of the asset's cost.

5. In case the undertaking is set up on or after 1st April 2015 in the notified backward areas of Bihar, Andhra Pradesh, Telangana or West Bengal and the plant & machinery has been acquired and installed up to 31st March 2020, then the additional depreciation will be available at the rate of 35%.

6. Donations for Scientific Research u/s 35

Under this section, if donations are made to approved research associations, institutes, colleges, universities, IIT National Laboratory or any other approved Indian company engaged in R&D, then 100% of such donation amount is available as deduction.

3. Expenditure on Agricultural Extension Project u/s 35CCC

As per this section, 100% of the expenses incurred for notified agricultural extension projects are allowed as deduction.

4. Expenditure for Skill Development Project u/s 35CCD

Under this section, 100% of the expenses incurred for notified skill development project are allowed as deduction.

5. Expenditure on Voluntary Retirement Scheme u/s 35CCC

Under this section, expenditure incurred on the Voluntary Retirement Scheme of employees can be claimed as deduction in 5 equal instalments of such expenditure.

6. Expenditure incurred on donations u/s 80G

Since the expenditure incurred for complying with the requirements of Corporate Social Responsibility is not allowed as deduction, companies should make sure that they contribute towards the schemes mentioned u/s 80G as donations for CSR, so that they are eligible to claim the same as deduction u/s 80G.

7. Deductions available under chapter VI A

Along with the deductions mentioned above, there are other deductions also that are available to corporates under Chapter VI of Income Tax Act.

For example –

1. Deduction for contributions given by companies to political parties or an electoral trust can be claimed under section 80GGB.

2. Deduction for profits and gains from business of collecting and processing of bio-degradable waste can be claimed under section 80JJA.

3. Deduction in respect of employment of new employees can be claimed by companies under section 80JJAA.

4. Deductions available with the motive to boost the economy

Government provides for various deductions with the objective of development of the economy subject to the specified conditions. Some of them are as follows –

1. Deductions in respect of profits and gains from industrial undertakings or enterprises engaged in infrastructure development, etc. u/s 80IA

2. Deductions in respect of profits and gains by an undertaking or enterprise engaged in development of Special Economic Zone u/s 80IAB

3. Deductions in respect of profits and gain earned by an eligible start up u/s 80IAC

Note: The expenses mentioned in point (ii), (iii) and (iv) above were allowed as deduction up to the extent of 150% of the expenditure amount earlier. But, now only an amount equal to the actual expenses incurred is eligible for deduction.

Some crucial points to keep in mind –

• In order to avail the benefit of the deductions provided under the Act, one must ensure that the payment for such expenses is preferably made in a mode other than cash, because as per section 40A(3), if cash payment of ₹ 10,000 is made to any person in a single day, then the expenditure for which such payment has been made will be disallowed.

• The applicable TDS must be deducted and deposited to the government within the prescribed time frame to ensure that the entire amount of the concerned expenditure is available for deduction.

• Employees' contribution to PF, ESI or any other employee welfare funds must be deposited on time as per the due date under the relevant Act by the employer to claim deduction for the same.

As per Finance Act 2021, a delay of even a single day in depositing such statutory contributions would lead to disallowance of the entire amount.

3.  Filing return within due date

Ensuring timely filing of Income Tax return can aid in reducing tax liability.

If the return is not filed within the deadline, it will lead to -

1. Imposition of penalty of up to ₹ 10,000,

2. Disallowance to carry forward business losses to subsequent years to be set off against income of following years.

3. Exemption on Capital Gains

Tax rates applicable on capital gains are as follows:-

i. Long-term Capital Gain

Category of long-term capital asset	Tax Rate
Sale of listed equity shares, units of equity oriented fund and unit of business trust	10% of the amount which is more than ₹ 1 lakh
Other long term capital assets	20%

 

ii. Short-term Capital Gain

Category of short-term capital asset	Tax Rate
Sale of listed equity shares, units of equity oriented fund and unit of business trust	15%
Other short term capital assets	Taxed as per the slab rate applicable to the assessee

Several exemptions have been introduced under capital gains to protect the income generated through the sale of capital assets and reduce the overall tax burden associated with the same. Some of such exemptions available for corporates are mentioned under the following sections 

a. Section 54D

Exemption on gains from the sale of industrial land or buildings, used for industrial purposes for a minimum period of 2 years, if the income is reinvested in purchasing land or buildings for industrial use.

b. Section 54EC

Exemptions on long-term capital gains arising from the sale of land or building or both on investing such income in NHAI or Rural Electrification Corporation bonds having lock-in period of 5 years within 6 months from the date of transfer of such asset.

Conclusion

There are many tax-saving provisions available for corporates under the Income Tax Act, 1961. If proper tax planning is done in light of these provisions, a considerable amount of money can be saved in the long run.

Authored by CA Manish Gupta and assisted by Kriti Agrawal

For any queries, kindly contact at [email protected]