Corporate Tax Planning

Unit-2
E-text

Module 5 & 6 : Residential status & taxation of companies

Scope of Total Incidence of tax [Section 5]

Total income of an assessee cannot be computed unless we know his/ her residential status
in India during the previous year. According to the residential status, the company assessee can
either be:
i) Resident in India or
ii) Non-resident in India.

Why should we determine Residential Status?

The taxability of income is dependent on the residential status of the assessee i.e. the total
income of an assessee depends whether he is resident in India or a non – resident in India. Since
the total income of an assessee varies according to his residential status in India, the incidence
of tax shall also vary according to such residential status in India.

Residential Status of a Company [Section 6(3)]

Residential Status

Resident Non-resident

A Company is said to be a resident in India in any previous year if:

a) It is an India company i.e. an Indian Company is always resident in India or
b) Its place of effective management (POEM) is in India during the previous year

A company will be a non-Resident in any previous year if:

a) It is not an India company
And
b) Its place of effective management (POEM) is not in India during the previous year

If the co. is not an Indian Co. but its place of effective management is in India, it will be treated
as Resident.

Meaning of POEM:
Place of effective management means a place where key management and commercial
decisions that are necessary for the conduct of the business of an entity as a whole are in
substance made. Key Mgt. & commercial decision may mean--
Board meeting, Major decisions, Substantial decisions
There may be more than one place of management but you have to determine the place where
the key management & commercial decision are taken.

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Applicability of POEM:
Not an Indian Co. having turnover/ gross receipt not exceeding Rs.50crores, POEM will not
be applicable– so it will be non-resident
If turnover exceeds Rs.50crore, concept of POEM will be applicable.

Nature of Income
Types of Income/ nature of income is one of the important determinants of incidence of tax.

Nature of Income

Indian Income Foreign Income

Indian Income- If any one of the three conditions is satisfied, the income will be treated as
Indian income or Indian sourced income:
i) The income is received (or deemed to be received) and accrued (or is deemed to
accrue or arise) in India during the PY or
ii) The income is received (or deemed to be received) in India but it is accrued outside
India during the PY or
iii) The income is received outside India but it is accrued (or is deemed to accrue or
arise) in India during the PY

Foreign Income –The income which is accrued and received outside India, is known as
foreign income.

So place of accrual and receipt of income is very important to determine the nature of income,

Incomes which are deemed to accrue or arise in India [Section 9]

The following incomes shall be deemed to accrue or arise in India.

i)Income from a business connection in India [Section 9(1)(i)]:

Any income which arises, directly or indirectly, from any activity or a business connection in
India is deemed to be earned in India. Business connections may be in several forms e.g. a
branch office in India or an agent or an organization of a non-resident in India. Formation of a
subsidiary company in India to carry on the business of the non-resident parent company may
also be a business connection in India.

ii)Income from any property, asset or source of income situated in India [Section 9(1) (i)]:
Any income which arises from any intangible property movable or immovable, which is
situated in India, is deemed to accrue or arise in India.

iii)Income from the transfer of any capital asset situated in India [Section 9(1) (i)]:
Where the capital asset is situated in India, regardless of the residential status of the transferor
or the transferee, capital gain, arising on its transfer, would be deemed to be income accruing
or arising in India

iv)Income under the head ‘Salaries’ [Section 9 (1) (ii)]:

Any income payable for services rendered in India shall be regarded as income earned in India
though it may be paid in India or outside.

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v)Salary payable by the government to an Indian citizen/ national for services rendered
outside India [Section 9 (1) (iii)]:
If the following conditions are satisfied, the income is treated as deemed to accrue or arise in
India:
i) Income is chargeable under the head ‘Salaries’.
ii) The payer is the Government of India;
iii) The recipient is an India citizen whether Resident or Non-Resident ;
iv) The services is rendered outside India.

According to section 10(7), all allowances or perquisites paid outside India by the
Government to the above India citizens for rendering services outside India are exempted.

vi)Dividend paid by an India company outside India [Section 9(1) (iv)]:

Dividend paid by an Indian company outside India is deemed to accrue or arise in India..

vii) Interest payable outside India [Section 9(1) (v)]:

Interest payable by the following shall be deemed to accrue or arise in India:
a) Interest payable by the Government, whether Central or State.
b) Interest payable by a resident outside India except in the following cases:
i. Interest is payable by a resident in respect of any debt incurred, or any moneys
borrowed and used, for the purposes of a business or profession carried on by
him outside India; and
ii. Interest is payable on moneys borrowed by a resident for the purposes of
making or earning any income from any source outside India.
c) Interest payable by a non-resident in respect of any debt incurred, or money borrowed
and used, for the purposes of a business or profession carried on by him in India.

viii)Royalty payable outside India [Section 9 (1) (vi)]:

Royalty income of the following types will be deemed to accrue or arise in India:
a) Royalty received from the Central Government or any State Government;
b) Royalty received from a resident, except where the payment is relatable to a business
or profession carried on by him outside India or to any other source of his income
outside India; and
c) Royalty received from a non-resident, if the payment is relatable to a business or
profession carried on by him in India or to any other source of his income in India.

ix)Fee for technical services payable outside India [Section 9(1) (vii)]:
Income by way of fees for technical services of the following types will be deemed to accrue
or arise in India:
a) Fees for technical services payable by the Central Government or any State
Government;
b) Fees for technical services payable by a resident, except where the payment is relatable
to a business or profession carried on by him outside India or to any other source of his
income outside India; and
c) Fees for technical services payable by a non-resident if the payment is relatable to a
business or profession carried on by him in India or to any other source of his income
in India.

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Incidence of Income

Residential Status: Resident & Non-Resident

Types of Income: Indian Income & Foreign Income

Resident Non-resident
Indian Income Taxable Taxable
Foreign Income -do- Not taxable

So, a Co. other than Indian co is liable to pay tax against its Indian income though it is a non-
resident.
On the other hand, both Indian and foreign income is taxable for a Co. which is resident in
India for a particular PY

Computation of Total Income

For computation of total income of a company, we have to consider the income of 4 heads
only viz.
Income from house property,
Profits and Gains of Business or Profession,
Capital gains and
Income from other sources

The total income of a company is also computed in the manner in which income of any other
assessee is computed. Income computed under four heads is aggregated first to get the Gross
Total income. While aggregation the income, section 60 and 61 shall be applicable. Further,
effect to set off of losses and adjustment for brought forward losses should made under section
70 to 80.
From the gross total income so computed, the following deduction of chapter VIA should be
allowed (applicable for company assessee):
80G Donations to certain funds / charitable institutions, etc.
80GGA Certain donations for scientific research or rural development.
80GGB Contributions given by companies to political parties.
80-IA profits and gains of new industrial undertakings or enterprises engaged in
Infrastructural development, etc.
80-IAB Deductions in respect of profits and gains by an undertaking or enterprises
engaged in development of special Economic Zone.
80-IAC Profits gains from Eligible start-up
80-IB Profits gains from certain industrials undertaking other than infrastructure
Development undertakings.
80-IBA Profits gains from Housing project
80-IC Deductions in respect of certain undertakings or enterprises in certain special
Category states.
80-ID Deductions in respect of profits and gains from business of hotels and
Convention centres in specified area
80-IE Special provisions in respect of certain undertakings in North-Eastern States
80 JJA Deductions in respect of profits and gains from business of collecting and
Processing of bio-degradable waste.
80-LA Deductions in respect of certain incomes of Offshore Banking Units and
International Financial Services Centre.
80JJAA Deductions in respect of employment of new workmen.

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Module 7 & 8: MAT Provision & MAT Credit

Minimum Alternate Tax (MAT)

In order to boost up corporate tax collection and to prevent the prosperous companies from
converting themselves into zero-tax companies, the then Union Government inserted Sec.
115JA to Income Tax Act, 1961 through the Finance Bill (No. 2), 1996. The section 115JA
came into effect from 1st April, 1997 (i.e., Assessment year 1997- 98). The said tax is termed
as Minimum Alternate Tax (MAT). Since the introduction of MAT, the provision contained in
the particular section has been amended for effective implementation of the MAT concept. As
a result Section 115JA was replaced by Section 115JB w.e.f 2001-02.

Minimum Alternate Tax (MAT) was introduced for those companies that make huge profits
and pay dividend to their shareholders but pay no / minimal tax under the normal provision of
the Income Tax Act, by taking advantage of the various deductions, allowances and incentives
allowed under the Act. But with the introduction of MAT provision, the companies have to pay
a fixed percentage of their profit as minimum alternate tax; the MAT provision is applicable
u/s 115JB to all companies including foreign companies subject to certain conditions.

The introduction of MAT provision u/s 115JB ensures that no company can avoid paying taxes
for their income. As they have different provision for allowable expenses and deductions under
both the Companies Act and Income Tax Act, the primary objective behind the introduction of
MAT is to collect taxes from the zero tax companies. Zero tax companies are companies who
show higher profit computed under the Companies Act and pay dividend to their shareholders
but do not pay taxes at all.

Presently, a company shall be liable to pay higher of (i) tax computed under normal provision
of Income Tax Act and (ii) tax computed u/s 115JB.

If accounting policies, accounting standards or rates or method of depreciation are

different ---
According to the first provision to section 115JB(2) the accounting policies, the accounting
standards adopted for preparing such accounts, the method and rates of depreciation which
have been adopted for preparation of the Statement of profit and loss laid before the annual
general meeting, should be followed while preparing Statement of profit and loss for the
purpose of computing book profit under section 115JB.
Some companies may follow an accounting year under the Companies Act which is different
from financial year (i.e. previous year ending March 31) under the Income tax Act. These
companies generally prepare two sets of accounts – one for the Companies Act and another for
the Income Tax Act. Generally different accounting policies/ standards, and method or rate of
depreciation are adopted in two sets of account by such companies so that higher profit is
reported to shareholders and lower profit if disclosed to tax authorities.

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Computation Book Profit u/s 115JB
Particular Amount Amount

Profit as per Statement of Profit & Loss Xxxx

Add. Following amounts if debited to the P/L Statement
1. Income tax paid or payable and provision therefor
2. Amount carried to any reserve
3. Amount set aside to provisions for future liabilities
4. Provision for losses of subsidiary companies
5. Dividend paid or proposed
6. Expenditure relatable to any income to which sec.10. 11 & 12 applies
7. Amount of depreciation
8. Amount of deferred tax and provision therefor
9. Amount set aside as provision for diminution in the value of asset
10. Amount standing in the revaluation reserve relating to revalued
asset on the retirement or disposal of such asset Xxxx Xxxxx
Deduct: Following amounts Xxxx
1. Amount withdrawn from reserves or provision if credited to the P/L
Statement
2. Income exempt from tax
3. Depreciation (other than revaluation of assets) debited to P/L
Statement
4. Amount withdrawn from revaluation reserve credited to P/L
statement provided it does not exceed the amount of depreciation
on account of revaluation reserve
5. Amount of loss brought forward or unabsorbed depreciation , which
ever is less as per books of account
Least of the following:
a) Amount of loss(before depreciation)
b) Unabsorbed depreciation
6. Profit of a sick industrial unit xxxx Xxxx
7. Amount of deferred tax if credited to P/L Statement Xxxxx
Book Profit ____

Credit in respect of MAT

Section 115JAA provides that where tax is paid in any assessment year in relation to the income
under section 115JB, a tax credit shall be allowed in subsequent years.

The amount of tax paid u/s 11JB is allowed to be carried toward to the extent of the MAT paid
in excess of the regular tax and can be set off against tax payable up to fifteenth assessment
year immediately succeeding the assessment year in which tax credit becomes allowable under
the provision of section 115JAA (for the assessment year 2018-19).

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 Computation of Tax Liability

Mechanism of tax credit

Tax Liability under normal provision Tax liability under MAT provision

Total income xxx Book Profit xxx

Tax on total income xx Tax on Book Profit xx
(apply the tax rate) (apply the tax rate)
Add. Surcharge (if applicable) xx Add. Surcharge (if applicable) xx
xxx xx
Add. Health & EC XX Add. Health & EC XX
Tax liability xxx Tax liability xxx

The amount of tax credit under section 115JAA may be found out under the following steps:

Step I: Find out total income of the company as per normal provision
Step II: Calculate the book profit (as per provisions of section 115JB)
Step III: Find out tax on (step I)
Step IV: Find out tax on (step II)

The amount of tax credit is equal to the tax paid under step IV as reduced by the tax computed
under step III.

Carry forward and set off of Tax Credit

The amount of tax credit under section 115JAA shall be carried forward and set off subject to
the following propositions:

• No interest is payable in respect of tax credit.

• The credit shall be allowed to be set off in a future year in which tax becomes payable
on the total income computed in accordance with the provisions other than section
115JB.
• Set off in respect of brought forward tax credit will be allowed for any assessment year
to the extent of the tax computed on total income
• Carry forward shall not be allowed beyond the fifteenth assessment year immediately
succeeding the assessment year in which tax credit becomes allowable.

Rate of Tax applicable for corporate assessee (w.e.f AY 2019-20)

Company Rate of income-tax
(%)
In the case of a domestic company-
Where the total turnover or gross receipt during the previous 2016 – 17 does 25
not exceed Rs.250 crore
any other Domestic Company 30
In the case of a foreign company- 40

Surcharge: There will be no surcharge, if net income does not exceed Rs. 1 crore. If the net income
exceeds Rs.1crore, the surcharge will be applicable as follows –

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 If net income is in the range of If net income exceeds Rs.
Rs. 1 crore – Rs. 10 crore 10 crore
Domestic company 7%* 12%**
Foreign company 2%* 5%**

Marginal relief: a)in the case of a company having a net income of more than Rs. 1 crore, the amount
payable as income-tax and surcharge shall not exceed the total amount payable as income-tax on total
income of Rs. 1 crore by more than the amount of income that exceeds Rs. 1 crore.
b)in the case of a company having a net income of more than Rs. 10 crore, the amount payable as
income-tax and surcharge shall not exceed the total amount payable as income-tax and surcharge on
total income of Rs. 10 crore by more than the amount of income that exceeds Rs. 10 crore.

Health and Education Cess (H & EC) : 4 per cent of income-tax and surcharge.

Minimum Alternate tax (MAT) – the following rate of minimum alternate tax shall be applicable –

If book profit is below Rs. If book profit is from Rs. 1 crore If book profit is more than Rs. 10
1 crore to Rs. 10 crore crore
IT S H& Total IT SC H & Total IT SC H & Total
C EC EC EC
Domestic 18.5 - 0.74 19.2 18.5 1.295 0.791 20.5868 18.5 2.22 0.82 21.5488
Company 4 8 88
Foreign 18.5 - 0.74 19.2 18.5 0.37 0.754 19.6248 18.5 0.92 0.77 20.202
Company 4 8 5 7

Case study I:
Tax liability computed under normal provision: Rs.13 lakh,
Tax liability under MAT provision: Rs.15lakhs
(AY -2018-19)
The company is to pay Rs.15lakhs
This is not the actual tax liability, but as per provision of 115JB, the higher will be the tax
liability.
MAT credit- Rs.2lakh, Upto AY 2033-34

Case Study – II
The net profit of XYZ ted. as per statement of profit & Loss of the previous year 2018 -19 is
Rs 150 lakhs after debiting/ crediting the following items.
(i) Provision for income-tax :Rs 10 lakhs
(ii) Provision for deferred tax : Rs 5 Lakhs
(iii) Proposed Dividend : Rs 15 lakhs
(iv) Depreciation debited to profit & Loss Account is Rs. 7 lakhs. It includes
depreciation on revaluation of asset to the tune of Rs. 2 lakhs.
(v) Provision for permanent diminution in value of investment: Rs. 1 lakhs

Brought forward losses and unabsorbed depreciation as per books of the company were as
follows:

Previous year Brought forward loss (Rs. in lakhs) Unabsorbed Depreciation

(Rs. in lakhs)
2015 – 16 2 4
2016 - 17 1 2
2017 – 18 10 3

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Compute book profit of the company under section 115JB for Assessment year 2019 – 20.

Solution:
Computation of book profit of XYZ Ltd. Under section 11JB for A.Y. 2019 – 20
Rs. in lakhs
Net profit as per statement of profit and loss 150
Add: Provision for income tax 10
Provision for deferred tax 5
Proposed dividend 15
Depreciation 7
Provision for diminution in value of investment 1 38

188

Less: Depreciation (excluding depreciation on revaluation of assets) 5

Aggregate of brought forward loss [(2+1+10) lakh] or unabsorbed
Depreciation [(4+2+3)] lakh 9 14

Book profit 174

Case Study – III

CD Ltd’s profit & loss statement for the year ended 31.3.2019 shows a net profit of Rs. 50
lakhs after debiting/crediting the following items.
(i) Depreciation Rs.20 lakhs (including Rs. 2 lakhs on revaluation).
(ii) Provision for unascertained liabilities Rs. 4 lakhs.
(iii) Provision for doubtful debts Rs. 2 lakhs.
(iv) Transfer to General Reserve Rs. 7 lakhs.
(v) Amount withdrawn from Reserve created during 2017 – 18 Rs. 2 lakhs. (Books
profit was increased by the amount transferred to such reserve in Assessment year
2017 – 18)
Addl. Information:
Brought forward loss and unabsorbed depreciation as per books of accounts are Rs. 10 lakhs
and Rs. 8 lakhs respectively.
Compute minimum alternate tax under section 115JB for Assessment year 2019 – 20.

Solution:
Computation of Book Profit of CD Limited under section 115JB

Net Profit as per profit and loss account 50, 00,000

Add: Transfer to General Reserve 7, 00,000
Provision for unascertained liabilities 4, 00,000
Provision for doubtful debts 2, 00,000
Depreciation 20, 00,000 33, 00,000
83, 00,000

Less:
Amount transferred from reserve and credit to profit and loss 2, 00,000
Account [since the book profit was increased by the amount
Transferred to such reserve in the assessment year 2017-18]
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Depreciation (excluding revaluation) 18, 00,000
Loss brought forward or unabsorbed depreciation
as per books, whichever is less 8, 00,000 28, 00,000
Book profit for computation of MAT u/s 115JB 55, 00,000

Computation of minimum alternate tax (MAT) under section 11JB

18.50% of book profit (18.5% of Rs. 55 lakhs) 10, 17,500

Add: Health and education cess @4% 40,700
Minimum Alternate Tax payable under section 115JB 10, 48,200

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