IIM-R - Business Taxes Lecture 13 & 14

BUSINESS TAXES
Lecture 13 & 14
Prof (Dr) Naveen Sirohi

Indian Institute of Corporate Affairs
About Me
A banker-turned-academician, Prof (Dr) Naveen Sirohi is the Founding Head of School of Finance &
Management at Indian Institute of Corporate Affairs (IICA), a think tank of the Government of India.
Possessing a unique blend of 20+ years of experience across corporate, academia and
government, he is contributing to the success of the corporate sector in India through the mandate of
capacity building, education, research and consultancy. After holding various managerial positions in the
banking industry across both public and private banks, he moved to academia and is now contributing
to provide academic and administrative leadership to the School. He has conducted 100+
Executive Education Programmes catering to more than 5000 corporate executives and government
officials on contemporary financial and leadership themes across levels (induction, middle and top
management) and across geographies (India and abroad).
Dr Sirohi is the Director of Forum of Indian Regulators (FOIR) Centre at IICA which is the knowledge, research and capacity building
hub for the Central and State Government regulators in India. He is also Founding HoD of two centres of excellence focussed on
regulatory governance and ADR (Mediation & Arbitration). He is also providing support to various priority initiatives of Government
of India like financial literacy, financial inclusion and financial reporting working closely with concerned government bodies/departments
like IEPFA, IPPB, NFRA. He contributed inputs and was acknowledged for the same in the Economic Survey 2021-22. He is also handling
the additional charge of Chief Financial Officer (CFO). Prof Sirohi is a visiting faculty in reputed institutions and has taken
sessions at National Centre for Good Governance (NCGG) at Lal Bahadur Shastri Academy of Administration (LBSNAA), National Institute of
Communication Finance (NICF), Indira Gandhi National Forest Academy (IGNFA), Gujarat National Law University (GNLU), Investor Education
and Protection Fund Authority (IEPFA), Department of Posts – Government of India, NTPC Power Management Institute, BHEL etc.
March 2024 Prof Naveen Sirohi, PhD 2

Topics to be Covered
• Corporate Taxation
• Type of Companies for Taxation Purpose
• Place of Effective Management (POEM)
• Incidence of Tax
• Minimum Alternate Tax
• Dividend Tax
• Alternative Tax Regime
• Penalties

Corporate Income Tax (CIT)
• The income-tax paid by domestic companies, and foreign companies on their income in India is
corporate income-tax (CIT).
• The CIT is at a specific rate as prescribed by the income tax act subject to the changes in the
rates in the union budget every year.
Income of a Company
• Profits earned from the business
• Capital Gains
• Income from renting property
• Income from other sources like dividend, interest etc.

Types of Companies for Taxation Purpose
Section 2(17) - who is a "company"?
• any Indian company; or
• any body corporate incorporated under the laws of a foreign country; or
• any institution, association or a body which is assessed or was assessable/assessed as a
company for any assessment year commencing on or before April 1, 1970; or
• any institution, association or a body, whether incorporated or not and whether Indian or non-
Indian, which is declared by general or special order of the CBDT to be a company.

Section 2(16): an Indian Company means a company formed and registered under the Companies Act,
1956. Besides, it includes the following;
• a company formed and registered under any law relating to companies formerly in force in any part of
India other than State of Jammu and Kashmir and the UTs specified in (e) infra; or
• a corporation established by or under a Central/State/Provincial Act; or
• any institution, association or a body which is declared by the Board to be a company under section
2(17); or
• a company formed and registered under any law in force in the State of Jammu and Kashmir;
• a company formed and registered under any law for the time being in force in the UTs of Dadar and
Nagar Haveli, Goa, Daman and Diu and Pondicherry.
• A company, corporation, institution, association or body as above mentioned is treated as an Indian
company only if its registered office is in India.

Domestic | Foreign | Investment | Widely-held | Closely-held
Domestic Company - an Indian company or any other company which has made prescribed
arrangements for the declaration and payment of dividends with Indian in accordance with
section 194.
Foreign Company - a company which is NOT a domestic company.
Investment Company - a company whose gross total income consists mainly of income
chargeable under the heads "Income from house property", "Income from capital gains", and
"Income from other sources".
Widely-held Company - a company in which public are substantially interested.
Closely-held Company - a company in which public are NOT substantially interested.

Section 2 (18) - Company in which the public are substantially interested
• Owned by Government/RBI: not less than 40 percent shared held;
• Section 25 of the Companies Act 1956 or Section 8 of the Companies Act 2013
• A company declared by the CBDT
• Mutual benefit finance company, whose principal business is acceptance of deposits from its
members and which has been declared by CG to be a Nidhi or a Mutual Benefit Society.
• A company with at least 50% or more equity is held by one or more co-operative societies
• A Public Ltd. Company: If it is not a private company as per CA 2013 and fulfils either of the
following two conditions:
(a) Its equity shares were listed on a recognized stock exchange, as on last day of the relevant previous year; or
(b) Its equity shares carrying at least 50% of the Voting power (in the case of an industrial company, the limit is 40%)
were beneficially held throughout the relevant previous year by Government or a statutory corporation or a
company in which the public are substantially interested or a wholly owned subsidiary of such a company.

Residential Status and Taxation of Companies
The residential status of the company is determined either
• on the basis of its incorporation (Registration ) ; or
• on the basis of the control and management of its affairs.
On the basis of Residential Status, companies can be classified in to two categories

• Resident Companies
• Non Resident Companies.

A company is said to be a resident in India in any previous year, if—
(i) it is an Indian company; or
(ii) its place of effective management, in that year, is in India.
Explanation — For the purposes of this clause "place of effective management" means a place where
key management and commercial decisions that are necessary for the conduct of business of an entity as
a whole are, in substance made.
Important – In order to determine the residential status of the company, the residential status of its
directors or key management personnel (KMP) is not relevant.
It may be possible that the directors of the company are residents of India but the company is controlled
from a place outside India and consequently, the firm is a non-resident in India

Section
6(3)
1. An Indian company is always resident in India. Even if an Indian company is controlled from a place located outside India (or even if shareholders of an
Indian company controlling more than 51 per cent voting power are non-resident and/or located outside India), the Indian company is resident in
India. An Indian company can never be non-resident.
2. A foreign company is resident in India if its place of effective management (POEM), during the relevant previous year, is in India. For this purpose, the
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.
3. Provisions of section 6(3)(ii) shall not apply to a foreign company having turnover or gross receipts of Rs. 50 crore or less in a financial year – Circular
No. 8/2017, dated February 23, 2017. In other words, a foreign company (whose annual turnover/gross receipts is Rs. 50 crore or less) cannot be
resident in India from the assessment year 2017-18 onwards.

Place of Effective Management as per Circular 6/2017
• “Place of effective management” (POEM) is an internationally recognised test for
determination of residence of a company incorporated in a foreign jurisdiction.
• Any determination of the POEM will depend upon the facts and circumstances of a given case.
• The POEM concept is one of substance over form.
• An entity may have more than one place of management, but it can have only one place of
effective management at any point of time.
• Since “residence” is to be determined for each year, POEM will also be required to be
determined on year to year basis.
• The process of determination of POEM would be primarily based on the fact as to whether or
not the company is engaged in active business outside India.

Company engaged in active business outside India
• The place of effective management in case of a company engaged in active business outside
India shall be presumed to be outside India if the majority meetings of the board of directors
of the company are held outside India.
• Active business outside India – A company shall be said to be engaged in “active business
outside India” if –
(a) the passive income is not more than 50 per cent of its total income;
(b) less than 50 per cent of its total assets are situated in India;
(c) less than 50 per cent of total number of employees are situated in India or are
resident in India; and
(d) the payroll expenses incurred on such employees is less than 50 per cent of its total
payroll expenditure.

Company engaged in active business outside India
Passive income
“Passive income” of a company shall be aggregate of, —
(a) income from the transactions where both the purchase and sale of goods is from/to its
associated enterprises; and
(b) income by way of royalty, dividend, capital gains, interest or rental income;
However, any income by way of interest shall not be considered to be passive income in case of a company
which is engaged in the business of banking or is a public financial institution, and its activities are
regulated as such under the applicable laws of the country of incorporation.

The determination of POEM would be a two stage process, namely –
1. First stage would be identification or ascertaining the person or persons who actually make
the key management and commercial decision for conduct of the company’s business as a
whole.
2. Second stage would be determination of place where these decisions are in fact being made.
The place where these management decisions are taken would be more important than
the place where such decisions are implemented.

Guiding Principles / Important Points
1. The location where a company’s Board regularly meets and makes decisions may be the
company’s place of effective management provided, the Board –
(a) retains and exercises its authority to govern the company; and
(b) does, in substance, make the key management and commercial decisions necessary for
the conduct of the company’s business as a whole.
2. If a board delegates the authority to make the key management and commercial decisions
for the company to the senior management or any other person including a shareholder,
promoter, strategic or legal or financial advisor, or a committee etc., and does nothing more
than routinely ratifying the decisions made, the company’s place of effective management
will ordinarily be the place where these senior managers or other person make the decisions.
3. The location of a company’s head office will be a very important factor in the determination of
the company’s place of effective management because it often represents the place where
key company decisions are made.
4. Day to day routine operational decisions undertaken by junior and middle management shall
not be relevant for the purpose of determination of POEM
5. The fact that a foreign company is completely owned by an Indian company will not be
conclusive evidence that the conditions for establishing POEM in India have been satisfied.
6. The fact that there exists a Permanent Establishment of a foreign entity in India is itself not a
7. The fact that one or some of the directors of a foreign company reside in India is itself not a
8. The fact of, local management being situated in India in respect of activities carried out by a
foreign company in India will not, by itself, be conclusive evidence that the conditions for
establishing POEM have been satisfied.
9. Existence in India of support functions that are preparatory & auxiliary in character will not be

Case Study 1
Laproz Ltd. is an Indian company. It has 10 shareholders who are foreign citizens and non-resident
in India. The business of the company is fully controlled from outside India. Find out the
residential status of Laproz Ltd.
• Laproz Ltd. is an Indian company.

• An Indian company is always resident in India.
• This rule is equally applicable even if shareholders are foreign citizens as well as non-resident
or even if business is controlled from outside India.

Case Study 2
Y Ltd. is a company incorporated in Mauritius (turnover more than Rs. 50 crore). It has 10
shareholders who are Indian citizens and resident in India. The company has active business
outside India and is controlled wholly from outside India by a team of professionals. What is the
residential status of Y Ltd.
• Y Ltd. is a foreign company.

• It is controlled wholly from outside India (POEM is outside India).
• It is, therefore, non-resident in India.
• Residential status of shareholders is irrelevant.
• Likewise, the nationality of shareholders is not taken into consideration.

Case Study 3
Z Ltd. is incorporated in Japan. It has 15 shareholders (10 are Indian citizens and resident in
India). The company has no active business in Japan. Gross annual turnover of the company for
the previous year 2021-22 is Rs. 48 crore mainly from operations conducted from Korea, Sri Lanka
and India. The company is managed by a team of professionals from India. Find out the
residential status of Z Ltd.
• Z Ltd. is a foreign company.

• Gross turnover of the company for the relevant previous year is Rs. 48 crore.
• A foreign company (whose turnover/gross receipts is not more than Rs. 50 crore) is treated as
non-resident in India.

Case Study 4
An Indian multinational group has a local holding company A Ltd. in Singapore. A Ltd. also has 100 per
cent downstream subsidiaries B Ltd. and C Ltd. in Hong Kong and D Ltd. in Cyprus. A Ltd. has income
only by way of dividend and interest from investments made in its subsidiaries. The POEM of A Ltd. is in
India and is exercised by ultimate parent company of the group. B Ltd., C Ltd. and D Ltd. are engaged in
active business outside India. The meetings of Board of Director of these companies are held in Hong
Kong and Cyprus. Find out the residential status of B Ltd., C Ltd. and D Ltd.
• Merely because POEM of A Ltd. (i.e., intermediate holding company) is in India, the POEM of its
subsidiaries shall not be taken to be in India.
• Each subsidiary has to be examined separately.
• B Ltd., C Ltd. and D Ltd. are independently engaged in active business outside India and majority of
board meetings of these companies are also held outside India.
• The POEM of these companies shall be presumed to be outside India.

Incidence of Tax
Section 5 - Incidence of tax on a taxpayer depends on his residential status and also on the place and
time of accrual or receipt of income.
Indian Income - Any of the following three is an Indian income —
1. If income is received (or deemed to be received) in India during the previous year and at the same
time it accrues (or arises or is deemed to accrue or arise) in India during the previous year.
2. If income is received (or deemed to be received) in India during the previous year but it accrues (or
arises) outside India during the previous year.
3. If income is received outside India during the previous year but it accrues (or arises or is deemed to
accrue or arise) in India during the previous year.
Foreign Income – If the following two conditions are satisfied, then such income is “foreign income” —
1. income is not received (or not deemed to be received) in India; and
2. income does not accrue or arise (or does not deemed to accrue or arise) in India.

Incidence of Tax

Minimum Alternate Tax (MAT)
ZERO TAX COMPANIES
• Projects in SEZs,
• Tax waivers in certain sectors/geographies,
• Other admissible expenses against net income:
• Skill development projects (150%)
• Agricultural extension projects (150%)
• Scientific research (in certain cases, up to 200%)
• u/s 32AC for investment in new plant and machinery
• u/s 32AD for investment in notified backward areas in India

Minimum Alternate Tax (MAT)
• Companies used to pay no taxes despite earning profits, using loopholes / government schemes and
policies; government wasn't earning tax revenues as expected
• First introduced in 1987
• Repealed in 1990
• Re-introduced in 1997
• u/s 115JB of the Income Tax Act 1961
• Companies required to pay, deeming a certain percentage of their book profits as taxable income.

Objectives of MAT
• At times, it may happen that a profit-making corporate taxpayer take advantage of various provisions
of Income-tax Law (such as exemptions, deductions, depreciation, etc.) may reduce its tax liability or
may not have paid any tax at all.
• Due to increase in the number of zero tax paying companies, MAT introduced by the Finance Act,
1987, with effect from assessment year 1988-89.
• Later, withdraws by the Finance Act, 1990, and then re-inducted w.e.f. 01-04-1997.
Objective
• To bring into the tax net "zero tax companies which in spite of having earned substantial book profits
and having paid handsome dividends, do not pay any tax due to various tax concessions and
incentives provided to them under the IT laws.

Non-Applicability of MAT
• MAT is non-applicable to
1. Life Insurance Companies
2. Shipping companies that have opted for the Tonnage Tax Scheme
3. Developer of SEZ
4. Units under SEZ
5. Certain foreign companies

Computation of MAT
• As per the concept of MAT, the tax liability of a company will be higher of the following:
• Tax liability of the company computed as per the normal provisions of the Income-tax Law, i.e., tax
computed on the taxable income of the company by applying the tax rate applicable to the company.
Tax computed in above manner can be termed as normal tax liability.
• Tax computed at the rate of 15% (plus surcharge and cess as applicable) on book profit – known as
MAT.
• Note: MAT is levied at the concessional rate of 9% (plus surcharge and cess as applicable) in case of a
company, being a unit of an International Financial Services Centre (GIFT city, Gujarat) and deriving
its income solely in convertible foreign exchange.
• Book Profit is calculated from Net Profit calculation as per Schedule III after making few positive and
negative adjustments

MAT Example
The taxable income of Essem Minerals Pvt. Ltd. computed as per the provisions of Income-tax Act is Rs.
8,40,000. Book profit of the company computed as per the provisions of section 115JB is Rs. 18,40,000.
What will be the tax liability of Essem Minerals Pvt. Ltd. (ignore cess and surcharge) ?
• The tax liability of a company will be higher of: (i) Normal tax liability, or (ii) MAT.
• Normal tax rate applicable to an Indian company is 30% (plus cess and surcharge as applicable). Tax
@ 30% on Rs. 8,40,000 will amount to Rs. 2,52,000 (plus cess).
• Book profit of the company is Rs. 18,40,000. MAT liability (excluding cess and surcharge) @ 15% on
Rs.18,40,000 will come to Rs. 2,76,000.
• Thus, the tax liability of Essem Minerals Pvt. Ltd. will be Rs. 2,76,000 (plus cess as applicable) being
higher than the normal tax liability.

Computation of Tax Liability

MAT Credit
• As discussed earlier, a company has to pay higher of normal tax liability or MAT amount.
• If in any year the company pays liability as per MAT, then it is entitled to claim credit of MAT paid over
and above the normal tax liability in the subsequent year(s).The provisions relating to carry forward
and adjustment of MAT credit are given in section 115JAA.
Adjustment of Carry Forward MAT Credit:
• A company is entitled to claim MAT credit i.e. excess of MAT paid over the normal tax liability.
• The credit of MAT can be utilised by the company in the subsequent year(s).
• The credit can be adjusted in the year in which the liability of the company as per the normal
provisions is more than the MAT liability to the extent of the difference between the tax on its total
income as per the normal provisions and as per the MAT provisions.
• MAT credit can be carried forward only for a period of 15 years after which it will lapse.
• No interest is paid to the taxpayer in respect of such credit.

MAT and AMT
• MAT stands for Minimum Alternate Tax
• AMT stands for Alternative Minimum Tax
• Motive behind both is same.
• But the application is different.
• The primary difference is that MAT is levied on companies while AMT is levied on Individual, HUF,
AOP, BOI (whether incorporated or not), and Artificial Judicial Persons having the Adjusted Total
Income exceeding Rs 20 Lakhs
• In simpler words, MAT is applicable only on corporate taxpayers, whereas AMT is applicable to non-
corporate taxpayers.

Alternative Tax Regime (ATR)
Who is covered?
• Individual
• HUF
• AOP / BOI / AJP
• AMT is a minimum tax that is leviable alternative to normal tax. Rate of AMT is 18.5% of adjusted
total income (plus applicable surcharge and cess).
• If the person is a unit located in an International Financial Services Centre (IFSC) and receives income
solely in convertible foreign currency, the AMT rate will be 9%.
• From AY 2023-24, the rate of AMT is reduced from 18.5% to 15% in case of co-operative society.
• AMT is a tax levied on ‘adjusted total income’ in a FY wherein tax on normal income is lower than
AMT on Adjusted total income. So, irrespective of normal tax, AMT has to be paid by taxpayers to
whom AMT provisions apply.
Dividend Tax
• Section 115O of the Income Tax Act, 1961 is applicable to domestic companies that have declared or
distributed dividends.
• The section states that domestic companies are required to pay a dividend distribution tax (DDT) on
the amount of dividend distributed to its shareholders.
• The DDT is paid by the company and not by the shareholders.
• It was repealed under the Finance Act 2020. Indian corporations are no longer required to pay DDT
on dividends to shareholders. Instead, shareholders will be taxed on dividends based on their
individual tax brackets.

Penalties
• An assessee has been made liable to penalty for the different defaults committed by him under the
different provisions of the IT Act.
• Most common / important penalties cover:
• Default in making payment of tax
• Under-reporting of income
• Failure to maintain books of accounts and other documents
• Audit and Audit Report
• Penalty for false entry such as fake invoices
• Undisclosed income
• Penalty for using modes other than Account payee cheque/ draft/ ECS
• Failure to furnish statements/ information
• Related to Search in respect of undisclosed Income
• Failure to comply on Notice/Summon etc.
Penalties
MENS REA
• Mens rea is evil intention or knowledge of the wrongfulness of the act that a person commits.
• It is said to be present if a person does something incorrectly deliberately knowing that his action is
against law.
• In other words, the person has a guilty mind in committing the relevant act.
• The burden of proof that ‘unlawful act has been done without reasonable cause’ lies with assessee.

THANK YOU
Email: prof.sirohi@gmail.com
You can connect with me on LinkedIn

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BUSINESS TAXES

Prof (Dr) Naveen Sirohi

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On the basis of Residential Status, companies can be classified in to two categories

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• Laproz Ltd. is an Indian company.

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• Y Ltd. is a foreign company.

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• Z Ltd. is a foreign company.

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IIM-R - Business Taxes Lecture 13 & 14

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