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Corporate Taxes are a type of tax applied on profits made by enterprises and businesses functioning in the country. The Tax Rate that applies to a company is determined by the size of its profits/taxable Income, as well as considerations including Cost of Goods Sold (COGS), Capital depreciation, and general, selling, and administrative expenditures.
Corporate tax and planning should go hand-in-hand for better cost management. Careful management of such expenses can help save money on business taxes and re duce income loss due to taxation.
The article contains a brief guide on various aspects of corporate Tax Planning.
Tax planning is an action undertaken by the taxpayers to lower the amount of tax owed to them by maximizing the use of all available allowances, deductions, exclusions, and other legal provisions. It is the examination of a financial position via the lens of taxation.
Tax planning aims to ensure that taxes are as efficient as possible. It also makes sure that all aspects of the Financial plan work together to achieve maximum tax efficiency. For fiscal effectiveness, tax planning is essential.
A corporation is a legal entity separate from its stockholders with distinct functions, rights, and responsibilities. Corporations in India are categorized into two types:
A domestic corporation has its administration and control in India and is established under the Indian Companies Acts. If a foreign company's Indian arm is wholly owned and managed within the nation, it is domestic.
A foreign corporation is based outside of India or has its operations managed and controlled outside of the country's borders.
Indian law provides a wide Range of tax-saving alternatives for taxpayers, including a vast number of exclusions and deductions via which you can reduce your overall tax burden.
Here is why proper tax planning is essential:
Minimal Litigation: There is always a conflict between the tax collector and the taxpayer. In such a case, tax payment compliance must be followed and correctly utilized to keep friction minimum.
Productivity: Channelling Taxable Income to Investment plan is one of the essential tax planning goals.
Reduction of Tax Liability: As a taxpayer, you can save the most money on your tax bill by ensuring that your business is appropriately organized and operating following the law.
Healthy Economic Growth: An Economy's growth is primarily determined by the expansion of its citizens. Tax planning forecasts the development of free-flowing white money.
Economic Stability: When a business's tax planning is done correctly, it adds to its stability.
Tax planning is of three main types, as follows:
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In India, the tax levied can either be direct or indirect. The direct tax is applicable on all types of assessments and, thus, is divided into income and corporate tax. Under the Companies Act of 2013, the registered companies must pay the corporate tax on their profit in a given financial year.
The gain that these businesses make gets taxed at a specific rate that may change as per the government's discretion.
Also known as company tax and corporation tax, corporate taxation in India is levied on foreign and domestic organizations.
A corporation refers to an entity with a separate legal identity from its shareholders and founders. The companies act of 2013 defines every company as an entity incorporated either under this act or some other company laws. These companies' income is assessed and computed differently from the individuals' income computation.
Here are the details about the corporate tax rates for various types of companies and added benefits with them:
Types of Companies | Corporate Tax Rate | Added Benefits |
---|---|---|
Companies that do not wish to claim any incentives/ exemptions | 22% + applicable surcharge and cess. 25.17% is the effective rate. | These companies do not have to pay any Alternative Minimum Tax |
Companies intending to claim incentives/ exemptions | 30% | The alternative minimum tax is reduced from 18.50% to 15% |
New Manufacturing companies | 15%, reduced from 25% (the earlier level) | These new manufacturing firms should have been incorporated before October 2019 and start their production by March 2023 |
Corporate tax is imposed on a company's net profit, which might be derived from rent, Capital Gains, interest, dividends, or the business itself. After the determination of taxable income after deductions, taxation occurs as follows:
A dividend refers to the profit distribution to the stakeholders of a company. The Dividend Distribution Tax (DDT) is charged on such profits' distribution. A corporation distributes such profit after the corporate tax deductions, and this is levied on the company's net profit.
Various companies carry Inter-corporate dividend tax planning to ensure better outcomes. The DDT is presently payable in the company's hands at the effective rate of 17.65%. It is to be removed from the financial year 2023. Thus, the current year of assessment is the last one for its applicability.
Companies should go for good tax planning before moving on to financial planning to better execute future financial activities. Here are the primary reasons why tax planning is essential:
Effective business tax planning can only be done by tax specialists who are well-versed with the local tax structure. You can also choose for tax planning using private corporations for better outcomes.
Corporate/ company tax planning is critical in assisting a company's value-added activities and strategic decisions. It aids businesses in reducing their tax burden and running their operations more smoothly and efficiently.
The primary goal of corporate tax planning for troubled corporations is to lower a company's Effective Tax Rate (ETR) to attain tax efficiency and stay competitive in its industry. Effective company tax planning is better for businesses than paying a hefty corporate tax every year.
Taking notice of deductions, exemptions, and rebates and proper administration and reporting of the organization's expenses can help reduce payable taxes. The following are examples of possible deductions:
Here are a few things you can do to save money on business taxes. These entirely depend on how the company's management plans to save money on taxes.
Many firms in the country use unorganized labour, making accurate record-keeping difficult. As a result, detailed records of overhead costs paid are required to claim deductions for labour and production costs.
While stock prices are often valued at cost, in some circumstances with shorter shelf life, it is also possible to value it at its Net Realizable Value (NRV), which can help avoid overvaluation and restrict taxable capital gains income. Significant variations in the value can lead to fraud. Therefore, this may only be appropriate in exceptional circumstances where the value remains relatively stable.
Deductions can be an effective way to control taxable revenue, and their appropriate management could be crucial for businesses wanting to save money on corporate taxes.
Here are the key aspects that lead to better and efficient tax planning results:
You could be a long-time taxpayer or a first-time payer, but if you did not correctly plan your taxes, you are likely to pay more tax than you should. The income tax provisions appear to be so complicated that the average person avoids dealing with them.
Here are some common mistakes that may worsen the situations related to income tax for you:
It is the root of all mistakes you'll make as a taxpayer. Instead of making timely investments that lead to optimal tax planning, this will eventually lead to you paying more taxes.
Many people receive phone calls from insurance firms as the end of the fiscal year approaches, urging them to purchase a tax-saving insurance policy. This isn't the best course of action.
Don't be one of those people who think tax planning begins and stops with Section 80C of the Income Tax Act of 1961, which exclusively covers investment instruments for tax savings. Explore more options for tax savings that meet your goals and needs.
A balance must be achieved between the numerous available techniques, like deductions and refunds, and innovative expenditure management to reduce corporate tax.
Understanding the cases in which these tactics are most effective can also help you maximize your company's profits while helping to achieve better income tax and corporate tax planning.