Understanding the Provisions of the Income Tax Act, 1961, Applicable to Companies

March 15, 2023

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The Income Tax Act, 1961 is the principal legislation that governs the taxation of individuals and companies in India. It lays down the rules and regulations regarding the computation of taxable income, the rates of tax applicable, deductions, and exemptions available to taxpayers, and the procedures for filing returns and paying taxes. In this blog, we will discuss the definition of a company as per the Income Tax Act, 1961, and the provisions related to it.

Table of Contents

Definition of Company:

The Income Tax Act 1961, defines a company as a “company registered under the Companies Act, 2013, or under the Companies Act, 1956.” A company can be either a domestic company or a foreign company. A domestic company is one that is incorporated in India, whereas a foreign company is one that is incorporated outside India but has a business presence in India.

Section 2(22) of the Income Tax Act, 1961, defines a company as:

“company” means –

(i) any Indian company, or

(ii) any body corporate incorporated by or under the laws of a country outside India, or

(iii) any institution, association or body which is declared by the Board to be a company for the purposes of this Act.

Classification of Companies:

Under the Income Tax Act, 1961, companies are classified as follows:

Domestic Company: A company that is incorporated in India is known as a domestic company. The income earned by such a company is taxable in India.

Foreign Company: A company that is incorporated outside India but has a business presence in India is known as a foreign company. The income earned by such a company in India is taxable in India.

Provisions related to Companies:

There are several provisions under the Income Tax Act, 1961, that are applicable to companies. Some of the key provisions are:

Tax on Income: A company is liable to pay tax on the income earned by it during the financial year. The rate of tax depends on the type of company and the amount of income earned.

Deductions and Exemptions: Companies are allowed to claim deductions and exemptions on certain expenses and investments made during the financial year. These deductions and exemptions are subject to certain conditions and limits.

Taxation of Dividends: A domestic company is required to pay a dividend distribution tax on the dividends declared or distributed to its shareholders. However, there is no such tax for a foreign company.

Taxation of Capital Gains: Capital gains earned by a company are taxable under the Income Tax Act, 1961. The rate of tax depends on the nature of the asset and the period of holding.

In addition to the provisions mentioned in the previous section, there are several other provisions under the Income Tax Act, 1961, that are applicable to companies. Some of these provisions are:

Minimum Alternate Tax (MAT): MAT is a tax that is applicable to companies that are not liable to pay tax or have paid tax at a lower rate than the prescribed rate. The MAT rate is 18.5% of book profits.
Taxation of Royalties and Fees for Technical Services (FTS): Royalties and FTS paid by a company to a non-resident are subject to tax in India. The rate of tax is 10% of the gross amount paid.
Transfer Pricing: Transfer pricing refers to the pricing of goods and services between related parties, such as a parent company and its subsidiary. The Income Tax Act, 1961, has provisions to prevent transfer pricing abuse. The law requires that the transactions between related parties be conducted at arm’s length, i.e., at a price that would be charged if the transaction were between unrelated parties.
Advance Tax: Companies are required to pay advance tax on their estimated income for the financial year. The advance tax must be paid in installments, and failure to do so may attract penalties and interest.
Taxation of Foreign Income: A domestic company that earns income from a foreign source may be liable to pay tax on such income in India, subject to certain conditions.

Conclusion:

In conclusion, a company is defined under Section 2(22) of the Income Tax Act, 1961, and is classified as either a domestic company or a foreign company. There are several provisions under the Income Tax Act, 1961, that are applicable to companies, including tax on income, deductions and exemptions, taxation of dividends, and taxation of capital gains. Companies must comply with these provisions to ensure that they are not in violation of the law and to avoid any penalties or legal action.

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Frequently Asked Questions (FAQs)

What is the definition of a company under the Income Tax Act, 1961?

The Income Tax Act, 1961 defines a company as a company registered under the Companies Act, 2013, or under the Companies Act, 1956.

What are the types of companies under the Income Tax Act, 1961?

Companies are classified as domestic companies or foreign companies under the Income Tax Act, 1961.

What is the tax rate applicable to companies under the Income Tax Act, 1961?

The tax rate applicable to companies under the Income Tax Act, 1961 depends on the type of company and the amount of income earned.

Are companies allowed to claim deductions and exemptions under the Income Tax Act, 1961?

Yes, companies are allowed to claim deductions and exemptions on certain expenses and investments made during the financial year.

What is Minimum Alternate Tax (MAT)?

MAT is a tax that is applicable to companies that are not liable to pay tax or have paid tax at a lower rate than the prescribed rate. The MAT rate is 18.5% of book profits.

What is Transfer Pricing under the Income Tax Act, 1961?

Transfer pricing refers to the pricing of goods and services between related parties, such as a parent company and its subsidiary. The Income Tax Act, 1961 has provisions to prevent transfer pricing abuse.