Unit 4: Corporate Tax
Computation of Taxable Income
Taxable income is the total income on which income tax is calculated after considering all exemptions, deductions, and losses.
Steps to Compute Taxable Income
| Step | Explanation |
|---|---|
| Step 1: Calculate Gross Total Income (GTI) | Sum of income under all heads: 1. Salary 2. House Property 3. Business/Profession 4. Capital Gains 5. Other Sources |
| Step 2: Deduct Exemptions & Allowances | HRA, transport allowance, PPF interest, etc., as per Sec 10 |
| Step 3: Adjust for Business/Other Expenses | Deduct allowable business expenses, depreciation, etc. |
| Step 4: Consider Set-off & Carry-forward Losses | Adjust current year income with past losses where permissible |
| Step 5: Apply Deductions under Sec 80 | 80C (Investments), 80D (Insurance), 80G (Donations), etc. |
| Step 6: Arrive at Taxable Income | Gross Total Income − Deductions = Taxable Income |
Example:
-
Gross Income: ₹12,00,000
-
Exemptions & allowances: ₹1,50,000
-
Deduction under 80C: ₹1,50,000
-
Taxable Income: 12,00,000 − 1,50,000 − 1,50,000 = ₹9,00,000
Carry-forward and Set-off of Losses (Companies)
Companies can adjust losses from one head of income against profits of another head in the same year (set-off) or future years (carry-forward) as per Income Tax Act rules.
Set-off of Losses
| Type | Explanation |
|---|---|
| Intra-head set-off | Loss from one source of a head adjusted against profit from another source of the same head (e.g., loss from one property vs. gain from another property) |
| Inter-head set-off | Loss from one head adjusted against income from another head (subject to restrictions, e.g., capital loss cannot be set off against salary) |
Carry-forward of Losses
| Type | Explanation & Period |
|---|---|
| Business Losses | Can be carried forward for 8 assessment years; subject to continuity of ownership rules |
| Capital Losses (Long-term) | Can be carried forward for 8 assessment years; adjusted only against capital gains |
| Speculation Loss | Can be carried forward for 4 years; adjusted against speculation profits |
Example
- Company A has business loss of ₹5,00,000 in FY 2024-25.
- If it has profit of ₹2,00,000 in FY 2025-26, it can set-off ₹2,00,000 and carry forward ₹3,00,000 for future years.
Minimum Alternative Tax (MAT)
MAT is a minimum tax payable by companies under the Income Tax Act if their regular income tax liability is lower than a prescribed percentage of book profits. It ensures that profitable companies pay at least a minimum tax.
Key Features
| Feature | Explanation |
|---|---|
| Applicability | Companies claiming deductions and exemptions may be liable for MAT |
| MAT Rate | Currently around 15% of book profits (plus surcharge & cess) |
| Book Profits | Calculated as per Companies Act, adjusted for certain items (e.g., deferred tax, prior year losses) |
| MAT Credit | MAT paid can be carried forward for 15 years and set-off against regular tax when it exceeds MAT liability |
Example
- Book profits: ₹10,00,000
- MAT @15%: ₹1,50,000
- Regular income tax: ₹1,00,000
- MAT payable: ₹1,50,000 (higher of regular tax or MAT)
- Excess MAT of ₹50,000 can be carried forward to set off against future tax liability.
Summary Table
| Concept | Key Points / Rules |
|---|---|
| Computation of Taxable Income | GTI − Exemptions − Deductions − Loss Adjustments = Taxable Income |
| Set-off of Losses | Intra-head & inter-head adjustments against current year income |
| Carry-forward of Losses | Business (8 yrs), Long-term capital (8 yrs), Speculation (4 yrs) |
| MAT | Minimum tax on book profits @15%; MAT credit can be carried forward 15 yrs |
In Short
Companies must compute taxable income after exemptions, deductions, and losses, and pay either regular tax or MAT, whichever is higher.
Proper planning of carry-forward & set-off of losses and MAT credit utilization is crucial for tax efficiency and compliance.
Set-off and Carry-forward of Amalgamation Losses
Amalgamation occurs when one or more companies merge into another company or form a new company. Special tax provisions allow carrying forward and setting off losses under certain conditions.
Key Points
| Type of Loss | Set-off / Carry-forward Rules |
|---|---|
| Business Losses | Losses of the amalgamating company can be carried forward and set off by the amalgamated company only if the same business is continued. |
| Unabsorbed Depreciation | Can be fully carried forward regardless of business continuity. |
| Speculative Loss | Allowed to be carried forward if conditions of Sec 72A / Sec 72AA are met. |
| Conditions | - Amalgamation must be as per Companies Act provisions - Shareholders continuity requirement must be satisfied (e.g., 3/4th of shareholders of transferor company hold shares in transferee company) |
Example Company A merges with Company B; Company A has a business loss of ₹10,00,000.
- If Company B continues the same business, loss can be set off against future profits of Company B.
- Unabsorbed depreciation of ₹2,00,000 can also be carried forward without restriction.
Tax Planning for Amalgamation, Merger, and Demerger
Objective: Tax planning aims to minimize tax liability and optimize post-merger financial structure while complying with the Income Tax Act.
Key Considerations
| Transaction | Tax Planning Approach |
|---|---|
| Amalgamation / Merger | - Ensure conditions under Sec 2(1B) and Sec 72A / 72AA are met - Plan for set-off of losses and carry-forward of unabsorbed depreciation - Issue shares to shareholders to satisfy continuity clause |
| Demerger | - Must satisfy Sec 2(19AA) conditions - Assets and liabilities should be transferred without immediate tax liability - Ensure capital gains and business loss treatment is optimized |
| Shareholder Consideration | Tax-free exchange of shares may be structured under Sec 47(viia) / 47(xiiib) |
Example
- XYZ Ltd. transfers a division to ABC Ltd. in a tax-neutral demerger.
- Shareholders of XYZ receive shares of ABC, and capital gains are exempted under Sec 47(xiiib).
Tax Provisions for Venture Capital Funds (VCFs)
Venture Capital Funds invest in start-ups and unlisted companies. Tax provisions are designed to encourage investment in high-risk ventures.
Key Features
| Feature | Provision |
|---|---|
| Tax Exemption for Fund | Income of VCF from long-term capital gains on investments in eligible start-ups is exempt from tax under Sec 10(23FB). |
| Pass-through Benefits | Gains may be passed to investors under specified conditions. |
| Investment Period | Must hold shares for a minimum period (usually 3 years) to qualify for long-term capital gains exemption. |
| Eligibility | - Must be registered with SEBI as a VCF - Invest in eligible start-ups or venture capital undertakings (VCUs) |
Example:
- A VCF invests ₹50 lakhs in a start-up and sells shares after 4 years at ₹1 crore.
- Long-term capital gains of ₹50 lakhs are exempt from tax under Sec 10(23FB).
Summary Table
| Aspect | Key Rules / Provisions |
|---|---|
| Set-off & Carry-forward of Losses | Allowed if business continuity and shareholder continuity conditions are met; unabsorbed depreciation fully allowed |
| Tax Planning for Amalgamation / Merger | Ensure Sec 2(1B), 72A, 47 conditions are satisfied; minimize tax on transfer of assets and shares |
| Tax Planning for Demerger | Tax-neutral restructuring; capital gains exemption under Sec 47(xiiib); continuity of business essential |
| Venture Capital Funds | Income exempt under Sec 10(23FB); registered with SEBI; long-term investment; gains passed to investors |
In Short
- Proper tax planning during amalgamation, merger, and demerger ensures losses can be utilized, capital gains are minimized, and shareholder benefits are maximized.
- Venture Capital Funds enjoy tax incentives to promote investment in start-ups, encouraging innovation and economic growth.