Chapter XIII
Taxation of companies
Case for taxing corporate profit
13.1 Companies or corporations are the most widely used and most efficient forms of doing business. They earn huge incomes. Hence, a tax on the profit of companies is considered reasonable and just. A tax on the income of companies can also be justified as a withholding tax that, in a comprehensive and timely manner, taxes the income which would otherwise flow to the shareholders.
13.2 The Code provides for taxing incomes of companies. The Code also provides for taxing dividends distributed by resident companies.
Dividend distribution tax (DDT)
13.3 In theory, all profits should be distributed as dividends to the shareholders but, in the real world, only a part of the post-tax profit is distributed to the shareholders as dividend. A tax on dividend can either take the form of a tax in the hands of the shareholder at his personal marginal rate or take the form of a tax at a flat rate upon distribution of dividend by the company. The first method of taxation has been found to be administratively cumbersome and prone to leakage. The second method is administratively simple and with no possibility of leakage. Therefore, under the Code, dividends will be taxed under the second method in respect of dividend distributed by a resident company.
13.4 A resident company will be liable to dividend distribution tax at the rate of fifteen per cent of the amount declared by way of dividends.
13.5 Once a dividend has suffered dividend distribution tax, it will be exempt in the hands of the recipient.
Minimum alternate tax (MAT)
13.6 A company would ordinarily be liable to tax in respect of its total income. However, owing to tax incentives and tax evasion, the liability on total income, in many cases, has been found to be extremely low or even zero. Therefore, internationally, a variety of economic bases and methods are used to calculate presumptive income so as to overcome the problems of tax incentives and tax evasion. For example, certain presumptions are based exclusively on the taxpayers' net wealth or on the value of the assets used in his business. Other presumptions are based on the gross receipts of the enterprise ; some others are based on visible signs of wealth. Standard assessment methods use several key factors and indices of profitability, which vary according to the activity, to determine the taxpayer's income.
13.7 Several countries have adopted minimum taxes based on a fixed percentage of the assets of a business. The economic rationale for the assets tax is that investors can expect ex-ante to earn a specified average rate of return on their assets. Therefore, it provides an incentive for efficiency. Accordingly, the Code provides for Minimum Alternate Tax calculated with reference to the "value of the gross assets". The shift in the MAT base from book profits to gross assets will encourage optimal utilization of the assets and thereby increase efficiency.
13.8 "Value of gross assets" will be the aggregate of the value of gross block of fixed assets of the company, the value of capital works in progress of the company, the book value of all other assets of the company, as on the last day of the relevant financial year, as reduced by the accumulated depreciation on the value of the gross block of the fixed assets and the debit balance of the profit and loss account if included in the book value of other assets.
13.9 The rate of MAT will be 0.25 per cent. of the value of gross assets in the case of banking companies and 2 per cent. of the value of gross assets in the case of all other companies.
13.10 Under the Code, MAT will be a final tax. Hence, it will not be allowed to be carried forward for claiming tax credit in subsequent years.
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