Entrepreneurs and businesses aiming for substantial growth often favour private limited company registration as their corporate structure. Managed by a select group of individuals, private limited companies are registered under the Indian Companies Act of 2013, solidifying their status as corporate entities. The Ministry of Corporate Affairs supervises these companies, owned by a collective of individuals called shareholders. In this blog, we shall see the specific benefits of corporate tax for private limited companies in India.
Understanding Private Limited Company Tax
Before going into the benefits of Corporate Tax for Private Limited Companies, let us first understand the tax structure for these companies. Private limited companies have the responsibility to pay taxes to the government. Taxation for these companies is overseen by both state and federal authorities. To simplify and improve the taxation process, these governing bodies have implemented different policy changes. One noteworthy change is the introduction of the GST registration, which has significantly simplified the tax structure for private limited companies.
Understanding Company Taxes in India
In India, taxes imposed on businesses fall into two primary categories: direct and indirect taxes. These taxes affect various types of taxpayers, each regulated by the income tax agency.
Direct Taxes
Direct taxes are further categorised into:
1. Income Tax – For individuals, an income tax is mandatory on their earnings. The tax rate depends on the level of income earned by the individual.
2. Corporate income tax – This applies to both domestic and foreign businesses functioning in India. CIT undergoes periodic rate adjustments in the union budget and is levied at a specified rate outlined by the Income Tax Act. This tax rate is distinct from individual income tax and applies specifically to corporate entities. We shall see the benefits of corporate tax for private limited companies here.
Understanding Taxation Structures for Corporations
Taxation of corporations in India plays a significant role in the financial scenario. Corporations, having a distinct legal identity apart from their shareholders, adhere to corporate tax regulations as specified in the Income Tax Act. These regulations vary for domestic and international businesses operating within India.
Domestic Corporations
Under the Indian Companies Act, domestic entities comprise businesses registered in India. These entities, whether private or public, are taxed on their entire income, which includes all earnings made within India. This comprehensive taxation covers all their generated income and is governed by provisions of IT Act.
Foreign Corporations
Businesses operating and managed outside India, not registered under the Indian Companies Act, are classified as foreign corporations. Unlike domestic entities, foreign corporations are solely taxed on the income they generate within India. They aren’t taxed on their global income, resulting in a more restricted tax liability scope.
What are the Benefits of Corporate Tax for Private Limited Companies?
Private Limited Companies in India can take advantage of various tax benefits to optimise their financial performance. These benefits of corporate tax for private limited companies encompass a range of strategies and practices to reduce tax liabilities. Some key areas of benefits of Corporate Tax for Private Limited Companies include:
1. Founders’ or Directors’ Salaries:
· Company owners and administrators aim to maximise profits. Founders or directors can receive their share of profits in predetermined profit-sharing proportions, such as dividends.
· Directors may opt to receive their profits as salaries instead of dividends, which can lead to tax savings. The salaries paid to founders or directors are considered a legitimate business expense.
2. Director’s Sitting Fees:
Private Limited Companies can charge directors attendance fees for board meetings, provided they do not exceed Rs. 1,000,000, and the Board of Directors (BOD) approves the amount.
3. Initial Costs:
Initial costs related to incorporation, including stamp duty, registrar fees, and fees for establishing Articles of Association and Memorandum of Association, can be used to reduce the company’s tax liability when proper documentation is maintained.
4. Rent Expenses:
Rent for a director’s or relative’s residence can be recorded as a legitimate expense if it serves as the physical address of the company. This allows for the deduction of rental expenses without the need to report the residence to tax authorities.
5. Capitalisation of Capital Assets and Depreciation:
Depreciation of assets that have reached the end of their useful life can be treated as an expense on the balance sheet, extending tax benefits over multiple fiscal years.
6. Family Members’ Salaries:
When family members contribute to the business, their salaries or assistance should be recorded as legitimate expenses. This reduces the company’s taxable income, indirectly benefiting shareholders.
7. Entertainment Expenses:
Business-related entertainment costs, such as hosting events for family or business associates, can be considered legitimate expenses. These expenses can lead to tax savings, with a flat discount of 30% on top of the actual VAT rate.
8. Director’s Vehicle Expenses:
Vehicle expenses incurred during business meetings and trips, including gasoline, maintenance, and repairs, can be included in the list of business expenses. With proper preparation and documentation, tax savings ranging from 22% to 30% can be achieved.
Utilising these benefits of Corporate Tax for Private Limited Companies can help optimise their financial performance and reduce their overall tax burden, ensuring more efficient financial management.
Income Tax Return for Private Limited Companies in India
In India, private limited companies are required to file income tax returns in compliance with the established tax regulations. The specific form to be filed depends on the company’s legal structure and business activities. Private limited companies fall under the following category:
Form ITR 6: Private limited companies, limited liability companies, and businesses with a single owner that are engaged in profitable operations must file Form ITR 6. This form is designed to cater to the unique tax reporting requirements of corporate entities.
Final Thoughts
The benefits of corporate tax for private limited companies in India are manifold. The advantages of a private limited company encompass liability protection, smooth ownership transfer, and capital accessibility via equity shares. Yet, one of its major advantages lies in the benefits of Corporate Tax for Private Limited Companies in India. Private limited companies can enjoy lower tax rates and diverse opportunities for tax savings. This includes deductions for business expenses and asset depreciation.
Furthermore, the option to compensate founders and directors through salaries instead of dividends can result in considerable tax savings. These tax benefits not only foster business expansion and resilience but also support the overall economic development of the nation by fostering entrepreneurship and encouraging investment in the corporate sector.
