This is authored by Janaki Nair a 3rd year B. A. LLB student in Symbiosis Law School Pune. The following article revolves around the impact that tax imposition would have on businesses of different capacities in India and around the world.
Taxation refers to how the Government of a particular country levies a financial charge or some other sort of levy on the citizens of the country. These citizens are known as the taxpayers and can range from individuals to established organizations and businesses. Tax is levied so that the Government is able to fund its spending and other public–oriented expenditures for the benefit of the public. It is compulsory by almost every citizen and a failure, resistance, or evasion to payment of taxes by any individual or group would result in punishment by law.
Broadly, two types of taxes are levied in India – Direct Tax and Indirect Tax.
Direct, just like the name, refers to the tax that is levied directly onto the income earned by individuals as well as corporations. Concerning direct tax, the taxpayer cannot shift it towards any other person or group, and therefore has to pay it by themselves. It is said to help reduce inflation and inequalities in society. It is called a Progressive Tax as the taxable amount increases per the income generated by the taxpayer. An example would be the infamous Income Tax of India.
Indirect tax on the other hand is the tax imposed by the Government on the sale and business of goods and services. The seller of these commodities and services can shift the burden of paying the tax to another individual or group who becomes the buyers in the transaction. However, this tax is called a Regressive Tax because it widens the gap of social inequality as everyone, regardless of their economic statuses, is supposed to pay the same amount of tax. The economic divide between the rich and the poor becomes even wider. An example would be the recently introduced Goods and Services Tax (GST) of India.
Corporation Tax on Companies
Taxation does not discriminate between people and organizations. The businesses are as responsible as the individuals are to pay their taxes in the correct time and amount to the Government. Business corporations, from the year that they start reaping profits, are liable to file their Income tax returns annually. The corresponding provision of law that deals with this topic are the Income Tax Act of 1961. Section 17 and 18 of the Act talks about the types of companies that are required to pay Income Tax annually.
Taxation based on Size of Company
However, the amount of Income-tax that is expected from each of the business corporates differs with the size of the firms. As it is based on progressive means, smaller business organizations have certain advantages over the bigger ones when it comes to paying tax annually. Smaller businesses of certain criteria are eligible for a tax known as Presumptive Taxation. According to Section 44AD of the Income Tax Act, a business with an annual turnover of less than Rs. 2 crores is said to be an ‘eligible assessee’ for this method. Under this, the eligible assessee does not have to maintain any records of accounting and does not have to audit these records. Additionally, these businesses only have to declare 8% (non – digital) or 6% (digital) of the gross receipts as taxable income to the Government.
Thus, this method was established to give some form of relief to small business owners who have lesser amounts of capital and profits to give away than their bigger counterparts. One more feature of presumptive taxation is that the taxpayers would have to pay advance tax under this scheme. However, instead of calculating the income and paying it every quarter, presumptive taxpayers can pay all of their tax before March 15th of the concerning financial year. Therefore, the major advantage that this method provides to small businesses is the huge reduction of the bureaucratic burden on the small business owner.
The country has also made enough initiatives to ensure that India is a good place for the small start–up companies to establish themselves by initiating schemes and programs such as Start-Up India, Made in India, etc. These businesses are also given an advantage through specific provisions in the Income Tax Act, 1961.
According to Section 80 of the 1961 Act, eligible businesses do not need to file any part of their profits as tax for 3 consecutive years out of a 7 – year – period. They are also free to choose which 3 years can be used for the above purpose, thus helping the business choose the 3 most profitable ones to exempt from tax payment. According to the amended Section 54GB of the 1961 Act, if any individual or HUF sells their property and gets a Long-Term Capital Gain out of the sale, then such gain will not be taxable if the consideration is used for subscribing to Equity shares of another eligible company and if the company utilizes the consideration received for acquiring assets for itself within one year of the subscription date.
To qualify as an eligible business, it needs to be:
- Incorporated as a private limited company or an LLP or as a partnership firm.
- Annual turnover should not have been less than 100 crores in any of the earlier financial years.
- a business shall be considered as a ‘start-up’ till 10 years from its date of incorporation.
Unlike their smaller counterparts, big businesses do not have many advantages when it comes to tax exemptions. According to Section 115BA, companies having a turnover of more than 400 crores would have to pay 25% of the gross profits earned in the financial year. Companies (both domestic and foreign) would have to pay or file for their income tax return either on or before 30th October every year (with the due date being extended to 30th November for Financial Year 2019-2020 because of the pandemic). According to Section 44 AA of the 1961 Act, if a company does not pay the correct amount of tax of the particular year, or if they fail to maintain proper accounts, then a fine of Rs.25,000 will be levied on them.
In conclusion, the taxation system in India can be said to be continuously developing. One of the most famous news regarding tax in India was the implementation of the Goods and Services Tax (GST) in the year 2017. GST has replaced several pre-existing tax schemes that were levied throughout the country by introducing a uniform code of tax system. The effects of it have shown both good and bad results and it can only be properly understood in the long run.
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