Tax is a major expense for any business. Every entrepreneur wants to save on tax to the best possible way. Tax planning is also a way of managing finances. This means tax planning is to lower taxable income, increase deductions, investments in tax-free instruments, etc.
Tax planning helps to increase savings, diversion of funds into more productive business, meet financials goals timely, etc.
Since there are various functions to handle in a business, managing all of them effectively may be difficult. Tax is one of the most important parts of these functions. ‘Profit after tax’ is usually the metric for investors. Hence, minimizing tax outflow is of key importance.
How FileAbhi.Com can help?
Our team of professionals are experienced with tax planning strategies. They will help you save on taxes based on personalized needs.
Along with tax planning strategy, we make sure that you are tax compliant as well. Contact us to save your efforts and energy and have a focused tax planning strategy.
Also Know: GST Services of FileAbhi
Tax planning strategies for corporates
1. Payments liable to Tax Deduction at Source (or ‘TDS’)
Tax Deduction at Source is a mechanism implemented by the government to collect tax at the source point. Under the Act, a buyer is required to deduct tax when payment is made. Many payments are liable to TDS. These taxes are deducted on behalf of the seller.
The seller receives the credit for these taxes. In case the buyer does not deduct tax as required, then the specific payment is not allowed as a deduction while computing business income. This may result in higher taxes in the hands of buyers due to non-compliance.
For example, if a company makes a payment of Rs 2 lakhs as a commission to a resident agent. But it does not deduct the tax @ 10%. 30% of Rs 2 lakhs is disallowed as a deduction while computing business income under the Act. This will increase the taxable income of the company and will increase the tax liability.
Accordingly, it is recommended to regularise the payments where TDS is required to avoid tax burden.
2. Claim of maximum depreciation
Depreciation is allowed as a deduction while computing taxable income. However, the calculation had to be as per the provisions of the Act.
Depreciation is a very important deduction since it is a non-cash expense. There is no actual outflow of cash, however, one can claim it as an expense. Under the Act, different depreciation rates can be claimed on different assets.
There are provisions where manufacturing companies are eligible for more depreciation on satisfaction of certain conditions. This will help to reduce the tax burden.
For example, if a company purchases new machinery in Bihar, it can claim a deprecation of 35% along with a normal deprecation of 15%.
FileAbhi's team can help you out in saving taxes along with keeping the compliance intact. You can hire our services.
3. Digital Transactions
India is moving towards a digital economy. Likewise, our regulations have also become strict. Various changes have been made in the Act to encourage digital payments and receipts.
One such provision is the disallowance of a cash payment of more than Rs, 10,000 in a single day to a single person as per Section 40A(3) of the Income Tax Act 1961. There are exceptions to this provision. However, one must be careful to avoid cash transactions in day-to-day business activities.
For example, if a company pays Rs 12,000 to an employee in cash in a single day, then that payment will not be allowed as a deduction.
A single transaction may not affect a company’s tax liability, but multiple such transactions may increase tax.
Small business owners can pay tax at a lower rate under section 44AD of the Income Tax Act, 1961 if 95% of their receipts are through digital means.
4. Startup India
In the last couple of years, the government has promoted the startup culture in India. Some conditions must be fulfilled to be a ‘Startup’ (Startup India initiative, launched in 2016). There are various provisions under the Act providing benefits to startups and their investors.
Before setting up a new entity, one must evaluate if they can be an eligible startup to avail the tax benefits.
You can hire FileAbhi's Startup India Services and get funding and kick start your business. Startup India Registration.
5. Transfer pricing
Transfer pricing is usually applicable to a mutinational corporate group having business in various jurisdictions. Transfer price is a price charged by the seller entity from its associated buyer entity. The fundamental principle of a transfer price is that it has to be an arms-length price.
All the inter-corporate transactions subject to transfer pricing should be undertaken at an arms-length price. In case the price is not as per the rules, income tax may be levied.
As a part of tax planning strategies, companies can evaluate various jurisdictions before setting up of new entity/ change of base jurisdiction, etc.
6. Exempt transfers
India has seen a significant rise in M&A activity, often involving high-value transactions that can greatly impact a company’s tax liability.
Certain transfers are exempt from tax under the Income Tax Act, provided specific conditions are met , like the transfer of capital assets from a holding company to its wholly-owned Indian subsidiary or from an amalgamating company to an Indian amalgamated company.
Leveraging these provisions can substantially reduce tax liability. Therefore, companies planning a reorganization should consult a tax professional like FileAbhi for an efficient strategy.
7. Tax incentives / tax-saving investments
The Act provides for various exemptions to companies involved in specific business (section 35AD of the Act). It also prescribes rules for claiming expenses for setting up of business/expansion (section 35D of the Act).
A company may benefit from making donations to specified entities (section 80G of the Act).
A dividend-paying company can evaluate if it can get a deduction under section 80M of the Act.
FAQ: Tax Planning For Corporates
1. Which ITR is applicable for Corporates?
- Generally, ITR 6 applies to domestic and foreign companies. ITR 7 applies to a company filing a return under sections 139(4A) to section 139(4D).
2. Are tax laws different for LLP and Private Limited Companies?
- Yes, tax laws are different for LLP and private limited companies. Eg - Different tax rates are prescribed for a private limited company depending on its turnover. There is a single tax rate for LLP.
3. How can Startup India help you save taxes?
The Act offers several tax benefits for eligible startups and their investors. Startups can avail advantages like the carry forward of losses even when there’s a change in shareholding beyond 51%, which is typically not allowed for other businesses. Investors, including individuals and Hindu Undivided Families (HUFs), can also benefit from exemptions on long-term capital gains when invested in the equity shares of eligible startups. These provisions help promote startup growth while offering significant tax savings.