How to calculate tax liability

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There are 6 friends, Annie, Beanie, Charul, Dravid, Esha and Frustie. These guys have different occupations and are worried about how they can calculate their tax liabilities.

Annie is a sole proprietor, Beanie is in a partnership with Charul, David is in Small Business Corporation whereas Esha and Frustie are part of a corporate. Are these words scaring you? Don’t worry but you can be any one of them and it is really simple, continue reading to learn!

Can we figure out each of their tax liabilities?

Sole Proprietorship

The business which is run by an individual for his or her own profit is called sole proprietorship. This is the simplest form of a business organization. Other than the owner, proprietorship has no existence. Also, the liabilities of the business are the personal liabilities of the owner. With the death of the owner the business terminates. In a sole proprietorship, the risk of business is to the extent of the owner's assets, whether employed in business or personally owned.

The professional people, service providers come retailers who are in the business for themselves are included in single proprietors. In spite of the proprietorship not being a separate legal identity from its owner, still it is a separate entity for accounting purposes. A sole proprietor has to maintain the financial activities of the business and his or her personal financial activities separately.

Partnerships-General and Limited

When two or more people join together to carry a business venture for profit come under a general partnership. Each partner of the business contributes money, property, labor comes on skills, the shares of the business in profits and losses. The partners have unlimited setup and the personal liabilities of an individual partner are limited for the dates of the business according to the amount which they invest. It is essential to file a certificate of limited partnership with authorities by the partners

Limited Liability Company (LLC)

A hybrid between partnership and Corporation is known as a limited liability company. In LLC, the members have operational flexibility and income benefits similar to a partnership. They also have limited liability exposure. There are various legal and statutory differences between limited partnership LLC.

Small Business Corporation (S-Corporation)

Subchapter S-Corporations can have a limited number of members and this a special closed Corporation. S-Corporation is created if one meets IRS code requirements, to provide small corporations with a tax advantage. In S Corporation taxes are waived and reported by the owner of their individual federal income tax return to avoid double taxation of regular Corporation.

Corporate Tax in India

The corporate is an entity that is a separate independent legal entity from its shareholders. All the companies, domestic or foreign are liable to pay corporate tax under the Income Tax Act. Let us understand various tax slabs that are applicable to corporate. There are 2 types of companies for the purpose of calculating tax :

  1. Domestic company- the companies which are registered under the Companies Act of India and include the company registered in foreign countries having control and management situated in India is a domestic company.
  2. Foreign company- the company which is not registered under the Companies Act of India and whose control is located outside India is a foreign company.  

For calculating the taxes which the company has to pay we'll have to understand what is known as the income of a company. Let us learn about the types of income that the company earns. here they are:

  1. Profits earned from the business
  2. Capital Gains
  3. Income from renting a property
  4. Income from other sources like dividend, interest, etc.

In the last chapter, we've covered income tax. Income tax is paid every year on the basis of the income slab of the taxpayer. There are various types of income tax returns that you will have to submit as a taxpayer to get returns assessed by the IT Department and receive the refund if any. Now, let us also look at the expenses which a company incurs from selling goods. Here they are:

  • Depreciation.
  • The total cost of goods sold.
  • Selling expenditures.
  • Expenses incurred for administrative purposes.

A company’s income includes net profit earned, rent income, capital gains, or income from other sources such as interest income or dividend income.  

Thus Net Revenue = Gross Revenue – (Expenses + Depreciation)  

Corporate Tax Rate in India

The rate of corporate tax differs for domestic corporations and foreign. Corporations pay tax at different rates. Also, based on the type of corporate entity and the different revenues earned by each of them, the corporation tax rate differs as per the slab rate system. Presently for the assessment year 2019-2020, the corporation tax rates in India are as follows:

Type of Company

Corporate Tax Rate

Surcharge on Net Income Less than  Rs. 1 crore

Surcharge on Net Income greater than Rs. 1 Crore and less than Rs. 10 Crore

Surcharge on Net Income greater than Rs. 10 Crore

Domestic with annual turnover upto Rs 250 Crore

25%

Nil

7%

12%

Domestic Company with turnover more than Rs 250 Crore

30%

Nil

7%

12%

Foreign Companies

40%

Nil

2%

5%

Corporation Tax Rates in India for a Domestic Corporation

The applicable rate of corporate tax for AY 2019-20 for domestic company is:

Gross Turnover

Tax Rate

Upto Rs. 250 Crore

25%

More than Rs. 250 Crore

30%

  • A domestic corporate entity with a turnover upto Rs. 250 Crore has to pay a flat rate of 25% corporate tax.
  • In a particular financial year, if the total revenue of a company is more than Rs. 1 crore, a surcharge corporate tax of 5% is levied on such a corporation.
  • For a domestic company, a Health and Educational Cess at 4% is charged.
  • In a case where a domestic company operates overseas, the same amount of corporate tax is charged on the total global earnings of the company.
  • Corporate tax in the case of domestic companies in India also considers the revenue that is earned by a domestic company operating abroad.

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Corporate Tax for Foreign Corporation in AY 2019-20

The applicable rate for Foreign corporation tax for AY 2019-20 for the domestic company is: 

Nature of Income

Tax Rate

Royalty received or fees for technical services received by a foreign corporation from the government or any Indian concern under an agreement made before April 1, 1976, and  approved by the central government

50%

Any other Income from Indian Operations

40%

Corporate Tax Rebates

Along with several types of corporate taxes, there are certain provisions for corporation tax rebates or deductions as well. Following are the key ones to consider:

  • Interest Income is deducted in some cases.
  • There are no taxes on the capital gains of a corporate entity.
  • There may be a tax rebate on dividends with applicable terms and conditions.
  • The corporate entity is eligible to carry the losses incurred in the business for a maximum of 8 years.
  • There are certain deductions when corporations set up new sources of power or new infrastructure, exports, and new undertakings.
  • If a domestic corporation receives some amount of dividends from another domestic corporation, they have the provision to deduct such dividends as rebates.

Tax Liabilities

Tax liabilities are the total amount of tax that is outstanding within a concerning time period. It is payable to taxing entities- central or state government or local authorities like a municipality. Individuals and institutions are liable to pay taxes on the income they earn. 

Tax liabilities are considered as short-term debt accounted for on the balance sheet of a business. They are to be cleared off within the given year. For individuals, these are payable obligations that are to be paid from withholdings or personal savings.

Types of Taxes

There are two major tax categories in India’s current taxation system - Direct and Indirect Taxes. Let’s understand them in detail:

Direct tax

Tax liabilities that are paid directly to the central government are direct taxes. Individuals and organizations with taxable income have to pay it.

Sub-divisions of Direct Taxes

  • Income tax: Individuals or HUF are liable to pay taxes on their income during a financial year other than that of the company. The income tax is levied on salary, pension, interest earnings, and property rental income.
  • Corporate tax: Health and education cess – Further, another 4% of the income tax is accounted for health and education.
    • Dividend distribution tax – Companies carry tax liabilities on its dividend circulated amongst the shareholders in every financial year and tax exemption up to Rs. 10 lakh is allowed under income tax law. This tax is levied on a company’s gross or net income of an investment. 
    • Minimum Alternative Tax – A minimum alteration tax is mandatory tax companies pay under Section 115JA at 18.45% rate on book profit, only if the concerned company is paying income tax below the said rate. 
    • Fringe benefits tax – Fringe benefits tax is accounted for on the benefits such as accommodation expenses, travel allowance, employee’s contribution to the retirement fund, etc.

Indirect Taxes: 

Unlike Direct Taxes, these taxes are not levied on individuals but on goods and services. This tax is not levied on profit, income or the revenue of an individual or an entity. Also, this tax can be transferred from one person to another.

Here’s a list of various types of Indirect Taxes:

  • Goods and Service Tax: Introduced in 2017, this tax is applied at the consumption stage. GST is applied at every stage of the supply chain wherever consumption takes place.
  • Customs Duty: If you buy a product from a different country and import it to India, then you have to pay tax on it. This tax is called Customs Duty.
  • Toll Tax: is levied either by the state or central governments on roads and bridges. The purpose of the tax is to fund road construction and maintenance activities.

Wrapping up

Now that you understand Calculating Tax Liabilities, it’s only logical that we move on to the next big topic - Section 80C: detailed. To discover the answer, head to the next chapter. 

A quick recap:

  1. There are two major tax categories in India’s current taxation system - Direct and Indirect Taxes.
  2. Income tax is paid every year on the basis of the income slab of the taxpayer.
  3. The rate of corporate tax differs for domestic corporations and foreign.
  4. Income tax is paid every year on the basis of the income slab of the taxpayer.
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