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Unit 3: Tax Planning: An Introduction

3.2 Corporate Tax Planning Notes

Corporate tax refers to a tax levied by various jurisdictions on the profits made by companies or
associations. As a general principle, the tax varies substantially between jurisdictions. In particular
allowances for capital expenditure and the amount of interest payments that can be deducted
from gross profits when working out the tax liability vary substantially. Also, tax rates may
vary depending on whether profits have been distributed to shareholders or not. Profits which
have been reinvested may not be taxed. The term “corporate tax planning” encompasses the
strategic structuring of business operations in order to minimize tax liabilities. Corporate tax
planning activities generally seek to avoid legally triggering tax costs rather than illegally
evading an existing obligation to pay taxes. Tax planning represents a forward-looking activity,
as opposed to tax compliance or reporting, which reflects back on events that have already taken
place. Corporations typically engage certified public accountants or tax attorneys for technical
advice in this complicated area. Basically Corporate Tax Planning is the strategies to reduce the
taxes. Tax planning and management is a risky and complex issue. It is very much at high
priority to deal with the taxes efficiently and effectively. There is indeed a need of perfect
corporate tax planning that will really facilitate the smooth flow.
A fundamental aspect of corporate tax planning involves determining which particular countries,
states and cities have the authority to impose tax on corporate activities. Each sovereign
government maintains different rules for imposing tax, which means that jurisdictional arbitrage,
can create tax cost differentials. Corporate tax planning opportunities oftentimes arise from
identifying the appropriate time to recognize an item of income or expense. Deferral of income
recognition to a future period or acceleration of expense deductions to current period result in
positive cash flows and savings due to the time value of money. Strategically exploiting the
discrepancies in rules for book accounting versus tax accounting may help create timing
differences that produce tax benefits.
Corporate tax rate in India is at par with the tax rates of other nations of the world. The corporate
tax rate in India is based on the origin of the company. If the company is domicile to India, then
the tax rate is flat at 30%. But for a foreign company, then the tax rate depends on several other
factors and considerations. For companies that are domicile to India, tax is charged on the global
income whereas for the foreign companies present in India, tax is charged on their income
within Indian Territory. Incomes that are taxable for foreign companies include income from
the capital assets in India, interest gained, income from sale of equity shares of the company,
royalties, dividends earned, etc.

3.2.1 Domestic Corporate Income Tax Rates

In case of Domestic Corporations, the effective taxes rate as well the tax rate with surcharge as is
30%. It should be noted that if the taxable income is greater than ` 1 million then a surcharge of
10% of the tax on income is also levied.

Notes It is important to note the fact that all the companies formed in India are considered
as Indian domestic companies, even for ancillary units with mother companies in foreign
countries.

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