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Corporate Tax Planning

Notes Company whether Indian or foreign is liable to taxation, under the Income Tax Act, 1961.
Corporation tax is a tax which is levied on the incomes of registered companies and corporation.
However, for the purpose of taxation, companies are broadly classified as domestic company

which is a company formed and registered under the Companies Act, 1956 or any other company
which, in respect of its income liable to tax, under the Income Tax Act, has made the prescribed
arrangement for declaration and payments within India, of the dividends payable out of such
income. A domestic company may be a public company or a private company and a foreign
company which is a company whose control and management are situated wholly outside India,
and which has not made the prescribed arrangements for declaration and payment of dividends
within India.
In this unit, we will study the computation of taxable incomes for companies by taking into

consideration the concepts of MAT, tax on distributed profits of Indian companies and tax on
dividends and income by VCC etc.
5.1 Computation of Taxable Income of Companies

Indian companies are taxable in India on their worldwide income, irrespective of its source
and origin. Foreign companies are taxed only on income which arises from operations carried
out in India or, in certain cases, on income which is deemed to have arisen in India. The later
includes royalty, fees for technical services, interest, gains from sale of capital assets situated
in India (including gains from sale of shares in an Indian company) and dividends from Indian
companies. Thus, the tax-liability on income of a company depends upon the residential status
of the company.

5.1.1 Residential Status of a Company

A Company is said to be resident in India during any relevant previous year if:-
(i) it is an Indian Company; or

(ii) the control and management of its affairs is situated wholly in India. In case of Resident
Companies, the total income liable to tax includes (section 5(1)):-
(a) any income which is received or is deemed to be received in India in the relevant
previous year by or on behalf of such company;
(b) any income which accrues or arises or is deemed to accrue or arise in India during
the relevant previous year;
(c) any income which accrues or arises outside India during the relevant previous year.
Similarly, a Company is said to be non-resident during any relevant previous year if:-

(i) it is not an Indian company, and
(ii) the control and management of its affairs is situated wholly or partially outside India. In
case of Non-Resident Companies, the total income liable to tax includes (section 5(2)):-
(a) any income which is received or is deemed to be received in India during the relevant
previous year by or on behalf of such company;

(b) any income which accrues or arises or is deemed to accrue or arise to it in India
during the relevant previous year.
As a result a situation may arise where the same income becomes taxable in the hands of the same
company in one or more countries, leading to ‘Double Taxation’. The problem of double taxation
may arise on account of any of the following reasons:-
1. A company (or a person) may be resident of one country but may derive income from other
country as well, thus he becomes taxable in both the countries.

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