A company has been defined as a juristic person having an independent and separate legal entity from its shareholders. Income of the company is computed and assessed separately in the hands of the company. However the income of the company which is distributed to its shareholders as dividend is assessed in their individual hands. Such distribution of income is not treated as expenditure in the hands of company, the income so distributed is an appropriation of the profits of the company.
Taxable Corporate Income
The tax levied on a company’s income is based on its legal residence. Companies of Indian origin are levied tax in India, while International companies are levied tax on earnings from their Indian operations. For International companies’ royalty, interest, gains from sale of capital assets within India, dividends from Indian companies and fees for technical services are all treated as income arising in India.
Tax On Distributed Profits
Till 1997, a company was not required to pay any income tax on the amount of dividends declared, distributed or paid by such company. But such dividend was included in the income of the shareholders under the head "income from other sources". The finance act 1997 brought about changes to the rule.
A) Tax On Distributed Profits Of The Domestic Company
The domestic company would be required to pay additional income tax on any amount declared, distributed or paid by such company by way of dividend (be it interim or otherwise) on or after 1-06-1997,be it from current or accumulated profits. Such additional income tax shall be payable @ 10 per cent of the amount so distributed. Even if no income tax is payable by the company on it total income, the additional tax would have to be paid.
B) Exemption Of Dividend In The Hands Of Shareholders
In view of the income tax now payable by the domestic company, any dividends declared, distributed or paid by such company, on or after 01-06-1997 shall be exempt in the hands of the shareholders.
Time limit for deposit of additional income tax:
Such additional tax will have to be paid by the principal officer of the domestic company within 14 days from the date of:
a) Declaration of any dividend.
b) Distribution of any dividend.
c) Payment of any dividend, whichever is earlier.
Additional income-tax is not allowed as deduction:
The company shall not be allowed any deduction on account of such additional income tax under any provisions of the income tax act.
Indian Budget 2008
Indian Corporate Taxation
Minimum Alternate Tax
To wipe out the ambiguity on adjustments relating to tax entries in the profit and loss account, it is proposed that the "book profits" be increased by an amount of DDT paid, amount of deferred tax paid and deferred tax provision debited to Profit and Loss Account.
Dividend Distributing Tax
In order to overcome the domino effect of DDT, it has been suggested that any dividend received by a domestic company (C1) during any financial year from its subsidiary (C2) shall be allowed to be deducted from dividend to be declared/distributed/paid by C1, to calculate DDT, if the dividends so received by C1 had been scrutinized to payment of DDT by C2.At the same time C1 must not be a subsidiary of any other company.
The Budget 2008 has proposed have a weighted deduction of 125% with respect to any sum paid for scientific research to a domestic company doing scientific research and development. To remove multiple deductions, it has been proposed some Indian companies incurring the expenses would not be able to use the weighted deduction of 150 per cent as prescribed under the provisions of the Act.