Discussion Topics

How do you determine a company's residential status?

With effect from Assessment Year 2017–18, a firm is considered to have been a resident of India in any previous year if:

  1. It's an Indian company.
  2. The POEM.

The term "place of effective management (POEM)" refers, for this definition, to the exact place of key management and business choices that are crucial to the overall success of an entity.

The CBDT has just released the definitive instructions for determining POEM. Some distinctive elements can be seen in the final POEM recommendations. The test of Active Business Outside of India (ABOI) is one of the distinctive features. According to the regulations, a company is considered to be conducting ABOI if its passive income does not exceed 50% of its total revenue. There are also some extra cumulative requirements related to the location of payroll costs, personnel, and total assets that must be met. 

Suppose the majority of the board of directors' meetings for a company conducting ABOI are held outside of India. In that case, that location is assumed to be where effective management for that company resides.


The determination of POEM would take place in two stages for companies other than those that are actively conducting business outside of India and would include the following:


  1. The first step would be to identify or determine the person who makes the important managerial and commercial decisions for how the company's business is conducted.
  2. The second step would be to identify the location of the actual decision-making process.

What distinguishes the Alternate Minimum Tax (AMT) from the Minimum Alternate Tax (MAT)?

Only corporate taxpayers are subject to MAT provisions, whereas AMT regulations cover non-corporate taxpayers. Non-corporate taxpayers who have claimed a deduction (1) under section 35AD, (2) under sections 80H to 80RRB (except section 80P), or (3) under section 10AA are subject to the provisions of the AMT.


What qualifies as a widely held company for tax purposes?

A company is said to be widely held if the public is interested in it. This is because the company's shares are broadly dispersed among millions of shareholders and are regularly traded on stock exchanges. On the other hand, a company that has a small number of individuals controlling the bulk of its shares is said to be a closely held company.

We went into great length on the circumstances that show a business is "a company in which the public is substantially interested."


How is company income tax determined?

In India, there are two types of taxes: direct and indirect. In terms of direct taxes, they are assessed on the income that various corporate organizations generate over the course of a financial year. The Income Tax Department registers many taxpayer kinds, and each of these taxpayer types pays taxes at a different rate. For instance, although being taxpayers, an individual and a company are not taxed at the same rate.

     Personal Income Tax: The type of income tax that individual taxpayers pay. Individuals are subject to various rates of taxation based on tax slabs.

     Corporate Tax (CIT): The income tax that domestic and foreign companies operating in India must pay on their income. The Act sets a precise rate for the CIT, subject to annual rate changes in the union budget.

A corporation is an entity that has a distinct legal personality from its shareholders (owners). According to the Income-tax Act, domestic and foreign companies must pay corporate tax. A foreign corporation is taxed on the money earned within India, that is, the income being accrued or received in India. In contrast, a domestic company is taxed on its overall income.


Are there any provisions for the set-off and carry forward of losses of a company in which the public is not substantially interested?

According to section 79 of the Income-tax Act, Unless there has been a change in shareholding in the prior year for a firm that is not one in which the public is substantially involved, no loss incurred in any year before the prior year may be carried forward and offset against the income of the prior year-

The person who beneficially held shares of the company with at least 51% of the voting power on the last day of the year or years in which the loss was sustained retained at least 51% of the voting power on those shares on the last day of the previous year.

Section 79 imposes a restriction that only applies in the cases of loss; it does not apply when adjusting unabsorbed depreciation, capital expenditures for scientific research, or expenses related to family planning.

The provisions of Section 79 are also not applicable to changes in shareholding resulting from the death of a shareholder, from the gifting of shares to a relative of the shareholder, or from the merger or dissolution of a foreign company whose subsidiary is an Indian company, as long as 51% or more of the shareholders of the foreign company that is merging or being disintegrated remain in the amalgamating or demerged foreign company.


What happens if we don’t reply to an income tax notice?

The majority of us think we have fulfilled all of our requirements once we file our income tax return, thus we are startled when we receive messages from the Income Tax Department. In line with the Income Tax Act, if you don't react to the notice within the allotted time, your income tax return may be deemed invalid and you could face penalties, interest, the restriction on carrying forward losses, and the loss of certain exemptions. These sanctions include fines of up to Rs. 10,000 and imprisonment for up to a year. If the filed income tax return omits or contains incorrect information, an income tax notice pursuant to Section 139(1) will be sent. If a tax notice is issued under Section 139(1), then the taxpayer must correct the error in his ITR within 15 days.Therefore, it is always advisable to pay attention to any message from the income tax department.


Is MAT a requirement for all companies?

The Minimum Alternate Tax, or MAT, was introduced to close the gap between tax liability determined by income calculation and book profits. The Minimum Alternate Tax is a policy designed to close the income tax loophole for all companies. All companies, with the exception of those engaged in the life insurance business, must comply with MAT. MAT is only considered payable if the tax applicable under the Income Tax Act's normal provisions is less than 18.5% of book profits.

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